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He published “A Dynamic Aggregative Model” at just the time when I was working on economic growth. as I later realized. After I went on to teach at MIT. SOLOW Introduction: The Tobin Approach to Monetary Economics My wife and I met Jim and Betty Tobin for the first time in Cambridge. I mean. Jim has said that it was his favorite paper. Kermit Gordon. But Tobin had learned about Keynes purely by accident. Not only was it interesting. Credit. an interesting excursion into Keynesian economics. having come back from the war still an undergraduate. 36. Later undergraduates like me were protected against that virus. went back to bed. who had already been named as the Chairman and Members of the new Council of Economic Advisers to take office in January. I read his papers on consumer demand. and Banking. interesting even now. I said I’d think about it. No. I am pretty sure I had not then read Tobin’s 1941 “Note on the Money Wage Problem. it is because I am.) They wanted me to come to Washington and join the Council staff. If I sound nostalgic for that pace. and would soon decamp for Yale.D. The Review of Economic Studies was the preferred journal in those days for eager young middlebrow theorists. I remember my first question was: “What are you guys doing up this late?” (It should have been a warning about Walter’s work habits. Jim must have finished his Ph. One night in December of that year. thesis by then. I was just beginning my graduate work. When I picked it up I found myself talking to Walter Heller. 4 (August 2004) Copyright 2004 by The Ohio State University . neither the first nor the last in a series of humongous Harvard blunders. Vol. but that was not really the beginning of our friendship. my wife and I were already asleep (we had three little kids) when the telephone rang. I knew about Tobin of course. And of course I read “Liquidity Preference as Behavior Toward Risk” in 1958. because I was teaching econometrics and looking for good examples of it. told my wife what it was all about. and Jim Tobin. Then John Kennedy was elected President in 1960. it came out only three times a year with a mere handful of articles per issue. after 11 o’clock. when he was an undergraduate. so I recognized a master hand.” That was. and commented “Why would I want Journal of Money.ROBERT M. probably in a year like 1947 or 1948.

when I pick up a current journal (I am not thinking of JMCB. like Art Okun or me. and probably the last Chairman who made sure that each memo he sent to the President credited the person who had actually done the work or written it. CREDIT. especially in macroeconomics. But I do want to use the occasion to describe Tobin’s way of formulating a model and thinking about it. If this conference induces some young macroeconomists to read a few of Tobin’s best papers. he read memos. Walter Heller hit it off with Kennedy. and the signs of partial derivatives. and occasionally Ken Arrow. This approach was not Tobin’s invention. The regular participants were Jim. where he starts and where he finishes. I am not about to get into the nitty-gritty of equations. Roy Wehrle. (If you want to look at an overview of Tobin’s work. and there’s this stuff in the fourth paragraph that I don’t understand. Dick Attiyeh. Can you explain it to me?” Somehow I doubt that the current Council has that experience. more or less deliberately. Kermit and Joe Pechman often pitching in. So I checked with my department and called back the next day to say OK.and monetary economics. Our family arrived in Washington in January 1961.) Today the focus is on one particular article. It would be sad if it were to die out in the profession. Barbara Berman (as she was then). in words that actually changed my life: “For the last 4 years I’ve been listening to you complain about Eisenhower’s economic policies. I honestly don’t think that the Council of Economic Advisers ever again—or earlier—came close to being what it was in those first Kennedy years. They indelibly marked my view of what serious macroeconomics ought to be (and it may not be yours). That was the real beginning of a long and close friendship with Jim Tobin that lasted until his death in 2002. It was the way your grandfather might have thought about macro. to get a phone call from Kennedy: “I’ve been reading this memo. and Ed Kalachek. Tobin’s way of combining rigor and relevance. Dick Cooper. intelligence and passion. and sometimes. At this hour of the evening. Art Okun. there is an excellent and empathetic survey in the November 2003 Economic Journal by one of his best students. There were regular late night discussions about what to think and what to say about pressing macro issues. who is currently the Chief Economist of the European Bank for Reconstruction and Development.” She replied. Why don’t you put your money where your mouth is?” I couldn’t think of a good answer. theory and common sense.” which appeared in the first issue of JMCB. and he wanted to understand. “A General Equilibrium Approach to Monetary Theory. and me.658 : MONEY. Jim Tobin was clearly the intellectual leader of the Kennedy Council. I was not an unqualified admirer of Kennedy. and was able to communicate with him. it’s a deal. Walter was the first. but he was a dream for an economist to work for. and younger people like George Perry. to explain what we had found out. by the way). I think that is actually happening. unknowns. that would already be a useful service to the future of macroeconomics. AND BANKING to interrupt my teaching and abandon my research? Better a hole in the head. Those conversations were intellectually as good as it gets. with Walter. Lloyd Ulman. Willem Buiter. Tobin just . and to find out what Kennedy wanted to know. has stayed green in my memory for more than 40 years. It was not unknown for a staff member.

