ESSAYS IN ECONOMICS, Volumes 1–4

James Tobin
Yale University Press, 1982–1996

VOLUME 1: MACROECONOMICS

This volume is a collection of professional papers I have written in macroeconomics over the past thirty years. A subsequent volume will include papers on other subjects, principally consumer behavior and econometrics. These collections do not include less scholarly essays on economic policy intended for a popular audience. I have previously published a collection of such papers in National Economic Policy (Yale University Press, 1966).

The essays in this volume are arranged by topic; within each topic they are generally in chronological sequence except when a different order seems to provide a more logical exposition of the subject matter. The papers are not reprinted here exactly as they were originally published. To the best of my ability I have corrected typographical errors and other slips. More important, I have deleted material that would be repetitive of other chapters; and in some cases I have deleted material that today appears to me irrelevant or wrong. I have also provided new footnotes to help the reader see the connection between one chapter and another and in some instances to point out changes in my views or to make other comments. The introductions to the topical sections attempt to provide some perspective and structure for the essays that follow.

In spite of these efforts at updating and integration, the volume remains a collection of separate papers written at different times rather than a coherent statement of macroeconomics as I might expound it today. Whatever unity it has derives from the quest it represents. I have been trying over these years to piece together for myself a reasonably systematic understanding of the related phenomena of short-run economic fluctuation and long-run growth.

Koon Suryatmodjo faithfully and skillfully read the articles to spot errors and repetitions, and to suggest editorial changes appropriate for this collection. Stephen Webb also gave able assistance in preparing the articles for republication. I am grateful to both of them. For help in this project, as in so many of my endeavors, I am deeply indebted to Mrs. Laura Harrison, my secretary.

Some of the papers in this volume were written with collaborators. I would like to thank William Brainard, F.T. Dolbear, Jr., H.S. Houthakker, Robert M. Solow, Harold W. Watts, Christian von Weizsäcker, and Menahem Yaari for graciously consenting to the inclusion here of articles of which they were joint authors, and Mrs. Challis Hall for permitting me to republish here a series of three papers written jointly with her late husband, my friend and colleague.

Finally, I acknowledge with gratitude the permission of the original publishers of the articles: American Economic Review, Alfred Knopf, Inc., Econometrica, Prentice-Hall, Inc., Economia International, Quarterly Journal of Economics, Richard D. Irwin, Inc., Review of Economic Studies, Journal of Money, Credit, and Banking, Review of Economics and Statistics, and Journal of Political Economy.

VOLUME 2: CONSUMPTION AND ECONOMETRICS

This is the second of two volumes of essays in economic science published from 1940 to 1972. The first volume, published in 1972, contained twenty-four papers on macroeconomics. The first four chapters of this volume continue the macroeconomic theme; they concern the theory of the relationship between unemployment and inflation and the unpleasant dilemma their connection poses for policy. Part V, ten papers on the consumption function, is also related to macroeconomic theory. But these papers also relate to the theory of individual behavior, and a number of them report the results of empirical econometric research. These two interests carry over to Parts VI and VII. In Part VI consumer theory and statistical method are applied to the problem of rationing. The three papers of Part VII are attempts to develop and to apply econometric methods suitable for the empirical analysis of consumer behavior.

With minor exceptions, mostly editorial in nature, the papers in this volume are reprinted as they were originally published. Chapter 26, however, is a rewritten amalgam of material published originally in two separate comments on papers presented at conferences. Those comments would not be meaningful here, but the substance of the model I presented is quite relevant.

I am grateful to Walter Dolde, F. Trenery Dolbear, Jr., Harold Watts, and H.S. Houthakker for allowing me to include here papers I wrote in collaboration with them, and I am even more grateful for those collaborations. I also acknowledge with gratitude the permissions of the original publishers of these papers, listed elsewhere, to reprint them here. I also express my deep appreciation to Mrs. Laura Harrison, Koen Suryatmodjo, and Stephen Webb, who helped prepare these volumes for publication.

VOLUME 3: THEORY AND POLICY

The papers in this volume were mostly written and published since 1974, although several earlier ones, including one (chapter 24) not previously published, are included. This is the third volume of my professional papers in economics, collected under the general title Essays in Economics; volume I bore the subtitle Macroeconomics (Chicago: Markham, 1971; revised edition New York: North-Holland, 1974); volume 2, the subtitle Consumption and Econometrics (New York: North-Holland, 1975). The three volumes do not encompass less scholarly essays on economic policy intended for a popular audience. I have previously published a collection of such papers in National Economic Policy (New Haven: Yale University Press, 1966).

The bulk of the present volume, parts I-III, consists of papers in macroeconomics written after the preparation of volume 1. Exceptions are chapters 7, 12, and 18. These are earlier papers now included because they are substantively related to the later articles with which they are grouped.

