James Tobin was a leading – perhaps the leading – American neo-Keynesian macroeconomist in the era of Keynesian dominance after World War II that extended through to the early 1970s. Along with growth theorist Robert Solow and micro and trade theorist Paul Samuelson, the three substantially shaped what became known as the neoclassical synthesis which fused neoclassical microeconomic theory, Keynesian macro theory, and neoclassical growth theory. The macroeconomic component of the neoclassical synthesis is termed neo-Keynesianism. All three received the Royal Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel, with Tobin winning his prize in 1981. Tobin died in 2002, aged 84.<\/p>\n
Robert Dimand (2014) has written a short book, which is part of The Great Thinkers in Economics<\/em> series edited by Tony Thirlwall, on Tobin\u2019s economics. For purposes of truth in advertising, it should be noted that Dimand was a student of Tobin\u2019s at Yale University and wrote his dissertation under Tobin\u2019s supervision. Like so many students who studied under Tobin, Dimand clearly has an abiding deep respect and admiration for Tobin, as does this reviewer.<\/p>\n Dimand\u2019s assessment of Tobin\u2019s contribution is elegantly framed in terms of Hicks\u2019 (1937) IS-LM model which dominated neo-Keynesian economics, and which Tobin subscribed to and sought to improve. Thus, there are chapters on Tobin\u2019s contributions to the economics of consumption and saving (S), investment theory (I), the theory of money demand and portfolio balance (L), and the theory of the money supply and financial market equilibrium (M). Additionally, there is a chapter on Tobin\u2019s view of Keynesian economics, a chapter on money and growth theory, and two policy chapters on inequality and financial market speculation. This list reveals the extraordinary range of Tobin\u2019s contribution to economics.<\/p>\n Chapter 1, titled an \u201cAmerican Keynesian\u201d, describes Tobin\u2019s views about the macro economy. Dimand argues Tobin\u2019s work constituted a coherent research program based on Keynes\u2019 explanation of the Great Depression. Monetary economies are prone to demand shortages and nominal wage and price flexibility cannot be relied on to eliminate unemployment.<\/p>\n Chapter 2, titled \u201cTransforming the IS-LM Model Sector by Sector\u201d, essentially provides an overview of the book. Tobin took the IS-LM model and both provided its component elements with microeconomic foundations rooted in neoclassical optimizing behavior and extended the model to include a broader menu of financial assets. The latter feature defined what became known as the Yale School of macroeconomics. The modelling approach was to use market demand functions with plausible restrictions on partial derivatives and subject to adding-up constraints and stock-flow consistency. This demand function approach contrasts with the representative agent utility maximization approach of today\u2019s new classical and new Keynesian macroeconomics.<\/p>\n Macroeconomists now take the interest elasticity of money demand for granted. Dimand shows this was a controversial issue in the 1940s and Tobin (1947-48) was instrumental in winning the day on this proposition, paving the way for the triumph of the standard IS-LM model and the belief that expansionary fiscal policy is at least partially effective.<\/p>\n Chapter 3 covers Tobin\u2019s contribution to the theory of consumption and saving, which also included developing the Tobit estimator. Tobin was a pioneer in introducing wealth into the aggregate consumption function, which was the neo-Keynesians\u2019 way of explaining why the average propensity to consume did not fall over time as predicted by Keynes\u2019 consumption theory.<\/p>\n Chapter 4 covers Tobin\u2019s contribution to money demand, portfolio balance and money creation. Whereas much of Tobin\u2019s macroeconomic research program has been abandoned by contemporary mainstream economics, his contributions on money demand and portfolio balance endure.<\/p>\n Chapter 5 covers Tobin\u2019s q<\/em> and his theory of investment, which has been another element of Tobin\u2019s work which has been embraced by contemporary mainstream economics. Dimand\u2019s approach to discussing q<\/em> theory is via the history of thought, and he compares Tobin\u2019s q<\/em> with Keynes\u2019 Q and Myrdal\u2019s Q. There is also a brief discussion of Crotty\u2019s (1990) Post Keynesian critique of q<\/em>.<\/p>\n Chapter 6 examines Tobin\u2019s contribution to neoclassical growth theory via the addition of money holdings. Money competes with capital for a place in portfolios. Inflation causes a shift in portfolio demands away from money to capital, which increases the long run capital \u2013 labor ratio but not growth. Steady state inflation is determined by the rate of money supply growth, so that money exerts real effects contrary to classical monetary theory. Unfortunately, this result does not hold up well when modelled in a neoclassical optimizing framework, an approach which Tobin applied to the IS-LM model.<\/p>\n Chapter 7 deals with Tobin\u2019s concern with inequality, while Chapter 8 deals with his concerns with speculation that prompted his Tobin tax proposal for foreign exchange markets.