American Economic Association

Tobin and Monetarism: A Review Article

Asset Accumulation and Economic Activity; Reflections on Contemporary Macroeconomic
Theory. by James Tobin
Review by: Robert E. Lucas, Jr.
Journal of Economic Literature, Vol. 19, No. 2 (Jun., 1981), pp. 558-567
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2724156 .
Accessed: 22/02/2015 10:35
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Journal
of Economic Literature.

http://www.jstor.org

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

Journal of Economic Literature

Vol. XIX (June 1981), pp. 558-567

o bin and Monetarism:

A

Article*

Review

By ROBERT E. LUCAS, JR.

University of Chicago

on essential points, on how to model the strucVOLUMEunder review contains

tures of our economies and on what government
James Tobin's three 1978 YrjoJahnspolicies can improve their performance. Since
son Lectures and his Paish Lecture of the
the mid-1960s the degree of consensus once
same year. These distinguished series procommandedby the post-Keynesian"neoclassical
vide occasions to reflect on "where things
synthesis" has decayed, along with confidence
in the stabilizing potential of active fiscal and
stand" or "what things add up to" in a
monetary intervention.
broad area of research, with the discussion
led by someone of sufficient eminence
Many observers, economists and laymen, perthat it is worthwhile for the rest of us to
ceive a crisis in macroeconomics. Indeed the
stop what we are doing and listen in. In
title of the now famous 1974 Jahnssonlectures
of SirJohn Hicks was, you will recall, The Crisis
macroeconomics, it is difficult to imagine
in KeynesianEconomics.But views differwidely
anyone more suited to this task than James
on the nature of the crisis, even more on the
Tobin.
solution (pp. ix-x).
The lectures may be read with benefit
As the lectures develop, it becomes
as four distinct treatments of four topics,
clear that while other economists may
and perhaps they are best read this way
perceive macroeconomics to be in a state
for they contain a good deal of genuinely
of crisis, Tobin himself does not. These
new substantive material. Tobin did not
lectures are an exercise in reassurance.He
use these occasions to reflect on his many
does not deny that the consensus of the
past accomplishments. They may also be
1960s has decayed. Rather, he argues
read as a fairly unified treatment of a sinobliquely but, in a cumulative sense,
gle topic, a reading the introduction to
forcefully that this decay did not arise
the volume seems to me to invite in its
from weaknesses in the scientific underfirst two paragraphs:
pinnings of the consensus but from an unThe four lectures publishedhere are about macwarranted loss of confidence on the part
roeconomic theory. These are troubled times
of many in the profession. This loss of confor macroeconomics,both theory and applicafidence is then traced to the influence of
tion to policy. Our profession is deeply divided
certain critics of the neoclassicalsynthesis.
Tobin's lectures deal in two ways with
* Asset accumulation and economic activity; Rewhat he sees as a pseudo-crisis.The fourth
flections on contemporary macroeconomic theory.
BY JAMES TOBIN. Yrjo Jahnsson Lectures. Chicago,
and the second half of the third are illusIllinois: The University of Chicago Press; Oxford: Batrations, illustrationsI found seductive, of
sil Blackwell, 1980. Pp. ix, 99. $13.00 ISBN 0-226the
good things that we macroeconomists
80501-8