I will come to that in a moment. their expectations. The signs of the various partial derivatives are discussed in common-sense terms. accept criticism. So I will just remind you. That cannot be done exactly. plus the ratio of income to wealth (to allow for “necessities” and “luxuries” among assets.” Those are microfoundations. All one can do is to try to make proper allowance. no Euler equations. SOLOW : 659 happened to be a master of it. There would be no objection if you were to frame your dissenting opinion by writing down one of those optimizing models and showing that its implications contradicted Tobin’s specification. their beliefs about the way the economy works. and respect the data. Since I think it may actually be more productive of useful knowledge than the current fashion. I fear that it may soon be extinct. because they are. like some obscure Melanesian language whose native speakers are dying off. Euler equation and all. That personage is not needed with the common-sense approach to microfoundations. But of course you would have to defend your specification. You know. The economist’s responsibility is to choose those asset-demand functions (or whatever) in such a way that they leave adequate scope for the market consequences of the heterogeneities that happen to exist. The usual homogeneity postulates and the adding-up conditions imposed by budget constraints are also built into Tobin’s specification. (I mention Pigou here only to make it clear that this issue has nothing to do with the apocalyptic struggle between Keynes and the Classics. One can take it for granted that agents are heterogeneous. there is something a little ludicrous in the belief that microfoundations for macroeconomics were invented some time in the 1970s. There are no optimizing consumers who maximize the expected present discounted values of infinite utility streams.) If you were skeptical about any of his specifications. . and their notions of “proper” behavior in the economic sphere. The first thing you will notice about “A General Equilibrium Approach” is that its basic building blocks are net-asset-demand functions. If you read Keynes’s General Theory or Pigou’s Employment and Equilibrium (or many lesser works) you will see that they are full of informal microfoundations. Tobin would have welcomed your comments. or his discussion about whether the marginal efficiency of investment should be sensitive to current output or should depend primarily on “the state of long-term expectations. and to connect up with current flows) and also any unspecified predetermined variables that make sense in context. their access to information. Every author tries to make his behavioral assumptions plausible by talking about the way that groups of ordinary economic agents might be expected to act. which determine the fraction of total wealth parked in each specified asset as a function of the rates of return on the various assets. The other big difference you will notice between Tobin’s approach and today’s fashion is the absence of a representative agent. They differ in their preferences. it would be much too hard. But you can recall Keynes’s argument that the marginal propensity to consume should be between zero and one.ROBERT M. I would be sad to see it sunk without a trace. So where are the “microfoundations?” The answer is that they are embedded in those common-sense restrictions on partial derivatives.

