What Are The Major Criticisms Of Fisher's Theory Of Interest Rate?


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Mehreen Misbah answered
Fisher's theory of interest rates is primarily based on two factors – why people buy and why other people borrow. Thus the economy in accordance to Fisher's classical approach consists of three components: Individuals who consume and save with their current income, the firms that borrow that part of unconsumed (saved) income as loans and invest that borrowed money, a market where savers grant loans of their saved resources to borrowers that consist of firms and individuals.

There are two major points of criticism of Fisher's classical approach. Both of them deal with his approach or considerations. The first one in the surmise that no new money is coming in the market, which is not a logical occurrence as profits are bound to be earned and funds are therefore going to be increased. The second factor that is beyond reasonable comprehension is the assumption that there was no cash in hand. All the money was either lend to the borrowers(the saved money) or consumed. There was no cash left for emergency situations, which is a highly unlikely phenomenon.

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