Introduction to James Tobin
Let me tell you about James Tobin, a Neo-Keynesian economist who won the 1981 Nobel Prize in economics for his work on the financial system and how it affects inflation and employment.
You should know he's famous for creating the Tobin Tax, which is a levy on foreign exchange transactions aimed at cutting down on currency speculation.
Tobin wrote several books, including Essays in Economics and Money, Credit and Capital. He passed away on March 11, 2002.
Key Takeaways
James Tobin served on President Kennedy's Council of Economic Advisers.
He developed portfolio selection theory and the Tobin Tax.
In 1981, he received the Nobel Prize in economics.
Early Life and Education
James Tobin was born on March 5, 1918, in Champaign, Illinois. He got his bachelor's and master's degrees from Harvard University.
After graduating in 1940, he started working at the Office of Price Administration and Civilian Supply in Washington, D.C. During World War II, he served in the United States Navy.
He went back to Harvard for his Ph.D. in economics in 1947 and then joined the faculty at Yale University in 1950, staying there until he retired in 1988.
Public Service
Throughout his career, James Tobin focused on applying economics to real-world problems, and he once said, 'Economics has always been a policy-oriented subject. Unless it is applied to the urgent policy issues of the day, it will become a sterile exercise, without use or interest.'
In 1961, President Kennedy asked him to join his Council of Economic Advisers as one of three economists. They helped with economic policy and put out the 1962 Economic Report, which outlined stabilization and growth policies called the 'new economics.'
Beyond that, Tobin worked as an academic consultant for the Board of Governors of the Federal Reserve and the U.S. Treasury Department.
Portfolio Selection Theory
James Tobin got the Nobel Prize in 1981 for analyzing financial markets and how they connect to spending decisions, employment, production, and prices.
His portfolio selection theory explains how financial markets shape investment choices for households and businesses, based on risks and expected returns. He pointed out that these individual decisions affect bigger economic factors like overall consumption, employment, and inflation.
The Tobin Tax
James Tobin came up with the Tobin Tax after the Bretton Woods agreement fell apart in 1971. That shift replaced fixed exchange rates tied to the gold standard with volatile floating rates.
To handle the quick money movements in this new setup, he suggested a small tax on every currency exchange transaction. This would discourage short-term speculation and protect smaller developing economies from big financial players.
The tax wasn't put into place during his lifetime, and after his death in 2002, its focus shifted from stopping speculation to raising money for international economic and social development.
What Is Tobin's Q Ratio?
The Tobin's Q ratio, developed in 1966 by Nicholas Kaldor and popularized by James Tobin at Yale, measures a company's value as its total asset value divided by its market value.
What Is the Tobin Project?
Started in 2005, the Tobin Project is an independent, non-profit research group inspired by James Tobin's work. It focuses on key 21st-century issues like democratic institutions, government and markets, economic inequality, and national security.
What Is the Baumol-Tobin Model?
The Baumol-Tobin model, created by William Baumol and James Tobin, looks at the balance between the benefits of holding cash for liquidity and the interest you lose by not investing that money.
The Bottom Line
James Tobin was an American economist who won the 1981 Nobel Prize. He created the Tobin Tax, advanced portfolio selection theory, and influenced models like the Baumol-Tobin model and Tobin's Q.
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