THE

558

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

559

Lucas: Tobin and Monetarism

could be doing had we not been diverted
by these critics. The second and the early
part of the third are frontal attacks on the
critics themselves. The first is an elegant
reexamination of some aspects of the controversy between Keynes and Arthur
Cecil Pigou in the 1930s, which Tobin sees
as bearing a close relationship to current
macroeconomic controversy.
My own work (for it is time I reveal
myself to be one of these critics) plays too
large a role in Lecture II for me to feel
comfortable in the role of a detached reviewer of the lectures as a whole, and I
imagine it would raise certain credibility
problems should I try to assume this role.
Accordingly, I will devote most of this review to the issues Tobin raises in the second lecture, treating the first not at all,
and the third and fourth tangentially only.
I do this without apology, for all four lectures are marked by the lucidity and grace
that we expect from Tobin's writing, and
readers with even a peripheral interest
in macroeconomics will surely prefer to
acquire their contents firsthand rather
than through a reviewer's paraphrase.
I
Tobin begins his second lecture by
drawing a parallel between the KeynesPigou controversy reviewed in Lecture I
and the current controversy between
Keynesian orthodoxy and what he calls
"the new classical macroeconomics."
Though the lines of battle are drawn on the same
issues as in the 1930s, the new classical economists have more modern and powerful armament. In the contest for the minds of economists,
policymakers,and the general public, they have
the advantage which the Keynesianshad in the
1930s, namely a recent history of unsatisfactory
economic performance and a general impression-right or not-that policies and prediction
based on opposing doctrines have gone wrong.
[Pp. 20-21]

Moreover, it is not only orthodox Keynesians who are thus beleaguered:

". . . it

is not farfetched to say that both earlier

monetarist macroeconomics and Keynesian macroeconomics are under attack" (p.
22).
In introducing the "new classicals,"Tobin offersgenerous praise of "theirinnovations in analytical technique and econometric method," nor is this generosity in
any way retracted as the lecture develops.
The subject of the lectures is not, however, technique and method and Tobin
defines the "new classical school" not in
terms of its technical contributions but
rather in terms of the simplifying assumptions its members tend to use and its prescriptions for policy, both conveyed entirely by undocumented paraphrases, as
in: "The new school denies disequilibrium
and denies that policies can help or speed
the natural processes of stabilization" (p.
22), or as in: "[T]he new classical macroeconomics says that no macroeconomic
policy systematically alters the real course
of the economy" (p. 21).1By emphasizing
what he sees as sharp differences between
the "new classicals"and the older "monetarist" tradition with which most of his
readers could be expected to have some
familiarity,these bald dicta and others like
them are made to appear Delphic, without history, motivation or explanation.
The reader is left to wonder how this
"school," however ingenious its techniques, can have helped to precipitate
what some see as a crisis in so practical
an area as macroeconomic policy.
Keynesian orthodoxy or the neoclassical
synthesis is in deep trouble, the deepest
kind of trouble in which an applied body
of theory can find itself: It appears to be
giving seriously wrong answers to the
most basic questions of macroeconomic
policy. Proponents of a class of models
which promised

31/2

to 41/2percent unem-

1 My actual views on macroeconomic policy were

sketched in my article, "Rules, Discretion, and the
Role of the Economic Advisor,"which appeared after the lectures under review were given. (1980a).

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

560

Journal of Economic Literature, Vol. XIX (June 1981)

ployment to a society willing to tolerate

annual inflation rates of 4 to 5 percent
have some explaining to do after a decade
such as we have just come through. A forecast error of this magnitude and central
importance to policy has consequences,
as well it should. Tracing out these consequences will lead to a somewhat more
coherent picture of the origins and intentions of recent critics of Keynesian
orthodoxy than Tobin provides, though
some of the revolutionary excitement will
be lost.
In the late 1960s Milton Friedman
(1968) and Edmund Phelps (1968) had argued, on fairly similar grounds, that these
predicted Phillips trade-offs were spurious. Their argumentsstressed a distinction
between an anticipated inflation, which
they argued would be roughly neutral in
its effects on employment, and an unanticipated inflation, which could be expected
to stimulate employment. Though I have
no doubt that one could locate passages
indicating that Keynes and Keynesians
were aware of this distinction, it played
no role in working Keynesian models of
that time, and it continues to play no role
today. In contrast, then, to models which
viewed a money multiplier, say, as a single
number independent of whether the
movement in money to which this multiplier is applied is anticipated or not, the
Friedman-Phelps suggestion was a radical
one.
Now, Friedman and Phelps had no way
of foreseeing the inflation of the 1970s,
any more than did the rest of us, but the
central forecast to which their reasoning
led was a conditional one, to the effect
that a high-inflation decade should not
have less unemployment on average than
a low-inflation decade. We got the highinflation decade, and with it as clear-cut
an experimental discrimination as macroeconomics is ever likely to see, and Friedman and Phelps were right. It really is
as simple as that. This view seems to me

