Tobin’s q and the Theory of Investment

Abstract

As he indicated in the title of his Asset Accumulation and Economic Activity (1980) James Tobin’s contribution to monetary theory centered on how asset markets affect real economic activity. Tobin came to economics during the Great Depression of the 1930s and emerged from the Depression and his initial immersion in the economics of Keynes with an abiding concern for policy-relevant macroeconomic theory, looking for a channel allowing public policy to stabilize real economic activity and avoid a recurrence of the mass unemployment of the 1930s. Reflecting the formative influences of the 1930s Tobin always regarded large-scale unemployment as a social problem, rather than as voluntary investment in search and consumption of leisure, and shared Keynes’s view of the volatility of private investment as the force driving economic fluctuations.