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James Tobin

An American economist who was awarded the Nobel Prize for his work and analysis of financial markets

Who is James Tobin?

Born on March 5, 1918, James Tobin is an American economist who was awarded the Nobel Prize for his work and analysis of financial markets and how they relate to production, prices, expenditure decisions and budgeting, and employment.

 

James Tobin

 

Mr. Tobin focused on Keynesian economics, and his most prominent work was on financial markets. He studied the financial markets and developed theories and ideologies regarding the effects of the markets on investment decisions and consumption of individuals.

 

Summary

  • James Tobin was an American economist who was awarded the Nobel Prize for his work and analysis of financial markets and how they relate to production, prices, expenditure decisions and budgeting, and employment.
  • The Portfolio Selection Theory was established by James Tobin and was the work that won him the Nobel Prize in Economics. The theory outlines the effects of the changes in financial markets on corporations and individual’s investment decisions.
  • Tobin developed an econometric model (the Tobin Model) for censored dependent variables, and he suggested that foreign exchange transactions should be taxed to reduce speculation in the currency markets. The tax is now known as the “Tobin Tax.”

 

Early Life of James Tobin

James Tobin was born in Champaign, Illinois, on March 5, 1918. He attended the University Laboratory High School of Urbana, Illinois. In 1935, Tobin was encouraged by his father (Louis Michael Tobin) to take the Harvard University entrance exams, and he was admitted to the university with a scholarship.

The American economist first read “Keynes’ General Theory of Employment, Interest and Money” in 1936, during his studies. Tobin’s thesis was focused on analyzing Keynes’ framework for presenting equilibrium “involuntary” unemployment. After graduating, Tobin continued his studies, obtaining a Master of Arts degree in 1940. He would later obtain his Ph.D. in 1947.

In 1941, Tobin published his first article – “A Note on the Money Wage Problem” in the Quarterly Journal of Economics – which was based on his thesis. Between 1941 and 1942, he worked as an economist for the Office of Price Administration in Washington, D.C. Tobin enlisted in the U.S. Navy during the Second World War, where he served as an officer.

After the war, Tobin returned to Harvard University to pursue his Ph.D. in 1947. In 1950, he was appointed as an Associate Professor of Economics at Yale University. In 1971, he became the president of the American Economic Association (AEA).

In 1981, Tobin was awarded the Nobel Prize in Economics, and he retired from Yale in 1988. The American economist passed away on March 11, 2002.

 

The Portfolio Selection Theory

The Portfolio Selection Theory was established by James Tobin and was the work that won him the Nobel Prize in Economics. The theory outlines the impacts of the changes in financial markets on corporations and individual’s investment decisions.

According to the theory, corporations and individuals will select physical/ “real” assets and/or financial assets to hold in their respective portfolios, based on the expected returns and risks associated with the assets.

Through his theory, Tobin reiterated that portfolio selection serves as a transmission instrument, whereby monetary and fiscal policies can influence macroeconomic outputs, such as inflation, employment, demand, and investment expenditure.

 

Tobin’s Notable Works and Publications

Besides working as a professor at Yale, Tobin also worked as a consultant and wrote various articles for newspapers, magazines, etc. He dedicated most of his time focusing on Keynesian macroeconomic concepts and models, focusing on financial markets and their macroeconomic inferences.

Some of Tobin’s notable publications and works include (but are not limited to):

  • Liquidity Preference as Behavior Towards Risk” (1958)
  • “On Improving the Economic Status of the Negro” (1965)
  • National Economic Policy (1966)
  • “The New Economics One Decade Older” (1974)
  • “Two Revolutions in Economic Theory: The First Economic Reports of Presidents Kennedy and Reagan” (1988)
  • “One or Two Cheers for ‘The Invisible Hand” (1990)

 

In addition to his publication, Tobin developed an econometric model (the Tobin Model) for censored dependent variables. He also became more popular by suggesting that foreign exchange transactions should be taxed to reduce speculation in the currency markets. The tax is now known as the “Tobin Tax.”

 

Related Readings

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  • Inflation
  • Joseph Stiglitz
  • Natural Unemployment
  • Milton Friedman

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