to remove most of the mystery as to the

origins of recent challenges to Keynesian
orthodoxy. They did not spring out of nowhere, nor are they to be found in an inexplicable Pigou revival.2
Tobin's lectures contain mention of
these events, as well as a sketch of the
logic underlying the Friedman-Phelps
"naturalrate hypothesis." Indeed, he concludes the latter with the observation that
"MostKeynesian economists accepted the
thrust of the Phelps-Friedman analysis
...." (p. 39). This remark may raise an
eyebrow or two among those who still remember the reception the naturalrate hypothesis in fact received from Keynesian
economists at the time it was advanced,
but these are bygones best let by. The
more serious question is: What, exactly,
is the nature of this acceptance, and what
are its implications? The answer implicit
in Tobin's lectures (he moves from this
point to a largely unrelated criticism of
my work) is that these questions do not
need to be addressed.
This seems to me to miss the point of
recent developments in theory and fact
about as badly as it can be missed. Here
we have Model A, that makes a particular
prediction. We have Model B, that makes
a strikingly different prediction concerning the same event. The event occurs, and
Model B proves more accurate. A proponent of Model A concludes: "Allright, I
'accept' Model B, too." Consensus economics may be a wonderful thing, but
there are laws of logic which must be
obeyed however eclectically one may be
inclined. These models gave different predictions about the same event because
their underlying assumptions are mu2A fuller account of these origins is contained in
my essay (1980).The main elements of the criticisms
of the "new classicals"were formulated soon after
Friedman and Phelps's work appeared, and thus before the "experiment" of the 1970s had been run.
Yet I think it is clear that it was the events of this
decade which led to this line being viewed as a serious challenge to the orthodox, Keynesian view.

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

Lucas: Tobin and Monetarism

tually inconsistent. If the FriedmanPhelps assumptions are now "accepted,"
which formerly accepted Keynesian assumptions are now viewed as discarded?
Tobin does not say. In evading this question, the question which poses precisely
what people mean by a "crisis"in macroeconomics, Tobin'slectures surrender any
hope of shedding light on the nature of
the crisis or of contributing to its resolution.
Though I refer to Tobin as "evading"
a central issue, I do not think he sees it
this way at all. He writes as though he is
willing to concede the "long-run" to
Phelps and Friedman, claiming only the
"short-run"for Keynesians. Where is the
conflict? Let me use a hypothetical policy
exercise to illustratewhy the matter is not
so easily resolved. Think of the problem
of choosing an annual monetary growth
rate. As one who accepts Model A, I will
use it to guide the choice of this rate for
1981, based on conditions in that year; I
will use it again to make the analogous
decision in 1982, based on 1982's situation,
and so on through the 1980s. Next, as one
who also accepts Model B as a long-run
model, I will use it to guide my choice
of the average rate of money growth over
the entire decade. Too late! This decision
has already been made (though nature too
will have a role in setting the circumstances to which the Model A based decision rule will be applied) before Model
B has ever been used. If we concede that
Model A gives us an inaccurate view of
the "long run," then we have conceded
that it leads us to bad short-run decisions
because these decisions are sufficient to
dictate our long-runsituation as well. (This
is not a hypothetical story of the 1980s,
is it? It is a history of the 1970s.)
The problem of reconciling the natural
rate hypothesis with some adequate treatment of output and employment fluctuations is genuine, and it is not easy. To pass
over it lightly is to ignore the motivation