.) My view is that the standard “empirical” test of a representative agent optimizing model—which is to “calibrate” it and check that it can reproduce a few low-order moments of the data—is a test with very little power against plausible alternatives.660 : MONEY. There is a lot in “A General Equilibrium Approach” to admire. I found that a clear majority of the articles that could do it did it. One could even question whether a representative-agent model qualifies as microfoundation at all. (An argument about robustness would be acceptable but I don’t recall one ever being made and such an argument would be intrinsically very unlikely to succeed if it were tried. AND BANKING It would cut no ice with Tobin or with me to say that the only respectable microfoundations are those deduced from a model with agents who optimize fully. Credit. not to mention that some of them are big and others small. and much of it has made its way into the literature of monetary-macro-economics.) Nor do I think there is any salvation for the current fashion in an appeal to empirical success. More power to them. A couple of them were straightforward data analysis. and physical constraints that could reasonably be imputed to real consumers. I realize that some fashionistas are in fact working to extend the standard model to allow for heterogeneous agents and various frictions and non-standard behavior patterns. CREDIT. he later described himself as an Old Keynesian. And on top of it all. information. and that the agents in the optimizing model have been endowed with preferences. not Neo. The hurdle is set far too low. (I should be careful about what I describe as “the current fashion. and offered no opportunity for this particular excess. This paper. That is just jive talk unless you can make a good case that real agents can carry out a decent approximation to the suggested optimization. it is rather the extraordinarily limiting and implausible microfoundations that the literature seems to be willing to accept. conditional on the usual things. and Banking. And in the meanwhile. But he was evidently aware that the standard Keynesian emphasis on current flows needed to be completed by an analysis that explicitly linked flows and stocks. Capital. and discovered that only a few of the articles exhibited the telltale symptom of doing their theory by introducing a representative agent who maximizes an infinite sum of discounted future utilities. along with the earlier “Money.” I took a quick look at the latest issue of the Journal of Money. In short. some reason would have to be given why a reasonable person should believe that a model with one agent or identical agents could possibly give a decent representation of a world in which agents differ among themselves in all those ways I just talked about. and Other Stores of Value. Tobin’s asset-demand functions and informal restrictions offer at least a decent shot at giving the world an even break. Tobin was of course a Keynesian. not New. workers. But when I inspected the latest issue of the Journal of Monetary Economics. and managers.” are steps along the way. it is not the general appeal to “microfoundations” that Tobin would have rejected in 1968 or 2002. beliefs. Suppose we move from methodology to substance. not Post. casual observation and the much more rigorous findings of behavioral economics tell us that the world of the fashionable model is very different from the world we are trying to give an account of.

with q doing a lot of the work. The point is that a role for q emerges quite naturally in “A General Equilibrium Approach. in the two-asset money-and-capital model. but Tobin is clear that a higher value of q is favorable for effective demand. almost simultaneous. The last point of substance that I want to mention is perhaps more philosophical than practical. There is no fanfare about it: q had first seen the light of day in a paper by Bill Brainard and Tobin in the May 1968 Papers and Proceedings number of the AER. Tobin asks: what distinguishes money from other assets in this way of looking at the economy? Why is the exchange of money for other government debt expansionary? His answer is that it has nothing to do with the conventional properties of money. the structure of rates of return on this and other assets must change in . the ownership of real capital.. and that is obviously qK. to show how comparative-static results for this shortrun model can be obtained... he shows how the financial sector can be reduced to a single equation in q and Y that plays the role of an LM-curve. less than a year earlier. but other exogenous events can too. “When the supply of any asset is increased. he was. the most lucid macroeconomist ever. That rate is usually taken to be zero. says Tobin.” Tobin needs an expression for real wealth in a model with one produced good and two assets (money and real capital). after all. it is clear what was being talked about in New Haven. but it could be some other number. p. the key is that money has a legally or institutionally fixed interest rate. whether it is a monetary stock or a market interest rate. In this paper. but it too reflects the general equilibrium approach. articles) gets at what these days is called the “credit channel” or “bank-lending channel. I will quote Tobin’s words at length. no issue arises about priority.” A third model in the paper introduces a banking system and two related assets. In summary. SOLOW : 661 A contemporary reader will immediately notice the appearance of q in its standard meaning as the ratio of the equity-market price of a unit of real capital to its cost of production. generally mediated through q. deposits and bank loans. The neat thing. What matters is that it is exogenously fixed. and invites the natural comparative statics to explicate the effects of policy measures on aggregate demand. and he intersects it with a schematic IS curve that is not specified in detail. The other component of wealth. Money holdings have to be deflated by the price of the composite good. is the market value of the existing capital stock deflated by p. What’s more. Given the vagaries of journal-editing and printing.. It could also be said that this paper (along with other. There is no reason to think that the impact will be captured in any single exogenous or intermediate variable.. and not determined in a market.” I’ll drink to that. so he surely had its relation with investment in mind. “. Monetary policies can accomplish such changes. There is no explicit q-theory of investment in this paper. q is usually taken as endogenous in the short run. But the point to remember is that this is a model in which stock effects play an equal role with flows. He also considers a long-run equilibrium interpretation in which q must equal 1.(T)he principal way in which financial policies affect aggregate demand is by changing the valuations of physical assets relative to their replacement costs. it that it does this in an explicit general-equilibrium way.ROBERT M. of course.

