James Tobin

• 1. Introduction

  ›

  James Tobin was born on the 5th of March, 1918, in Champaign, Illinois, the son of a journalist credited with inventing "Homecoming" at the University of Illinois. He died on the 11th of March, 2002, in New Haven, Connecticut, at the age of eighty-four. Those eighty-four years traced an arc from a small Illinois university town to the highest councils of American economic policy, from a Harvard scholarship won in 1935 to a Nobel Memorial Prize awarded in 1981.

  But the numbers alone do not capture what made Tobin remarkable. He was the kind of economist who believed markets could fail, that governments had a duty to stop recessions, and that a small tax on currency trading could make the entire global financial system safer. His ideas became textbook staples. One of them, a proposal for taxing foreign exchange transactions, now bears his name in newspapers and policy debates around the world.

  What drew a boy from Champaign to Keynesian economics? How did an officer on a Navy destroyer in wartime become one of the architects of John F. Kennedy's economic agenda? And why, decades after his death, do economists still argue about the Tobin tax?

• 2. From Champaign to Harvard

  ›

  Louis Michael Tobin, born in 1879, worked as a journalist at the University of Illinois Urbana-Champaign and is credited as the inventor of "Homecoming." His wife, Margaret Edgerton Tobin, born in 1893, was a social worker. Their son James attended the University Laboratory High School of Urbana, a laboratory school on the university's own campus, growing up in an environment where ideas and institutions were the fabric of daily life.

  In 1935, a national scholarship opened the door to Harvard College. The timing turned out to matter enormously. In 1936, while Tobin was still an undergraduate, John Maynard Keynes published The General Theory of Employment, Interest and Money. Tobin read it during his studies, and the encounter shaped everything that followed.

  He graduated summa cum laude in 1939. His senior thesis took a critical look at Keynes's own mechanism for explaining involuntary unemployment in equilibrium, a thesis that became his first published article in 1941. A master's degree followed in 1940, and then the war interrupted his academic plans entirely.

• 3. War and the Return to Theory

  ›

  In 1941, before enlisting, Tobin worked for the Office of Price Administration and Civilian Supply and the War Production Board, practical posts that put him inside the machinery of a wartime economy. In 1942 he joined the US Navy, serving as an officer on destroyers for the duration of the war.

  When peace came, he returned to Harvard and wrote a doctoral thesis on the consumption function under the supervision of Joseph Schumpeter, one of the towering figures of twentieth-century economics. He received his Ph.D. in 1947.

  That same year, Harvard elected Tobin a Junior Fellow of its Society of Fellows, a position that gave him freedom from teaching obligations and funding to pursue his own research for three years. It was a rare gift of unstructured time at the precise moment when his intellectual agenda was forming. He used it to lay the groundwork for the monetary economics that would define his career.

• 4. Yale and the Cowles Foundation

  ›

  In 1950 Tobin moved to Yale University and never left. He joined the Cowles Foundation, an influential research group that relocated to Yale in 1955, and served as its president in two separate stretches, 1955-1961 and then again in 1964-1965. His central research mission was to give Keynesian economics firmer microeconomic foundations, particularly in the area of monetary theory.

  William Brainard, a Yale colleague, became one of his most frequent collaborators. Together with Brainard, Tobin published work in 1977 on asset markets and the cost of capital. In 1957 Yale appointed him Sterling Professor of Economics, the university's highest faculty honor.

  In 1972 Tobin and Yale economics professor William Nordhaus published Is Growth Obsolete?, an article that introduced the Measure of Economic Welfare. It was the first model designed for economic sustainability assessment, an early intervention in debates about whether GDP was an adequate measure of a society's well-being. He formally retired from Yale in 1988, though he continued lecturing as Professor Emeritus and kept writing until his death.

• 5. Kennedy's Economist

  ›

  During 1961-62, Tobin served as a member of John F. Kennedy's Council of Economic Advisers under chairman Walter Heller. The roster of economists working alongside him included Arthur Okun, Robert Solow, and Kenneth Arrow. Together they helped design the Keynesian economic policy that the Kennedy administration implemented.

  After his formal term on the Council, Tobin continued as a consultant between 1962 and 1968. He also served for several terms on the Board of Governors of the Federal Reserve System's Academic Consultants panel and as a consultant to the US Treasury Department.

  His time in Washington was not a detour from his academic work. It was the applied expression of a consistent conviction: that government had both the tools and the responsibility to prevent recessions and stabilize economic output. He returned to Yale and continued writing on current economic issues throughout his career, holding the presidency of the American Economic Association in 1971.

• 6. The Ideas That Stayed

  ›

  The Nobel Committee awarded Tobin the prize in 1981 for "creative and extensive work on the analysis of financial markets and their relations to expenditure decisions, employment, production and prices." He had already won the John Bates Clark Medal in 1955, awarded to the American economist under forty judged to have made the most significant contribution to the field.

  Several of his technical contributions became standard tools in economics. The tobit model, introduced in 1958, is a regression technique for situations where the dependent variable is censored, meaning it can only take values above or below a certain threshold. His "q" theory of investment, from 1969, the Baumol-Tobin model of transactions demand for money from 1956, and his 1958 model of liquidity preference as behavior toward risk are all cited in economics textbooks.

  The 1958 liquidity preference paper was also a conceptual breakthrough in how economists think about investing under uncertainty. Rather than tracking an investor's utility across a potentially vast number of possible outcomes, Tobin showed that under certain conditions about preferences or return distributions, the whole problem could be reduced to a simple trade-off between risk and expected return. As the economist Palda later described it, this simplification was difficult to exaggerate in its brilliance.

• 7. The Tobin Tax

  ›

  Outside the seminar room, James Tobin became most widely known for a proposal he made for taxing foreign exchange transactions. He saw international currency speculation as dangerous and unproductive, and designed the tax specifically to throw sand in the wheels of that speculation.

  The idea was not headline news when he first proposed it. But in August 2009, Adair Turner, speaking in a roundtable interview in Prospect magazine, endorsed new global taxes on financial transactions. Turner warned that the financial sector had grown "swollen," paying excessive salaries and becoming too large for society's good. His invocation of the Tobin tax sent the proposal around the world again.

  Along with James Meade in 1977, Tobin had also proposed nominal GDP targeting as a monetary policy rule, formally advocating it in 1980. That idea too has had a long afterlife in policy debates, attracting attention whenever central banks struggle to hit conventional inflation targets. Tobin was a trustee of Economists for Peace and Security, an affiliation that reflected the same conviction that animated the currency tax: that markets left entirely to themselves could produce outcomes that were neither efficient nor safe.