561

for virtually all recent developments in

macroeconomic theory. What makes this
problem difficult is that the basis of the
Phelps-Friedman argument is the idea
that monetary policy is basically a matter
of units changes, and units changes should
not have real consequences. If one accepts
some idea of monetary neutrality as being
central, how does one simultaneously accept the idea that instability in the quantity of money has been a principal source
of real instability? If a particular policy
variable has the power to account for historical employment movements up and
down the business cycle, why can this
power not be put to good use by deliberate manipulation? These questions have
more pertinence for monetarists than for
Keynesians, which is probably why we
thought more about them, but they are
good questions for anyone who accepts
the Friedman-Phelps logic.
What Tobin criticizes in his Lecture II
is a collection of theoretical examples designed to deal with this puzzle, and what
he terms the "new classical macroeconomics" and more colorfully still, the
"monetarism Mark II school." No doubt
from force of habit, he discusses this
"school" as though it were some sort of
political coalition, a critical decision which
leads him to miss the common feature of
these examples: their attempt to deal with
a specific and important scientific problem. The reader who places himself in the
position of a model builder attempting to
face this puzzle honestly will have no difficulty in seeing why results which at first
seemed odd indeed are in fact just what
he should have expected from the first.
One wishes to construct a model in which
monetary changes are neutral in the sense
required by the Friedman-Phelps natural
rate hypothesis. Accordingly, one devises
a setup in which changes in money are,
in effect, currency reforms (so as not to
clutter up the discussion with the inflation-tax issues we all know about). One

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

562

Journal of Economic Literature, Vol. XIX (June 1981)

endows the agents in this model economy

with enough sense to see a currency reform for what it is (or to be free of "money
illusion").These features, if the details are
worked out correctly, produce the Friedman-Phelps conclusion for the "long
run.
But as ThomasSargent and Neil Wallace
(1975) showed in what is perhaps the most
striking of the examples Tobin discusses,
these features produce a great deal more.
If the system has the capacity to absorb
one currency reform in a way that is neutral with respect to real behavior, it must
have the capacity to absorb any number
of them neutrally. Any pre-announced
pattern of currency reforms over time, no
matter how complex or erratic this pattern may be, will be as neutral in its effects
as the single, "once and for all" reform
of textbook fame. Logic does not permit
us the luxury of accepting the second,
"long-run"conclusion as sensible and rejecting the first, "short-run"conclusion as
"extreme":the one follows from the other.
Even if one is willing to think of changes
in the quantity of money as "currency reforms," it is hard to think of them as preannounced. One may, however, think of
agents as reacting to expected movements
in money (again, however complicated
the pattern) as though these were pre-announced currency reforms. If so, one is
left free to think of the unexpected or
"surprise" part of money movements as
having non-neutral or business-cycle-type
effects on real variables. In constructing
an explicit model with this feature, it turns
out to be necessary to model people as
being too short on information to be able
to diagnose the money movement for
what it is as it is in progress. One needs
to add a certain amount of the right kind
of confusion to the system. This is the kind
of model Phelps sketched in his introductory essay to the Phelps volume (1970). I
worked out a version in detail in my 1972
paper. The example worked out in that

paper rests crucially on the hypothesis of

rational expectations, or the hypothesis
that people use their limited information
as best they can. It is also a competitive
equilibrium model, with the usual postulates of maximizing agents and cleared
markets. The same features are shared by
Sargent and Wallace (1975) and by subsequent examples of mine, Sargent's and
Robert Barro's.
These models do succeed in their twin
objectives. They provide examples of
monetary economies in which money has
the kind of long-run neutrality that the
Friedman-Phelps logic requires, yet retains the capacity to induce short-rundisruptions of the sort documented by Friedman and Anna J. Schwartz (1963). These
models do, to be sure, carry implications
which are stronger than those obtained
by Friedman and Phelps, but surely it is
the desire to obtain all the implications
of a set of assumptions which leads us to
prefer explicit theoretical models to
looser, verbal arguments. They do not,
however, succeed in reconciling a Friedman-Phelps long-run with a Keynesian
short-run:There is simply nothing Keynesian about them. I will confess that this
worried me at first, but I got over it after
awhile.
Tobin's reactions to these models are
heartfelt and overwhelmingly negative. I
believe this reflects his view that the "new
classical models" are a cause of the decay
of confidence in the neoclassical synthesis,
as opposed to a response to what I see as
the failure of Keynesian models to deal
with events in the 1970s. Whatever the
reason, Tobin's reaction prevents him
from ever really looking at these models
to see what, if anything, can be learned
from them, and turns what might have
been genuine criticism into the denunciation of a heresy. Much of his criticism is
directed at the level of abstractionof these
models. (By "abstract"I do not mean "rigorous,"of course, but "leaving a lot of im-

