- Introduction:The Tobin Approach to Monetary Economics
My wife and I met Jim and Betty Tobin for the first time in Cambridge, probably in a year like 1947 or 1948, but that was not really the beginning of our friendship. Jim must have finished his Ph.D. thesis by then, and would soon decamp for Yale, neither the first nor the last in a series of humongous Harvard blunders. I was just beginning my graduate work, having come back from the war still an undergraduate. I am pretty sure I had not then read Tobin's 1941 "Note on the Money Wage Problem." That was, as I later realized, an interesting excursion into Keynesian economics, interesting even now, I mean. But Tobin had learned about Keynes purely by accident, when he was an undergraduate. Later undergraduates like me were protected against that virus.
After I went on to teach at MIT, I knew about Tobin of course. I read his papers on consumer demand, because I was teaching econometrics and looking for good examples of it. He published "A Dynamic Aggregative Model" at just the time when I was working on economic growth, so I recognized a master hand. Jim has said that it was his favorite paper. And of course I read "Liquidity Preference as Behavior Toward Risk" in 1958. The Review of Economic Studies was the preferred journal in those days for eager young middlebrow theorists. Not only was it interesting, it came out only three times a year with a mere handful of articles per issue. If I sound nostalgic for that pace, it is because I am.
Then John Kennedy was elected President in 1960. One night in December of that year, after 11 o'clock, my wife and I were already asleep (we had three little kids) when the telephone rang. When I picked it up I found myself talking to Walter Heller, Kermit Gordon, and Jim Tobin, who had already been named as the Chairman and Members of the new Council of Economic Advisers to take office in January. 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.) They wanted me to come to Washington and join the Council staff. I said I'd think about it, went back to bed, told my wife what it was all about, and commented "Why would I want [End Page 657] to interrupt my teaching and abandon my research? Better a hole in the head." She replied, in words that actually changed my life: "For the last 4 years I've been listening to you complain about Eisenhower's economic policies. Why don't you put your money where your mouth is?" I couldn't think of a good answer. So I checked with my department and called back the next day to say OK, it's a deal. Our family arrived in Washington in January 1961.
That was the real beginning of a long and close friendship with Jim Tobin that lasted until his death in 2002. 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, especially in macroeconomics. Walter Heller hit it off with Kennedy, and was able to communicate with him, to explain what we had found out, and to find out what Kennedy wanted to know. I was not an unqualified admirer of Kennedy, but he was a dream for an economist to work for; he read memos, and he wanted to understand. Walter was the first, 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. It was not unknown for a staff member, like Art Okun or me, to get a phone call from Kennedy: "I've been reading this memo, and there's this stuff in the fourth paragraph that I don't understand. Can you explain it to me?" Somehow I doubt that the current Council has that experience.
Jim Tobin was clearly the...