Part IV gathers together five articles on welfare and inequality. These are related both to my interest as an economist in these subjects and my concern as a citizen with welfare and tax reforms, and with policies to diminish poverty, discrimination, and inequality. Consequently they are close to, perhaps even beyond, the line separating professional papers from popular policy-oriented pieces that these volumes were designed to respect. If any of them cross the line, I hope the reader will excuse me, and perhaps also for chapter 14 in part III, which combines economic analysis, statistical narrative, and political opinion.

Part V is of a different character altogether. The essays, either book reviews or memoirs, concern six distinguished economists.

The monetary papers of part I fall into three groups. The first four expound, and apply to the stagflationary economy of the 1970s, a framework for monetary analysis set forth in a number of the essays published in volume 1. I stress the systematic variation and unpredictable volatility of the velocity of monetary aggregates, the persistence of inflationary trends in the face of monetary contraction, the importance of equity prices in the climate for real investment, the effects of monetary policy on equity prices, and the misleading nature of simplistic real interest rate computations when, as in the case of OPEC price increases, consumer price inflation overstates the dollar returns to operational investments. Chapter 4 uses financial data for a sample of corporations to trace the changing weights of growth, cyclicality, debt, dividend payout, and other factors in security market valuations, and from these weights computes an index of the cost of capital for business investment.

"Keynesian" has become a bad word. Politicians and pundits, who probably have never read J. M. Keynes, blame his economics for all the discontents of the day. Economic theorists who have read Keynes find his influence at the root of mammoth analytic errors. As a beginner in economics in college I cut my teeth on Keynes's General Theory. Over the forty-odd years since, I have been a friendly critic or a critical friend. I have tried to play some part in correcting, amending, extending, and generalizing Keynes's analysis, and in constructing the "neoclassical synthesis" of Keynesian and price-theoretic traditions in macroeconomics. In part I, the message of chapters 5 and 6 is that neither recent economic history nor latter-day classical counter-revolutions in economic theory have rendered obsolete the central propositions of Keynesian macroeconomics. [This is the theme of my book Asset Accumulation and Economic Activity (Oxford: Basil Blackwell; and Chicago: University of Chicago Press, 1980).]

An earlier controversy in monetary theory was provoked by Milton Friedman's brand of monetarism, beginning in the mid-1960s. I entered the lists, perhaps all too often, as the eclectic Keynesian challenging the extreme theoretical and empirical claims of Friedman and other monetarists. Chapters 7–9 continue a sequence of articles republished in volume 1. Chapter 7 questions on empirical grounds Friedman's "permanent income" theory of the demand for money; he abandoned the theory about the same time — probably not because of this article! In 1970–1971 Friedman, responding to widespread and long-unsatisfied interest, published in the Journal of Political Economy two articles expounding the conceptual and theoretical basis of his monetarist doctrines. Chapter 8 was my contribution to the subsequent symposium. At issue is whether fiscal policies and other nonmonetary shocks can, in the absence of accommodative changes in money supplies, systematically alter aggregate demand, output, and prices. I argued against Friedman's essentially negative answer. Chapter 9 is a sequel in the same controversy, questioning a back-up monetarist position that fiscal policies have transient effects that are wiped out in time by the growth of public debt.

The first two chapters of part II continue the same subject: the effects of fiscal and monetary policies, short run and long run, on output, prices, interest rates, and capital formation. The more ambitious is chapter 11, a thorough-going exposition of the macroeconomic theory of an economy with three imperfectly substitutable kinds of assets available to savers, namely, money, bonds, and capital.

In chapter 13 Martin Baily and I considered whether public service employment or wage subsidies to private employers could be expected to increase employment in aggregate. The obvious affirmative answers are naive, and "natural rate" theories suggest that these interventions will not alter employment or unemployment, only their distribution. Our verdict was cautiously optimistic. Chapter 14 takes a nonapocalyptic view of the size and growth of the public sector in the United States and argues against freezing fiscal rules into the Constitution. I wrote chapters 15 and 16 while spending the year 1972–1973 at the University of Nairobi, Kenya; they seek to use economic analysis on matters that were in the forefront of professional and public discussions of policy at the time. Chapter 17 reprints the attempt my colleague Bill Nordhaus and I made to conceptualize and illustrate a national Measure of Economic Welfare. The approach turned out to be popular not only in this country but in Japan and elsewhere. Much more ambitious and thorough statistical efforts to construct measures of this kind are in process.

My interest in international monetary economics and policies owes a great deal to my friend and colleague Robert Triffin, and to my special responsibilities on these matters when I served on President Kennedy's Council of Economic Advisers in the early 1960s. The framework of chapter 18 is one of my reactions to the problems of balance of payments adjustment, and to the conflicts of interest these problems generate between countries. The floating exchange rate regime of the 1970s changed the game; the problems and conflicts are the same but show up in different guises. My offbeat reform proposal is set forth in chapter 20. Preceding it is a theoretical article on exchange rates, which extends to an international setting the macroeconomic modeling framework of chapter 11.