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

Lucas: Tobin and Monetarism

portant things out".) "The new classical
macroeconomics [is] an intellectually ingenious construct that does not describe
the societies in which we happen to live"
(p. 46). Mine, in particular, uses ". . . very

questionable ad hoc assumptions for

which no empirical evidence is offered"
(p. 42). "The Lucas model explains the
same gross observationsas Keynesian theory and the Phelps-Friedman hypothesis"
(p. 41) but

".

. . [it] leaves many other

facts unexplained" (p. 42).

The reader should be aware that my
description of the model under discussion
begins: "Each period, N identical individuals are born, each of whom lives for two
periods (the current one and the next)."
And so on. If this sort of thing appeals
to you, read the article. If it does not, you
are right in guessing that it does not get
any better as it proceeds. Now it does not
seem to me a critical or an economic insight to observe that one can detect differences between the world described in this
paper and the United States, or that it utilizes "questionable ad hoc assumptions,"
or that it leaves facts unexplained. If ever
there was a model rigged, frankly and unapologetically, to fit a limited set of facts,
it is this one. Ad hoc? If you only knew
how hard it was. Insofar as theoretical
models of this type have an influence that
is worth trying to counteract (as Tobin
wishes to do), it must be because people
perceive useful analogies between the
patently artificialworld of the model and
the world we live in, and not because they
are unable to distinguish between these
two different worlds. If so, then successful
criticism must go beyond an enumeration
of the ways in which the model and reality
differ to offer some perception of the nature of the analogies that are being drawn
and some argument to the effect that
these analogies are misleading.
The research constituting the "new
classical school"is a collection of theoretical models, including the two I have

563

sketched and many more, by the authors

Tobin lists and many others. There is sufficient diversity among them that it would
be quite impossible to swear fealty to all
of their simplifying assumptions. But examples and counter-examples can teach
us something, and it may be useful to
sketch the main lessons, of wider applicability, that these "new classical"examples
suggest.
One lesson is most clearly drawn from
Sargent and Wallace's 1975 paper and
from subsequent empirical and theoretical work by Sargent (especially 1976 and
1976b). These papers together show that
a classof models in which systematic activist monetary and fiscalpolicy has no ability
to stabilize the economy has exactly the
same ability to fit time series as do standard, Keynesian models in which monetary and fiscal policy has very great powers to do this. This is a counter-example,
of course, and as these authors insist, it
is not a proof that systematic monetary
policy does not matter in the U.S. economy. What these findings do show, however, is that what had formerly been accepted as evidence that economists do
know how to fine tune the economy
through monetary and fiscal policies
(namely, the empirical success of Keynesian econometric models) is no evidence
at all. These multipliers we use in advising
heads of state are meaningless numbers,
just as were the trade-offswe offered our
fellow citizens a decade ago. This does not
preclude the possibility that someone,
someday, will come up with policy multipliers which have some basis in evidence,
but in the meantime, perhaps we ought
to let the limits of our present abilities
be somewhat more widely and franklyadvertised.
A second lesson is not so much an implication of these models but of the hypothesis of rational expectations on which all
of them rest. It bears on the question of
how we want to use the term "policy."