<\/p>\n Chapter 9 concludes the book and is titled \u201cTobin\u2019s legacy and modern macroeconomics\u201d. The key takeaway is that the market mechanism, operating through price and nominal wage adjustment, may not be able to restore full employment. Indeed, greater flexibility and faster adjustment of prices and nominal wages may make things worse (Palley, 2008). This is the enduring big picture message from Tobin\u2019s macroeconomic vision, but it was developed late in the game (Tobin, 1975, 1980, 1993). By then, early neo-Keynesianism had stained Keynesianism as macroeconomics with downward nominal wage rigidity, and new classical macroeconomics had captured the mainstream profession with claims about the market clearing role of price and nominal wage flexibility.<\/p>\n The great strength of Dimand\u2019s book is its organization in terms of the IS-LM model which provides a framework for placing Tobin\u2019s enormous and varied contributions in an orderly and understandable way.<\/p>\n Strangely, Dimand does not discuss Tobin\u2019s (1972) theory of the Phillips curve which responded to Friedman\u2019s vertical Phillips curve based on the NAIRU (non-accelerating inflation rate of unemployment) hypothesis. The NAIRU hypothesis was instrumental in overthrowing neo-Keynesianism. Tobin\u2019s \u201cinflation greases the wheels of labor market adjustment\u201d theory of the Phillips curve provides a compelling counter. Unfortunately, Tobin only sketched his theory and it was not formally modelled until much later (Palley, 1994; Akerlof et al., 1996), by which time the NAIRU had become hegemonic within mainstream economics.<\/p>\n One tantalizing area is the relation between Tobin and his heterodox critics. There is a brief mention of the Post Keynesian theory of endogenous money in Chapter 4 (p.71) and there is a discussion of Tobin\u2019s response to his Post Keynesian critics of q<\/em> theory in Chapter 5 (p. 87 \u2013 88). As Dimand reports, Tobin viewed heterodox criticism (Crotty, 1990) as misrepresenting his construction of q<\/em> theory by claiming he believed in \u201cstable\u201d and \u201cefficient\u201d financial markets.<\/p>\n The big question is why did Tobin\u2019s macroeconomics fade away so quickly and comprehensively. Tobin and the neo-Keynesians dominated the mainstream in 1970. By 1980 they were substantially on the way out. Why?<\/p>\n Dimand makes mention of the \u201cresurgence of inflation as a policy problem (p.146)\u201d and the Lucas critique that traditional Keynesian \u201cstructural models could not be used to evaluate the effects of policy regime changes (p.147)\u201d. However, the bulk of Dimand\u2019s explanation is that Tobin\u2019s disaggregated multi-asset ISLM-styled model \u201cdid not have closed-form solutions, and using simulations to solve the model numerically was a challenge to the computing capacity of 1980 (p.148)\u201d; \u201cthere simply was not enough available data for a Tobin-style disaggregate portfolio choice model (p.148)\u201d; the data was \u201cplagued by severe multi-collinearity problems (p.149)\u201d; and the money and long-run growth results \u201cturned out to be sensitive to model specifications (p.150)\u201d and significantly affected by \u201cseemingly small and innocuous changes in exactly how a model is specified (p.150).\u201d<\/p>\n All of the above is true, but I think it is insufficient. In my view, Tobin\u2019s macroeconomics has faded because of political reasons and because of theoretical limitations, but explaining that requires a paper of its own. The good news is that Tobin\u2019s macroeconomics remains profoundly relevant and can be revived theoretically, as suggested by the work of Godley and Lavoie (2007). Robert Dimand\u2019s book further motivates the case for that revival.<\/p>\n References<\/strong><\/p>\n Akerlof, G.A., Dickens, W.T., and Perry, G.L., \u201cThe Macroeconomics of Low Inflation,\u201d Brookings Papers on Economic Activity<\/em>, 1(1996), 1-76.<\/p>\n Crotty, J.R., “Owner-Manager Conflict and Financial Theories of Investment Instability: a Critical Assessment of Keynes, Tobin, and Minsky,” Journal of Post Keynesian Economics<\/em>, 12 (Summer 1990), p.519-42.<\/p>\n Dimand, Robert W., James Tobin<\/em>, Basingstoke: Palgrave Macmillan, 2014 (197 pages, hardcover, Palgrave Macmillan, ISBN 978-14039-8555-2).<\/p>\n Godley, W. and M. Lavoie, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth<\/em>, Basingstoke: Palgrave Macmillan, 2007.<\/p>\n Hicks, J.R., \u201cMr. Keynes and the Classics: A Suggested Interpretation,\u201d Econometrica<\/em>, 5 (1937), 147 \u2013 159.<\/p>\n Palley, T.I., “Escalators and Elevators: A Phillips Curve for Keynesians,” Scandinavian Journal of Economics<\/em>, 96 (1994), 117 – 123.<\/p>\n ————–, \u201cKeynesian Models of Deflation and Depression Revisited,\u201d Journal of Economic Behavior and Organization<\/em>, 68 (October 2008), 167 – 77.<\/p>\n Tobin, J., \u201cLiquidity Preference and Monetary Policy,\u201d Review of Economics and Statistics<\/em>, 29 (May 1947), 124-131: 30 (November 1948), 314-317.<\/p>\n ———–, \u201cInflation and Unemployment,\u201d American Economic Review<\/em>, 62 (1972), 1 \u2013 26, reprinted in Essays in Economics: Volume 2<\/em>, New York: North-Holland, 1975, p. 33 \u2013 60.<\/p>\n ———–, \u201cKeynesian Models of Recession and Depression,\u201d American Economic Review<\/em>, 65 (1975), 195-202.<\/p>\n ———–, Asset Accumulation and Economic Activity<\/em>, Chicago: Chicago University Press, 1980.<\/p>\n ———–, \u201cPrice Flexibility and Output Stability: An Old Keynesian View,\u201d Journal of Economic Perspectives<\/em>, 7 (1993), 45 \u2013 65.<\/p>\n","protected":false},"excerpt":{"rendered":" James Tobin was a leading – perhaps the leading – American neo-Keynesian macroeconomist in the era of Keynesian dominance after World War II that extended through to the early 1970s. 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