In part IV, four of the five essays were related to a crusade that engaged me in the mid-1960s. In addition to structural antipoverty strategies — measures to preserve and improve human capital and to assure equal opportunity — I favored, as I do now, some income redistribution via taxes and transfers. A national negative income tax seemed, as it does now, a very good way to accomplish humanitarian goals while minimizing perverse incentives with respect to work, family stability, and migration. Chapter 24 goes one step further by integrating welfare transfers or "negative taxes" with the regular positive income tax. Chapter 25, given as the Henry Simons Lecture at the University of Chicago Law School in 1970, is on a different but related subject. It is interesting that public sentiment in a democracy demands egalitarian distribution of some goods and services and some obligations while also tolerating and even welcoming vast differences in total income and wealth.

As a student and practitioner of economics, I have always enjoyed reading what economists said about each other and discovering the human side of the authors whose scientific works I studied. Biographical portraits by Keynes, Schumpeter, and Samuelson are works of art, revealing of the artists as well as of their subjects. Though their examples inspire me to include part V in this collection, I do not pretend to join their league.

Alvin Hansen was for me a teacher and mentor, and then for another quarter-century a friend. Kermit Gordon, my contemporary, I knew for many years prior to an intimate working relation in Washington in 1961–1962, which cemented a close friendship for the rest of his life. Harry Johnson was also a very good friend from 1948 until his death in 1977, though mostly at a distance after our common experiences in early post-war Cambridge, England. Paul Douglas I knew less well but admired from afar. The other two are fortunately still living. The brief piece on Milton Friedman, on the occasion of his Nobel award, speaks my genuine admiration of his scientific contributions, transcending the dissents from his monetary theories and policies expressed elsewhere. A long friendship with Ken Galbraith, characterized fundamentally by mutual respect, has survived irreverent disagreements of the kind expressed in my book review (chapter 31).

Several of the essays were, as indicated in the contents, written jointly with others. I thank all my coauthors both for their pleasant and fruitful collaborations and for their consents to publish our joint work in this volume. As on many previous occasions, including the two previous collections of essays, the help of my secretary, Mrs. Laura Harrison, has been indispensable. I am grateful to the MIT Press for suggesting the assembly of another volume and for patiently putting it together. Finally, I acknowledge with thanks permissions to reprint here articles originally published in American Economic Review, American Enterprise Institute, American Philosophical Society, Ballinger Publishing Co., The British Academy, Brookings Institution, Daedalus, Eastern Africa Economic Review, Economic Inquiry, The Economist, The Industrial Conference Board, Journal of Development Economics, Journal of Finance, Journal of Law and Economics, Michigan State University, the MIT Press, National Bureau of Economic Research, North-Holland Publishing Co., Princeton University Press, Quarterly Journal of Economics, Southern Economic Journal, Yale Law Journal, and The Yale Review.

VOLUME 4: NATIONAL AND INTERNATIONAL

This is the fourth volume of my professional papers in economics, collected under the general title, Essays in Economics. The papers in this collection were written and published during 1980–1994, except for the last chapter, my 1974 memoir of Seymour Harris. I am grateful to the MIT Press for publishing this volume and Essays, Volume 3, and for taking over and reprinting the first two volumes, thus keeping the whole set in print.

The Essays collections do not include less scholarly essays on economic policy intended for general readers. I have published separately two collections of such papers, and a third one is in the works.

Not surprisingly, most of the articles in this volume concern macro-economic theory and policy. The introductory chapter is autobiographical. Part I contains five essays on money and finance, beginning with my Nobel lecture in 1981. That lecture describes the theoretical model of the economy's financial sector and its relation to macroeconomic activity developed by me and my colleagues at Yale. The following chapter concerns the empirical implementation of the model. Chapter 5 is my attempt to explain the phenomenon of money to encyclopedia readers.

Part II consists of articles on various aspects of macroeconomics. Chapters 7, 8, and 13 state my Keynesian views, in opposition to the new classical attacks prevalent in recent years. All macroeconomic debates are ultimately about policy, but the essays of part III specifically discuss policy issues, both monetary and fiscal. In the last twenty-five years, international money and finance have become increasingly important aspects of macroeconomics and of my own interests. These are the subjects of part IV.

Continuing a practice begun in Essays, Volume 3, the final part reprints some articles and memoirs concerning particular economists whose paths I have crossed, if not personally, then at least intellectually.

Acknowledgments

Several of the essays were written jointly with others, as indicated in the table of contents. I thank all the joint authors both for our fruitful and pleasant collaborations, and for their consents to republish our works here.

During the years when the essays collected here were written, I have continued even in retirement to benefit from the logistical support and intellectual stimulus of my environment here at Yale University, its Department of Economics, and especially the Cowles Foundation for Research in Economics. I cannot begin to list my individual debts. For help in preparing this book for publication I am grateful to Marian Daly and to two of my undergraduate students, Serkan Saracoglu and Richard Tashjian, and two graduate students, Kevin Foster and Christine Reynolds.