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

564

Journal of Economic Literature, Vol. XIX (June 1981)

One way to think of formulating policy

is to think of the selection of today's decision variables, given today's situation:
How big should the current year's deficit
be? Another is to think of formulating a
set of rules, which the policy authority is
viewed as being in some sense locked into,
describing how policy will react to any
particular state of the system now and in
the future. In a rational expectations
framework,and really I think in any situation in which we need an idea of the way
agents view the future in order to predict
their reactions to current policies, only
the second makes sense. We need to follow the counsel of Henry Simons, Milton
Friedman, James Buchanan, and others to
talk about policy, in terms of rules, and
to seek institutional arrangements which
bind us to follow them (though certainly
this conclusion does not settle the question
of whether the particularrules these economists advocated are better than other
possibilities).
These are rather less sweeping pronouncements than those of Tobin's "new
classical school,"but they are not entirely
without interest. Had his lectures addressed these conclusions, rather than a
platform synthesized from a miscellany of
illustrative models, they would have come
closer to being engaged in the debate that
is really in process. Does Tobin believe
that the Keynesian macroeconometric
models (MPS, DRI, Wharton, and so on)
are of value in providing reliable estimates
of the effects of alternative monetary and
fiscal policies? If not, it would have been
of interest had he said so in his lectures.
If so, it would have been of interest to
know what he believes the scientific basis
for this opinion to be. Does he think that
our economic authorities should continue
to formulate monetary and fiscal policy
on a year-to-year basis, as unconstrained
as they now are by legislative or constitutional limits on what policies may be selected, or does he see our (economists')

task as that of designing new rules of the

game, and conceiving institutional frameworks capable of enforcing them? Abstract theorizing of the sort the "new classicals"have so far produced does not settle
questions of this character, but it can help
to pose them sharplyand once posed, they
need to be faced.
II
Lecture II contains a section entitled
"Rational Expectations Without Market
Clearing,"which I found difficultto read,
quite possibly because it rests on research
results that I have not as yet seen. In any
case, this section heading fits exactly a
class of papers with which I am familiar,
and that I associate with work by Phelps
and John B. Taylor (1977), Taylor (1979),
and Stanley Fischer (1977). The models
in these papers treat wages as being set
in nominal terms for a number of periods
in advance, as opposed to being set periodby-period in competitive markets, but
take expectations to be rationaland otherwise closely match the "new classical"assumptions. These models all produce the
Friedman-Phelps conclusions for the
"long run" yet leave some scope for effective, activist monetary policy due to the
fact that people are locked into a nominally fixed arrangement in advance.
None of these models offers an explanation as to why people should choose to
bind themselves to contracts which seem
to be in no one's self-interest, and my conjecture is that when reasons for this are
found they will reduce to the kind of informational difficultiesalready stressed in my
1972 article, for example. But even if true,
this has yet to be shown, so that at present
these models must be viewed as a genuinely different route by which the puzzle
motivating the "new classicals" may be
resolved. This route is also in a sense less
"extreme," so that some economists may
find experimenting with these models a
less stressfulway to familiarize themselves

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

565

Lucas: Tobin and Monetarism

with the implications of rational expectations.
Some imaginative simulationsby Taylor
(1979 and 1980), using the model he presented in 1979, illustrate very nicely the
sense in which a rational expectations
model with a "Keynesian short run" (that
is, with some prices historically fixed) can
preserve some conclusions we used to
think of as Keynesian and also strongly
differ from others. Taylor'ssimulations require that one think of setting a policy
as fixing a policy rule in advance, and having this rule be entirely trustworthy and
understood by private agents. That is to
say, his rationalexpectations model promises reliable predictions of agents' responses to policy changes only under circumstances in which one thinks of a
"policy change" as a change in the rule
by which particular policy decisions are
generated. Second, to evaluate policies
Taylor utilizes an undiscounted, or "only
the long run matters," objective function,
permitting him to avoid issues of "time
inconsistency." (See Finn Kydland and
Edward Prescott, 1977.) These features
are those his approach shares with the
"new classicals."On the other hand, currency reform monetary changes, foreseen
or not, can have real consequences in Taylor's setup, for prior commitments on
some traders' parts render them helpless
to react immediately in the way they want
to. The best policies under Taylor's criterion are not fixed money growth rules but
rules which direct monetary policy to lean
against the wind in a pre-announced fashion.

