James Tobin
Citation: For his analysis of financial markets and their relations to expenditure decisions, employment, production and prices.
The key idea
Tobin's q (the ratio of market value to replacement cost of capital) drives investment. Portfolio choice models how investors allocate between risky and safe assets.
The explanation
Tobin developed the portfolio-choice model (mean-variance optimisation in a two-asset world), the q-theory of investment (firms invest when q > 1), and proposed the Tobin Tax (a small levy on FX transactions to dampen speculation). He was Kennedy's chief economic advisor.
Why Africa should care
Tobin's q is the framework behind every M&A and corporate-finance discussion at Nairobi Securities Exchange listings. The Tobin Tax debate has been revived in proposals for African FX-transaction levies — Kenya's controversial digital service tax and various proposed mobile-money levies have similar economic logic.
How to use it
Use Tobin's q to ask whether a firm's stock price implies expectations of capital expansion or contraction. A persistently high q signals expected growth; a persistent q < 1 signals an industry in retreat.
Canonical works
- James Tobin (1958) "Liquidity Preference as Behavior Towards Risk" Review of Economic Studies
- James Tobin (1969) "A General Equilibrium Approach to Monetary Theory" Journal of Money, Credit and Banking
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