James Tobin: An Appreciation of his Contribution to Economics

Abstract

Jim Tobin, who died on March 11, 2002 at the age of 84, was one of giants of economics of the second half of the twentieth century and the greatest macroeconomist of his generation. Tobin's influence on macroeconomic theory is so pervasive -so much part of our professional 'acquis' -that many younger economists often are not even aware that it is his ideas they are elaborating, testing, criticising, refuting or re-inventing. In this Appreciation, I consider Tobin's scholarly contributions, made over a period of more than 50 years.Tobin received the 1981 Nobel Memorial Prize "for his analysis of financial markets and their relations to expenditure decisions, employment, production and prices". I consider his contributions to mean-variance portfolio demand and asset pricing theory, especially the Portfolio Separation Theorem; pitfalls in financial model building; portfolio balance and flow of funds models and the 'credit channel'; the life-cycle model and social security; econometric methodology, including the Tobit estimator and his pioneering work using both time series and cross-sectional data to estimate food demand functions; economic growth; Tobin's q; the 'Tobin Tax'; the monetary and fiscal policy (Tobin [1986b, p. 113]). Perhaps; but more rare even is the young student of economics taking his first tentative steps as a professional economist who, on becoming acquainted with Tobin, in person or through his writings, did not feel better about his choice of profession.With one exception, the scope of what follows is restricted to Tobin's published scholarly contributions. The exception is an attempt to combine Tobin's 2 Tobin wrote more than 500 papers, and it is impossible to provide a comprehensive overview in a single review article. Grossman [1975] is an interesting review of the first of Tobin's Essays in Economics ). Both Grossman [1982] and Lucas [1981b] contain critical reviews of Tobin [1980]. 3 published writings on social security reform with my distillation of some of Tobin's lecture notes on the subject -one that illustrates well both the intellectual rigour and the moral and political engagement of the man. Liquidity Preference, Separation and Asset PricingTobin received the 1981 Nobel Memorial Prize "for his analysis of financial markets and their relations to expenditure decisions, employment, production and prices". With Harry Markowitz [1952 he developed what became the foundations of modern portfolio theory 3 . The key 'separation theorem' proven by Tobin [1958b], is that in a world with one safe asset and a large number of risky assets, portfolio choice by any risk-averse portfolio holder can be described as a choice between the safe asset and the same portfolio of risky assets. The ratio of the shares in the total portfolio accounted for by any pair of risky assets is the same for all risk-averse portfolio holders. The degree of risk aversion only determines the shares in the total portfolio accounted for by the safe asset and by the common portfolio of risky assets. This is...

Institutional investors’ allocation to emerging markets: A panel approach to asset demand

“…Often the models presented incorrectly signed or insignificant parameters. Researchers have tried to overcome these problems by estimating parameters combining the data with some a priori information according to Bayesian principles 5 , but were in the end not wholly successful (Buiter, 2003).…”

Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique

“…Whereas Blinder tends to describe as “Keynesian” the set of views that he has converged to in the wake of the Keynesian‐monetarist debate, Buiter (2003) tends to attribute to James Tobin the aspects of the modern monetary policy framework that Buiter likes. Moreover, Buiter casts monetarism in negative terms, building Tobin up by attributing to monetarists views they did not hold and giving Tobin credit he happens not to deserve.…”

Integrating Europe's Financial Markets

“…6 For an existing market structure, for example, expanding the roster 5 Tobin distinguishes between several efficiency concepts for a system of financial markets, including technical efficiency and information arbitrage, functional efficiency, and full-insurance efficiency (à la Arrow-Debreu). See, for example, Tobin (1984) and Buiter (2003). 6 Based on evidence from 47 countries and 1,200 banks, Levine (2003) finds that denying foreign entry raises interest margins.…”

“…Buiter (2003) recounts that Tobin himself questioned the more rigorous application: "Tobin viewed his model of portfolio choice under uncertainty . .…”