Is this what Tobin and others now mean

by a Keynesian model? If so, then we have
come a very long way toward restoring
seriousnessto our discussionsof macroeconomic policy, perhaps as far as we can go
on the basis of the theory and evidence
we have so far processed. My guess would
be that if this were Tobin's view he would
have utilized the opportunity afforded by

the Jahnsson Lectures, together with his

considerable expository abilities, to explain this. It would please me to learn that
this guess is wrong.
III
Tobin's third and fourth lectures are related to the theme of the second, in the
sense that they consciously contrast his
own mature and thoughtful style in applying economic theory with what he presents as the offhand, shoot-from-the-hip
style of the "new classicals."The third lecture'begins with three questions (p. 49):
Do government deficits absorb private saving?
Does public debt diminish private demand for
stocks of productive capital assets?Can the burden of current government expenditure be
shifted to future generations?

"Among its [the new classical macroeconomics] alleged implications are unqualified negative answers to the three questions at the beginning" (p. 49). This is a
mode of criticism into which Tobin lapses
at several points in his lectures. In fact,
Tobin's remark pertains not to the "new
classicalschool" in general, but to a particular article by Robert Barro (1974), a paper which offers nothing that any objective reader could conceivably construe as
an "unqualified negative answer" to any
of the three questions Tobin poses. The
term "alleged," moreover, insinuates that
either Barro or the "new classicals"have
laid claim to implications that they have
not derived. This allegation is Tobin's and
Tobin's only, and I am at a loss to understand why he did not either say that he
,alleges this to be the case, and document
his reasons for doing so, or alternatively,
delete the passage altogether.
The fourth lecture deals with some strategic issues in constructing dynamic models, and advertises some interesting research on asset markets now ongoing at
the Cowles Foundation. This work is a
continuation of Tobin's eari;er work (in
conjunction with William Brainard) on a

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

566

Journal of Economic Literature, Vol. XIX (June 1981)

problem that he correctly identified early

in his career as being central to monetary
theory: the demand for a collection of
highly substitutable "monetary" assets.
(See, for example, Brainard and Tobin,
1968). At some point, we will need to be
told exactly how these asset demands are
to be linked to the characteristics of the
earnings streams to which these assets are
a claim. My guess is that rational expectations may come up at this point, but this
is only a guess and we will have to wait
and see.

IV
As I warned at the outset of this review,
I have made no effort to allocate my attention to varioustopics in this review in proportion to the allocation in Tobin's lectures. Tobin has a remarkable gift for
making difficult matters seem easy, a gift
from which everyone working in monetary economics has reaped large benefits.
My review has glided over those parts of
these lectures in which this gift has
seemed to me to be put to good use, and
has focused on those parts which seemed
to me to substitute the simplification of
caricature for the simplificationoffered by
genuine clarity. I hope my own evident
role in this debate will make it easier for
the reader to undertake necessary corrections.
The archeologist Heinrich Schliemann,
the discoverer of Troy, became convinced, we are told, that a particular skull
unearthed in a later excavation was the
head of Agamemnon. To the frustration
of this creative and productive scientist,
his associates confronted him with one
devastating argument after another to the
effect that this could not possibly be the
case. Exhausted, Schliemann took up the
skull and thrustit in the faces of his unconstructive critics: "Alrightthen, if he is not
Agamemnon, who is he?"

