Customer Reviews

Essays in Economics, Vol. 1: Macroeconomics

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This is an excellent collection of articles,some coauthored with other economists,written by Tobin.This review will concentrate on essay number 3, from the first part of the book, on liquidity preference and monetary policy,and essay number 15,from the third part of the book, on liquidity preference as behavior toward risk.
Tobin's entire modeling approach in macroeconomics is based on the application of the Ramsey-de Finetti-Savage personalist, subjectivist,Benthamite Utilitarian approach to probabilitiy and decision making.This subjectivist Bayesian approach runs entirely counter to the logical aproach to probability put forth by J M Keynes on 1921(1907,1908).Tobin accepts the Bayesian misbelief that there is no such thing as uncertainty distinct from risk.Further,risk is always measurable by the standard deviation of a normal probability distribution and all probabilities are unique,linear,exact,precise,definite,known single number answers .Bayesian updating simply involves finding a more accurate mean/variance/standard deviation for a normal distribution.This directly conflicts with Keynesian revision which means that new data can fundamentally CHANGE THE RELEVANT PROBABILITY DISTRIBUTION from normal to non normal.
Naturally,,given the above framework,Tobin evaluates monetary policy from the viewpoint that only a transactions demand for money is operational. Tobin follows Baumol's work on the need to hold money to deal with risky transactions,as well as the desire to hold cash to smooth out payment patterns in discrete time,as opposed to continuous time.This means that the speculative demand for money can't be anything other than a very minor problem for the macro economy and that the Tobin tax on stock market transactions is not needed theoretically since such speculative behavior should not lead to any major macroeconomic problems.Of course,for Keynes the speculative demand for money is the primary problem.Liquidity preference is behavior in the face of uncertainty and not risk.

Tobin called himself an "eclectic" Keynesian because he had no idea of what it was that Keynes was talking about when Keynes pointed out that it was the uncertainty of the decision maker that was at the root of the problem of insufficient aggregate investment spending, due to uncertain expectations of the future.Unfortunately,Tobin never realized what the fundamental logical foundation of Keynes's system of decision making was-the weight of the evidence variable,w, from Keynes's A Treatise on Probability(1921,sections 7 and 8).Bayesians automatically assume that w=1.This allows them to constantly update with new evidence while at the same time never changing the initial probablity distribution.