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Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England James Tobin Robert W. Dimand Brock University, Canada © Robert W. Dimand 2014 Softcover reprint of the hardcover 1st edition 2014 978-1-137-43194-3 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any license permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries . ISBN 978-1-349-49235-0 ISBN 978-1-137-43195-0 (eBook) DOI 10.1057/9781137431950 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Dimand, Robert W. (Robert William) James Tobin / Robert Dimand. pages cm.—(Great thinkers in economics) 1. Tobin, James, 1918–2002. 2. Economists – United States. 3. Economics – United States – History. I. Title. HB119.T6D53 2014 330.092—dc23 2014028138 [B] Contents Preface vi Acknowledgments viii Introduction 1 1 An American Keynesian 10 2 Transforming the IS-LM Model Sector by Sector 24 3 Consumption, Rationing, and Tobit Estimation: Tobin as an Econometrician 44 4 Portfolio Balance, Money Demand, and Money Creation 63 5 Tobin’s q and the Theory of Investment 73 6 Money and Long-Run Economic Growth 90 7 To Improve the World: Limiting the Domain of Inequality 106 8 Taming Speculation: The Tobin Tax 113 9 Tobin’s Legacy and Modern Macroeconomics 130 Notes 156 Bibliography 166 Index 191 v Preface I had the privilege and good fortune to know James Tobin and to study with him. I came to Yale as an economics graduate student in 1978 already intending to work in the history of economic thought, and specifically on John Maynard Keynes, after a bachelor’s degree in history and economics at McGill. This choice of field was, then as now, regarded by leading North American economics departments as eccentric at best: in my first year at Yale, the only course offered in the history of economic thought was Harry Miskimin’s history department graduate course on French mercantilism, a fine course but perhaps a bit specialized. But Jim Tobin, who had taken Joseph Schumpeter’s sequence of courses in the history of economic analysis while at Harvard, provided encouragement and support (as did the economic historian William Parker and, among untenured faculty, Katsuhito Iwai and David Levine). After I had taken his courses in “Money and Finance” (one taught jointly with John Taylor, then a visiting professor), I was the teaching assistant for his course “The Keynesian Revolution and the Counter-Revolutions,” and he supervised my dissertation, based on surviving student notes of Keynes’s lectures (then being edited by T. K. Rymes at Carleton). This dissertation, accepted in 1983, eventually became the basis of my book, The Origins of the Keynesian Revolution (1988). In 1992, I returned to Yale as a visiting fellow to spend a sabbatical and a leave as one of the two assistant editors (with Kevin Foster) for William Barber’s edition of The Works of Irving Fisher (14 volumes, 1997), for which Jim was consulting editor. Studying with Jim, and discussing Keynes, Fisher, and the history of macroeconomics with him, was a wonderful experience for a then-young historian of macroeconomics – and not least the day in October 1981 that his Nobel Memorial Prize was announced. Jim liked to recount that the telephone call from Stockholm had gone to an unrelated teenage Yale sophomore, the only “James Tobin” actually living on the Yale campus, but the student’s roommate had refused to wake him with vi Preface vii the news of the prize – and it was later discovered that the student had previously received several phone calls from journalists and had shared with them his opinions about politics and economics. This is not a biography but rather, in keeping with the aims of the Great Thinkers in Economics series, a book about James Tobin as an economist, examining his contributions to economics, prima- rily in monetary economics and macroeconomics (such as his money demand models, the corridor of stability, Tobin’s q theory of invest- ment, and the Tobin separation theorem), but also extended to applied econometrics (notably the Tobit estimator and the 1950 food demand study) and to proposals to fight poverty and inequality. Beyond surveying his contributions, I consider the reasons for the decline in influence of his approach to monetary economics, and suggest that aspects of his work are of renewed interest in the wake of the global financial crisis. In particular, I draw attention to his modelling from 1975 onward of a “corridor of stability” – models of economies that are self-adjusting most of the time but not for infre- quent large shocks – as an alternative to models of economies that are either always stable or never stable. The theme of this book is that James Tobin’s work in economics was not just an assortment of individual contributions, but a coherent research program shaped by how he first came to economics: during the Great Depression of the 1930s that followed a stock market crash and a breakdown of financial intermediation, reading Keynes’s General Theory (before even reading an economic principles text- book) with a bent for expressing ideas in formal ideas, and seeing economics as a path to economic stabilization, not as a collection of abstract puzzles. Acknowledgments In researching and writing this book, I have benefited from, and am grateful for, financial support from Brock University’s Faculty of Social Sciences and Committee for Research in the Social Sciences, and for a sabbatical in which to complete the manuscript. I am also grateful for visiting fellowships at the Center for the History of Political Economy at Duke University from September to December 2013 and at the John F. Kennedy Institute for North American Studies at the Free University of Berlin from April to July 2014. I thank the editor of this series, Tony Thirlwall, for his comments on the manu- script, and for his invitation to write this book. Earlier versions of much of this material were presented at confer- ences (at which I received many helpful comments) and published in conference proceedings. For permission to make use of material drawn from co-authored papers, both published and unpublished, I am grateful to Harald Hagemann for material in Chapter 5, to Steven N. Durlauf for material in Chapter 6, and to Mohammed H. I. Dore for material in Chapter 8. I thank Duke University Press and the editor of History of Political Economy , Kevin D. Hoover, for permission to reprint in revised form three articles that appeared in the annual conference supplement to HOPE : “James Tobin and the Transformation of the IS-LM Model,” in Michel DeVroey and Kevin D.