In memory of James Tobin, economist and honnête
hommeOECD Development Centre, Paris
On 11 March 2002, James Tobin — Yale professor, Nobel laureate and adviser to John F. Kennedy — died in New Haven, Connecticut at the age of eighty-four. The remembrances that friends, colleagues and family offered during the memorial service on 27 April brought Jim back to Battell Chapel and to Hillhouse Avenue, both as the scientist who built the Yale school of economics and as the man of integrity. I am grateful to the editors of the European Journal on the History of Economic Thought for this opportunity to remember my Yale master, to whose memory I dedicated a keynote address at the annual conference of the European Society for the History of Economic Thought (ESHET) held in Rethymnon (Crete) on 14-17 March.
At ESHET 2002, I claimed that comparing development experiences reinforces "peer pressure" procedures for institutional change. Building on the responses of Nobel laureates about the most significant works on economics in the twentieth century, published in this Journal (Editorial 2001), I also stressed the relevance to development thinking of theories of economic growth and expectations – to both of which Tobin contributed.
Tobin’s interest in the long run was theoretical rather than historical. It led him to a model which, quoting his autobiography, "differs from the other growth literature by explicitly introducing monetary government debt as a store of value, a vehicle of saving alternative to real capital, and by generating a business cycle that interrupted the growth process". On the other hand, his theory of the allocation of savings among different financial assets ("don’t put all your eggs in one basket", as he liked to say) shows an early awareness of the role of expectations.
Tobin advised the President of the United States on international macroeconomics at a time when the success of the Marshall plan led to the creation of the Organization for Economic Cooperation and Development (OECD) to promote appropriate trade and macroeconomic policies among its members. Development theory and policy were born with the United Nations and the Bretton Woods institutions but the most successful case of development assistance continues to be the Marshall plan. Unfortunately, outside the OECD, the role of "peer pressure" in bringing about appropriate economic and social policies has not been duly recognized.
In fact, the realization that good governance is at least as important as development assistance is one of the great achievements of the " Monterrey consensus", so named in reference to the declaration approved at the UN conference on Financing for Development, held in Monterrey, Mexico in March 2002, the contents of which were influenced by the International Monetary Fund, the World Bank and the World Trade Organization (together with business associations and civil society). And the potential effect of appropriate policies remains immense: in 1950, over 78% of world population lived in countries with a gross domestic product per capita which was 19% that of the OECD; in 2001, the figures were 85% and 15%.
From the perspective of development thinking, then, Tobin’s understanding of international issues is as relevant as his domestic social concerns. I believe Jim’s commitment to the common good reflected both because – as he showed during World War II - the service of mankind was concrete for him. In his remembrance, Nobel laureate Robert Solow evoked Tobin’s dedication to international issues when they were together at the Council of Economic Advisers. After the service, I learned from Richard Cooper that, early in his career, Tobin spent some time at the UN Economic Commission for Europe. Willem Buiter added that Tobin was a visiting professor in Kenya . And his autobiography mentions that, after returning from the council in September 1962, he remained active as a consultant on the issues that had concerned him as a member.
Equally relevant for international development, the autobiography continues: "Kennedy and Johnson added the war on poverty to their agenda. Walter Heller and the council were very much involved. I became quite interested in the economic disadvantages of blacks and in the inadequacies, inefficiencies, and perverse incentives — penalties for work and marriage — of federal and state welfare programs (…). Nothing in our view of the functioning of capitalist democracies says either that prosperity requires hard-hearted welfare policies and small governments or that it requires redistribution in favor of workers and the poor". National institutions serving the common good and international peer pressure help make these choices between equity and efficiency legitimate among OECD countries, even though market and government failures have to be reckoned with.
During the development process, a combination of technology and social institutions explains why some countries prosper while others lag behind. In the contribution to ESHET 2002 mentioned above, I argue that the more patient and adaptive nations take more advantage of technology and may thus avoid being prisoners of history or geography. The reason is that, when the rate of discount is less than the strength of increasing returns relative to the speed of adjustment, an expectations-(rather than history-) driven equilibrium exists.
Back in 1972, Tobin proposed that governments levy a small tax on foreign exchange transactions, as a way to discourage destabilizing speculation. He thought of this tax as a way to help promote free trade, by assuring countries that they could open their markets without exposing themselves to disruptive movements of "hot money" (in the same vein, Tobin was the intellectual force behind the Kennedy tax cut, which is nowadays usually praised by conservatives). On 13 March, at the 7th Annual Strategic Lectures of the Institute of Strategic and International Relations in Paris, I shared a panel on "International security, democratic governance and economic development" with Dominique Plihon, a leader of Attac, the French group dedicated to implement the "Tobin tax". In discussing the Zedillo report (chaired by another product of the Yale school who became President of Mexico) and the ensuing "Monterrey consensus", I mentioned that Tobin had died and referred to him as economist and honnête homme. I was glad to see that my feelings were echoed. The concrete commitment to international understanding and the common good that Tobin provided in his day are a more essential part of the "Monterrey consensus" on international development than the tax that misuses his name .
At the memorial service, everyone shared a sense of gratitude for Jim’s "faith in the power of ideas" and for the modesty he had learned from his Harvard teacher Alvin Hansen, as William Brainard said in his remembrance. John Kenneth Galbraith, a colleague and admirer of Alvin Hansen, remembers Tobin as a "quiet and penetrating economist" whose interest ranged well beyond economics, even though he remained modest about it. Galbraith thought that Tobin was as concerned as he about the poor in India, but that Jim and his wife Betty shared a preoccupation on domestic poverty, and had been less inclined to travel. Once again, Jim’s concern was with concrete problems: finding enough inequality to worry about at home, he never became an "internationalist". The preoccupation with problem solving was visible in the distinguished military service evoked by his brother Roger. It was also typical of his devotion to academic life. Carl Kaysen, a friend from Harvard and Washington, remembers him as "brave and generous" and told me a story that illustrates Tobin’s character. Even before it was time to return to Yale, Kingman Brewster, who was then the provost, agreed to the administration’s request to extend Tobin’s leave of absence. But Tobin declined Kennedy’s offer to stay on, saying he had made a promise which he felt he should keep.
Cambridge, Massachusetts 21 July, 2002