Introduction

James Tobin, winner of the 1981 Royal Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel, was the outstanding monetary economist among American Keynesians. He is known to the public for the proposed Tobin tax to curb international currency speculation and to the economics profession for contributions ranging from the Tobit estimator for limited dependent variables and the Tobin separation theorem in portfolio choice through Tobin’s q in investment theory to the Nordhaus-Tobin Measure of Economic Welfare (a pioneering work of “green accounting”). Tobin vigorously upheld, first against Milton Friedman’s monetarism and then against New Classical economics, the Keynesian vision of an active role for government in stimulating output, employment, and growth and in preventing depressions in an economy that was not automatically self-stabilizing. In the first debate with Friedman (see, e.g., the exchange in Gordon 1974), Tobin largely persuaded the economics profession that money demand does respond to interest rates, and both monetary and fiscal policy matter for short-run aggregate demand. “In retrospect,” reflected Tobin (in Colander 1999, 120), “that controversy doesn’t look as important as the one between Keynesian economics and New Classical macroeconomics — about whether or not the actual economy is best described as a continuous full-employment solution.”