If we cannot trust economists guided

by Keynesian doctrine to direct the fortunes of our economy, whom can we trust?
This is the question with which Tobin
deals in his lectures, and his answer mixes
a masterful display of the use of conventional macroeconomic analysiswith a caricature of the alternative offered by the
"new classicals."It is an answer that struck
me as false, but not because I am convinced that the "new classicals"have succeeded in identifying their "skull" with
the precision claimed by the Keynesian
economists of the 1960s. Its falseness lies
rather in its refusal to face the serious
arguments asserting that the guidance
offered by Keynesian models is so unreliable and speculative as to render it unusable in practical discussions of economic
policy.
The central question of macroeconomic
policy today is not that of which set of
experts should be entrusted with the responsibility to manage our economy. It is
rather that of determining a workable set
of limits on the scope of governmental influence over economic activity and of devising institutional arrangements which
can make these limits stick. The capitalist
democracies have paid dearly for their neglect of this question over the past decade.
If we continue to evade it, as I read Tobin
advocating we do, we are in for a good
deal worse.
REFERENCES
ROBERT.
"Are Government Bonds Net
Wealth?" I. Polit. Econ., Nov./Dec. 1974, 82(6),
pp. 1095-1117.
BRAINARD, WILLIAM C. AND TOBIN, JAMES. "Pitfalls
in Financial Model Building," Amer. Econ. Rev.,
Papers and Proceedings, May 1968, 58(2), pp. 99122.
FRIEDMAN, MILTON. "The Role of Monetary Policy,"
Amer. Econ. Rev., 1968, 58(1), pp. 1-17.
BARRO,

J. A
monetaryhistory of the United States, 1867-1960.

FRIEDMAN, MILTON AND SCHWARTZ, ANNA

Princeton: Princeton University Press for the National Bureau of Economic Research, 1963.
KYDLAND, FINN E. AND PRESCOTT, EDWARD C.

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions

Lucas: Tobin and Monetarism

"RulesRatherThan Discretion:The Inconsistency
of Optimal Plans,"I. Polit. Econ., May/June 1977,
85(3), pp. 473-91.

E., JR. "Expectationsand the Neutrality of Money," I. Econ. Theory, 1972, 4-5(2),
pp. 103-24.

LUCAS, ROBERT

. "Methods and Problems in Business Cycle

Theory," J. Money, Credit and Banking, 1980a

forthcoming.
. "Rules,Discretion, and the Role of the Economic Advisor,"in Stanley Fischer, ed., Rational
expectations and economic policy. Chicago: University of Chicago Press for the National Bureau
of Economic Research, 1980b, pp. 199-210.
PHELPS, EDMUND S. "Money-Wage Dynamics and
Labor-MarketEquilibrium,"J Polit. Econ., July/
Aug. 1968, 76(4), pp. 678-711.
ET AL. Microeconomic foundations

of em-

ployment and inflation theory.New York:Norton,

1970.
AND TAYLOR, JOHN

B. "Stabilizing Powers

567

of MonetaryPolicy under RationalExpectations,"

I. Polit. Econ., 1977, 85(1), pp. 163-90.

THOMAS
J. "AClassicalMacroeconometric
SARGENT,
Modelfor the United States,"J.Polit. Econ., 1976a,
84(2), pp. 207-37.
. "The Observational Equivalence of Natural

and UnnaturalRateTheories of Macroeconomics,"

J Polit. Econ., 1976b, 84(3), pp. 631-40.
AND WALLACE, NEIL. "'Rational' Expecta-

tions, the Optimal Monetary Instrument,and the

OptimalMoney Supply Rule,"J.Polit. Econ., 1975,
83(2), pp. 241-54.
TAYLOR, JOHN B. "Estimationand Controlof a Macroeconomic Model with Rational Expectations,"
Econometrica,1979, 47(5), pp. 1267-86.
. "An Econometric Business Cycle Model with

RationalExpectations:Policy EvaluationResults,"
Columbia University Working Paper, 1980.
TOBIN, JAMES AND Ross, LEONARD. "Living with
Inflation,"New YorkRev. of Books, May 6, 1971,
pp. 21-26.

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AM

All use subject to JSTOR Terms and Conditions