” I suspect that this thought also has something to do with Goodhart’s Law: one of the problems associated with expanding the definition of the “money supply” beyond the monetary base is that things with market-determined interest rates get swept into the expanded “money supply. the monetary authority can affect the current rate of production and accumulation of capital assets. to force the market evaluation of existing capital to diverge from its reproduction cost.662 : MONEY. If the rate of return on one asset. a large part of the necessary adjustment can occur in this way. I want to say a word about it from the perspective I have been advancing. As I said earlier. but use their ingenuity to introduce behavioral elements—even if in artificial ways— that can bring the model response closer to what one sees in real economies. the relation to the economy is attenuated. The chance that it will be settled by versions of the Ramsey model seems to me to be orders of magnitude smaller than the chance that the Red Sox will beat the Cubs in the 2004 World Series. This enables the monetary authority to force the market return on physical capital to diverge from its technological marginal efficiency—or.” Apart from the difficulty of control brought about by financial engineering. and Nelson in this volume is precisely intended to co-opt Tobin’s 1969 paper into the fashionable modeling style. On the favorable side. is fixed.. The paper by Andre´s. but different specifications tailored to a preference for forward-looking optimization but limited by unrealistic specifications that you . That is Tobin’s story about monetary policy in the short run. you would have to choose specifications and impose constraints in an ad hoc common-sense manner. indeed must. But if the own rate is fixed. the whole adjustment must take place through reductions in other rates or increases in prices of other assets.) To estimate a Tobin model. optimizing. “money”. and I read the paper as a step in that direction. it is obviously a skillfully carried out exercise in its tradition. what is the same thing. In fact I want to say two things about it. now: suppose I ask what is accomplished by doing this exercise rather than starting with Tobin’s asset-demand functions. representative-agent style. Tobin never took care of it in a satisfactory way.(A)n n -asset economy will provide no more than n–1 independent market-clearing equations. That is a good thing. Lo´pez-Salido. On the skeptical side. and nibbled away at it. etc. Its scope is much narrower than the paper by Andre´s et al.. Estimates would of course depend on those specifications. At least those of us who root for the Red Sox know in our hearts that we are kidding ourselves. AND BANKING a way that induces the public to hold the new supply.. I am much in favor of those who like to—or feel they must—model in the fashionable dynamic. This is the manner in which the monetary authority can affect aggregate demand in the short run. How the short run eases into the long run is a difficult matter. not only mathematically but conceptually. one favorable and one skeptical. then the market rate of return on capital can. Imagine Tobin completed by a real sector in his own style. (Of course the 1969 paper doesn’t talk about goods and labor markets. though he was at least aware of the problem. The alternative is to provide estimates that also depend on specifications. When the asset’s own rate can rise. be among the n–1 rates to be determined. By creating these divergences. CREDIT.

He had his problems with short-run wage and price dynamics. or about the game-aspects of economic policy. And so on. pragmatic person insist on a demand curve that would emerge from a single representative apple-buyer maximizing within a narrow class of utility functions? Why? I realize that an occasion like this is bound to call forth an excess of piety. I am no doubt especially vulnerable to that tendency. So perhaps I should say explicitly that I am perfectly aware that money-and-macro did not end with “A General Equilibrium Approach. Maybe a simple analogy without any ideological baggage will make the point. SOLOW : 663 wouldn’t make unless you had to: ignoring heterogeneity (except in trivial ways). though I would probably not go along. Would any reasonable. if not in practice—by a less plausible. once simple consistency conditions are imposed. Suppose you wanted to estimate a downward p-sloping demand curve for apples. but was soon overtaken in the profession—at least in the journals. If you are looking for an excess of piety. . allowing only special classes of asset preferences. What reason is there to believe that those specifications are any better. that’s where to look. I have been trying to get across the notion that “A General Equilibrium Approach” was a useful paper because it opened up a line of research that was in fact followed by some readers of JMCB. He was perhaps not serious enough about the role of expectations. ignoring bounded rationality. Since Jim Tobin was a close and admired friend. You could argue. that he might profitably have made more use of the intertemporal optimizing model as a sort of benchmark. ignoring capital accumulation (!).” or even with Tobin’s later papers and books. as do we all even now. less promising way of doing monetary macroeconomics.ROBERT M. or not significantly worse than. some reasonable-looking asset-demand functions? I do not see any such reason.