Yale University professor James Tobin, long credited with being one of the nation's most creative economic thinkers, yesterday won the Nobel economics prize for one of his most practical pieces of work.
The Swedish Academy of Sciences in Stockholm awarded the 1981 Nobel Memorial Prize for Economic Theory to Tobin, 63, for an analysis of investments and financial markets that it described as a "portfolio selection theory." He will receive 1 million Swedish kroner, or about $180,000, in prize money.
Tobin has developed a wide following for his academic endeavors, but he also has been prominent among those academicians who lend their talents in the political and economic policy arenas.
He was a member of president John F. Kennedy's Economic Council in 1961-62 and in recent months has been one of the most severe critics of President Reagan's economic policies and of the Federal Reserve Board. He contends that they have made the mistake of instituting an inflationary tax policy at the same time that they are restricting the amount of credit in the economy. That combination, he says, ensures that the nation will suffer both inflation and high unemployment for years to come.
In recognizing Tobin's achievements, the Nobel committee honored one of the leading American exponents of Keynesian theory, just as it has recognized the apostle of the opposite leading theoretical school, Milton Friedman, dean of the monetarists, in 1976. The Keynesians rely more on tax and budget adjustments to regulate the economy, the monetarists rely almost exclusively on controlling the supply of money and credit.
A surprised and delighted Tobin said in New Haven yesterday that the "portfolio selection theory" cited by the Nobel committee "sets forth the principle of not putting all your eggs in one basket because then, if something goes wrong, you lose them all at once."
Other economists said that the title the Nobel committee chose to define this work of Tobin's is too narrow, and that Tobin had been modest in explaining it for reporters in New Haven yesterday. Actually, Tobin's work for the first time showed the relationships of financial assets to the development of government financial policy.
"Tobin's creative and extensive work on the analysis of financial markets and the transmission mechanisms between financial and real phenomena has unquestionably inspired substantial research during the 1970s on the effects of monetary policy, the implications of government budget deficits and stabilization policy in general," the academy said.
"The lively and qualified research in progress in these areas is to a large extent based on Tobin's fundamental contributions," the citation continued. "Few economic researchers of today could be said to have gained so many followers or exerted such influence on contemporary research."
Among practical things that came out of Tobin's work was not only the public's willingness to diversify financial holdings, but also an awareness that "money" can be held in different forms, such as certificates of deposits or money market funds. Thus, every time the Federal Reserve tries to control one kind of money, Tobin showed, ingenious markets can devise a different form of it.
Tobin for years has been mentioned as a possible Nobel award winner because of his studies of monetary policy, as well as his work on balance of payments deficits and exchange rates. The Swedish academy, in singling out Tobin's "portfolio selection theory," mentioned that it was only part of a series of accomplishments "which cover a broad spectrum of economic research."
Tobin is known in the profession for original or seminal work. When Kennedy first offered him an Economic Council job, Tobin demurred, saying: "You don't want me, I'm an ivory tower economist."
Kennedy responded: "That's the best kind -- I'm an ivory tower president."
Tobin becomes the 10th American recipient in the 13 years since the Nobel economics prize was first awarded. His selection was welcomed by his colleagues, especially by fellow Keynesians.
"It makes my day," said Walter W. Heller, former chairman of the Council of Economic Advisers, when informed of the Tobin award in a telephone conversation. "What comes first to mind is the bell-like clarity of his mind and thinking."
Economist Paul Samuelson, himself a Nobel economics award winner, gives Tobin credit in his famous economics textbook for being among the first to become "disenchanted" with using the gross national product to measure economic welfare. With economist William Nordhaus, Tobin developed the concept of net economic welfare by placing a price and cost on the process of urbanization -- pollution, for example.
But perhaps even more important, Tobin's study of monetary and fiscal policy convinced him that the best way to achieve steady economic growth was to be tough on the fiscal side -- run a federal surplus if possible -- while following a fairly easy money policy.
A few weeks ago, Tobin described the probable results of the Reagan-Volcker policy in grim terms before a group of House of Representatives staffers. He attacked Federal Reserve Board Chairman Paul Volcker for following a "Thatcher-like" policy, which he defined as a "single-minded" intention to bring down inflation through a tough monetary regime. He was referring to British Prime Minister Margaret Thatcher.
Volcker, Tobin asserted, is ready to "accept whatever kind of damage this does to the real economy in terms of unemployment, low production, recession, low investment, and so on in the hope that in time, enough people will be unemployed, enough union leaders will be desperate to protect the jobs of their members, enough businessmen will be like Chrysler desperate for selling something, that they will begin to slow down the rates of wage increase and price increase in the industrial sector of the economy which are the core of our inflation."
Tobin argued that it would be a "perverse" approach now to raise taxes or cut the budget in order to balance the budget, without getting a change in monetary policy. Before Congress proceeds to tighten up fiscal policy, as now demanded by Wall Street, Tobin said, it ought to get some assurance from the Fed that it will ease up on monetary policy.
Born in Champlain, Ill., on March 5, 1918, Tobin has been at Yale since 1950 and professor of economics since 1955, becoming Sterling Professor in 1957. He is the university's second economics laureate, following Tjalling Koopmans, who shared the 1975 award.
Tobin served as president of the American Economic Association in 1971. He has a 1939 summa cum laude bachelor's degree from Harvard College. He also has a master's (1940) and a doctorate (1947) from Harvard.