James Tobin was a Neo-Keynesian economist who received the 1981 Nobel Prize in economics for his research on the financial system and its impact on inflation and employment.

He is known for pioneering the Tobin Tax, a levy on foreign exchange transactions to reduce currency speculation.

Tobin is the author of several books including Essays in Economics and Money, Credit and Capital. James Tobin died on March 11, 2002.

Early Life and Education

James Tobin was born on March 5, 1918, in Champaign, Ilinois. He earned both a bachelor's and master's degree from Harvard University.

After his graduation in 1940, Tobin began his career at the Office of Price Administration and Civilian Supply in Washington, D.C. During World War II, he served in the United States Navy.

Tobin returned to Harvard to earn a Ph.D. in economics in 1947 and joined the faculty at Yale University in 1950 until his retirement in 1988.

Public Service

Applying the study of economics to real-world problems guided James Tobin’s work throughout his career and he once noted, “Economics has always been a policy-oriented subject. Unless it is applied to the urgent policy issues of the day, it will become a sterile exercise, without use or interest."

In 1961, President Kennedy invited James Tobin to serve as one of three economists on his Council of Economic Advisers. The group aided the executive branch on economic policy issues and published the 1962 Economic Report, a statement of stabilization and growth policies known as the “new economics”.

In addition to his work with the Kennedy Administration, Tobin served as an academic consultant to the Board of Governors of the Federal Reserve and the U.S. Treasury Department.

Portfolio Selection Theory

James Tobin received the Nobel Prize in economics in 1981 for his analysis of financial markets and their relations to expenditure decisions, employment, production, and prices.

His portfolio selection theory defines how financial markets influence the investment decisions of households and businesses based on weighted risks and expected rates of return. Tobin emphasized that these microeconomic decisions made within a home or business influence macroeconomic aggregates, such as overall consumption, employment, and inflation.

The Tobin Tax

James Tobin developed the "Tobin Tax" in response to the collapse of the Bretton Woods agreement in 1971. Volatile floating currency exchange rates replaced fixed currency exchange rates once based on the U.S. dollar's link to a gold standard.

As money moved quickly in an environment of varying rates, Tobin proposed to reduce this volatility with a small tax levied on every transaction of exchange from one currency to another. This tax would discourage short-term currency speculation and cushion the effect of such speculation on small developing economies, which could not compete with large financial institutions.

The "Tobin Tax" was not formally implemented or used until after James Tobin's death in 2002 and Tobin's original purpose of halting currency speculation has been eclipsed by ideas of using the tax to raise revenue for economic and social development internationally.

The Bottom Line

James Tobin was an American economist who received the 1981 Nobel Prize in economics. He pioneered the "Tobin Tax," the study of portfolio selection theory, and has influenced theories in economics including the Baumol-Tobin Model and the "Tobin Q."