The Elgar Companion to John Maynard Keynes
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The Elgar Companion to John Maynard Keynes

Edited by Robert W. Dimand and Harald Hagemann

The most influential and controversial economist of the twentieth century, John Maynard Keynes was the leading founder of modern macroeconomics, and was also an important historical figure as a critic of the Versailles Peace Treaty after World War I and an architect of the Bretton Woods international monetary system after World War II. This comprehensive Companion elucidates his contributions, his significance, his historical context and his continuing legacy.
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Chapter 75: James Tobin

Robert W. Dimand


James Tobin, 1981 Nobel laureate in economics, was the outstanding monetary economist among the founding generation of American Keynesians. He extended each of the sectors of the IS–LM framework for analysing aggregate demand: saving and consumption (wealth as an argument in the saving function), investment (Tobin’s q), money supply (commercial banks creators of money) and money demand (the Allais–Baumol–Tobin square root rule for transactions demand for money, the mean-variance approach to portfolio demand for money as an asset). Tobin’s q theory posited that investment depends on q, the ratio of the market value of equity to the replacement cost of capital (a ratio related to Q in Keynes’s Treatise on Money), providing a channel for speculation, expectations and monetary policy to affect investment through asset prices. Tobin spoke for Keynesians in a controversy with monetarist Milton Friedman about the possibility of, and need for, stabilization policy. Rejecting the representative agent models underlying New Classical economics, Tobin advocated a different sort of “general equilibrium approach to monetary theory” that emphasized stock-flow consistent modelling. Calling himself an Old Keynesian rather than New Keynesian or Post-Keynesian, Tobin argued that economies are stable only within a corridor of stability, requiring government intervention to return to potential output if a large shock moved the economy out of that corridor.

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