AN OUTLINE AND CRITICAL ASSESSMENT FOR FINANCIAL ARTICLE 2 - Essay Example

? AN OUTLINE AND CRITICAL ASSESSMENT FOR FINANCIAL ARTICLE 2 Outline I. Basic Information A. Information concerning the article 1. Title : The Debt-Deflation Theory of Great Depressions 2. Author: Irving Fisher 3. Publication: The Econometric Society 4. Topic Statement and purpose: To develop the great depressions debt-deflation theory statistically and theoretically. B. Thesis Statement Reaction 1. Special conclusions new and important II. Description of the article A. Special conclusions 1. Cycle theory 2. Debt and deflation roles 3. The 1929-33 deflation 4. Debt starters B. Illustrations 1. Graphs III. Evaluation A. organization of the article B. style used in the article C. Effectiveness of the work D. Topic treatment E. assumptions of the author about the audience Critical Assessment The article entitled “The Debt-Deflation Theory of Great Depressions” authored by Irving Fisher seeks to present a theory of debt-deflation of the great depression in a statistical and theoretical manner. The paper draws conclusions deemed as being special, new, and important and aims at specifying what some of these conclusions are and also fitting them in the conclusions of the other students found in the field of economics. The purpose of the author is to offer his work as embodying on the topic of cycle theory. Fisher (1933: p 337) captures a reaction to the thesis by mentioning the reaction comment of two of the best and most-read authorities in economics field. One of the best-read authorities described the special conclusions as being important and new. The author selects the point form structure in presenting the special conclusions. A suggestion that the conclusions may serve as a dispute to some and raw materials to others is given by Fisher. The point form or listing structure adopted by the author presents direct points with a brief discussion on every conclusion outlined. Fisher (1933: p 337) presents a list of 49 tentative special conclusions. However, the structure adopted by Fisher first categorizes the conclusions into four major groups, which are cycle theory, debt and deflation roles, the 1929-33 deflation, and debt starters. The main ideas from the article are as follows 1. Cycle Theory Economic system comprises of innumerable variables and changes in all (or any) of these variables have several causes. It is only in the mind or imagination where the variables can only remain stable and be kept in balance or equilibrium by forces of demand and supply. Economic theory comprises of a study of dis-equilibrium and imaginary equilibrium. Dis-equilibrium proceeds in either an actual historical case or any constituent tendency. The old persistent notion of business cycle being a simple and self generating cycle is a myth Innumerable tendencies for economic dis-equilibrium roughly classified under trend or growth tendencies, haphazard disturbances, and cyclical tendencies. Sorts of Cyclical tendencies include one being forced on economic mechanism and the other is the free cycle The price level disease and the debt disease are considered the most important causes in the booms and depressions than all the other causes. Over-speculation and over-investment are important but would have far less severe results if not conducted using borrowed money. 2. Debt and deflation roles Secondary variables affected by deflation and debt are circulating media, debts, their circulation velocity, net worth, price levels, profits, trade, interest rates, and business confidence. Debt liquidation leads to distress selling and deposit currency contraction causing a fall in price levels. Apart from the interest on debts and debt, the other fluctuations come about as a result of decrease or fall in price Deflation occurring for another reason apart from debt results to a much less evil Deflation caused by debt reacts on the debt 3 The 1929-33 deflation An example of debt-deflation depression Unless a counteracting cause is brought in to prevent the decrease in the price level, depressions such as that of 1929-33 tends to go on Based on the foregoing analysis, it is economically possible to prevent or stop a depression by reflating the level of price up to the average level where the outstanding debt were contracted by the present debtors and assumed by the existing creditors if the theory of debt-deflation of the great depression is correct, then the issue of controlling the levels of price assumes a new importance Price level control or the dollar control would, a panacea (Fisher, 1933: p 347). 4. Debt Starters Over-indebtedness had its starters Easy money forms the great cause of borrowing When the starter has new opportunities to make an unusual profitable investments, the debt bubble tends to be blown faster and bigger than when it is great misfortune causing the non-productive debt Owing to the present or current interpretation, the world war was never supposed to result in a great depression given that the subsequent deflations could be avoided The public mind or psychology of getting into debt for gain crosses via a number of distinct phases Phases are the lure of huge and prospective dividends in income, hope of making profits on sales, the reckless promotion vogue, and development or creation of downright fraud (Fisher, 1933: pp 349). Economic changes comprise of unsteady occasional disturbances and steady trends acting as starters for the cyclical oscillations New investment opportunities because of new inventions are among the occasional disturbances These disturbances conspire with others and result in over-indebtedness and then attempts of liquidation ensures Unless counteracted by reflation, over-indebtedness leads to swelling of the dollar or falling of prices Dollar swells or shrinks, liquidation aggravates the debts and depression worsens. General correctness of the theory of debt-deflation of great depression outlined Fisher has managed to accomplish the purpose of the article by developing the debt-deflation theory at the end of his article (Fisher, 1933: pp 349). However, the author has made a number of assumptions regarding the audience when developing the theory. Fisher argues that most of the conclusions are new citing an evidence of two authorities, which is not a clear representation of the audience in the field of economics. The effectiveness of this article is based on the presentation of evidence regarding the great depression and the discussion of the starters of that depression. In developing the theory of debt-depression of the great depression, Fisher (1933: p 346) presents the tentative conclusions and argues that the conclusions can be modified upon the presentation of new evidence. He further argues that the work is still seeking anticipations, a perspective that makes the work be regarded as new to some and important. However, the objectives of the author are achieved and supported by the evidence in the discussion and illustrations given in form of graphs. Bibliography Fisher, I., 1933. The Debt-Deflation Theory of Great Depressions. Econometrica, 1(4), 337-357. Read More