Lucas Tobin

American Economic Association

Tobin and Monetarism: A Review ArticleAsset Accumulation and Economic Activity; Reflections on Contemporary MacroeconomicTheory. by James TobinReview by: Robert E. Lucas, Jr.Journal of Economic Literature, Vol. 19, No. 2 (Jun., 1981), pp. 558-567Published by: American Economic AssociationStable 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 ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

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

http://www.jstor.org

This content downloaded from 190.104.233.115 on Sun, 22 Feb 2015 10:35:25 AMAll use subject to JSTOR Terms and Conditions

Journal of Economic Literature Vol. XIX (June 1981), pp. 558-567

o bin and Monetarism: A Review Article*

By ROBERT E. LUCAS, JR. University of Chicago

THE VOLUME under review contains James Tobin's three 1978 Yrjo Jahns-

son Lectures and his Paish Lecture of the same year. These distinguished series provide occasions to reflect on "where things stand" or "what things add up to" in a broad area of research, with the discussion led by someone of sufficient eminence that it is worthwhile for the rest of us to stop what we are doing and listen in. In macroeconomics, it is difficult to imagine anyone more suited to this task than James Tobin.

The lectures may be read with benefit as four distinct treatments of four topics, and perhaps they are best read this way for they contain a good deal of genuinely new substantive material. Tobin did not use these occasions to reflect on his many past accomplishments. They may also be read as a fairly unified treatment of a single topic, a reading the introduction to the volume seems to me to invite in its first two paragraphs:

The four lectures published here are about macroeconomic theory. These are troubled times for macroeconomics, both theory and applica- tion to policy. Our profession is deeply divided

on essential points, on how to model the struc- tures of our economies and on what government policies can improve their performance. Since the mid-1960s the degree of consensus once commanded by the post-Keynesian "neoclassical synthesis" has decayed, along with confidence in the stabilizing potential of active fiscal and monetary intervention.

Many observers, economists and laymen, perceive a crisis in macroeconomics. Indeed the title of the now famous 1974 Jahnsson lectures of Sir John Hicks was, you will recall, The Crisis in Keynesian Economics. But views differ widely on the nature of the crisis, even more on the solution (pp. ix-x). As the lectures develop, it becomes

clear that while other economists may perceive macroeconomics to be in a state of crisis, Tobin himself does not. These lectures are an exercise in reassurance. He does not deny that the consensus of the 1960s has decayed. Rather, he argues obliquely but, in a cumulative sense, forcefully that this decay did not arise from weaknesses in the scientific under- pinnings of the consensus but from an un- warranted loss of confidence on the part of many in the profession. This loss of confidence is then traced to the influence of certain critics of the neoclassical synthesis. Tobin's lectures deal in two ways with what he sees as a pseudo-crisis. The fourth and the second half of the third are illustrations, illustrations I found seductive, of the good things that we macroeconomists

* Asset accumulation and economic activity; Re- flections on contemporary macroeconomic theory. BY JAMES TOBIN. Yrjo Jahnsson Lectures. Chicago, Illinois: The University of Chicago Press; Oxford: Ba- sil Blackwell, 1980. Pp. ix, 99. $13.00 ISBN 0-226- 80501-8

558


Lucas: Tobin and Monetarism 559

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 Keynes- Pigou 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 arma- ment. In the contest for the minds of economists, policymakers, and the general public, they have the advantage which the Keynesians had in the 1930s, namely a recent history of unsatisfactory economic performance and a general impres- sion-right or not-that policies and prediction based on opposing doctrines have gone wrong. [Pp. 20-21]

Moreover, it is not only orthodox Keynes- ians who are thus beleaguered: ". . . it

is not farfetched to say that both earlier monetarist macroeconomics and Keynes- ian macroeconomics are under attack" (p. 22).

In introducing the "new classicals," To- bin offers generous praise of "their innova- tions 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 pre- scriptions 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).1 By 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 tech- niques, 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 41/2 percent 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).


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 in- tentions 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 spuri- ous. Their arguments stressed a distinction between an anticipated inflation, which they argued would be roughly neutral in its effects on employment, and an unantic- ipated 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 high- inflation decade, and with it as clear-cut an experimental discrimination as macroeconomics is ever likely to see, and Fried- man 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 no- where, nor are they to be found in an inex- plicable Pigou revival.2

Tobin's lectures contain mention of these events, as well as a sketch of the logic underlying the Friedman-Phelps "natural rate hypothesis." Indeed, he concludes the latter with the observation that "Most Keynesian economists accepted the thrust of the Phelps-Friedman analysis ...." (p. 39). This remark may raise an

eyebrow or two among those who still re- member the reception the natural rate 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 concern- ing the same event. The event occurs, and Model B proves more accurate. A propo- nent 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 mu-

2A 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.



tually inconsistent. If the Friedman- Phelps 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's lectures surrender any hope of shedding light on the nature of the crisis or of contributing to its resolu- tion.

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 illustrate why 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 circum- stances 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-run situation 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

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 his- torical employment movements up and down the business cycle, why can this power not be put to good use by deliber- ate 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 de- signed 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 diffi- culty 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


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 Fried- man-Phelps conclusion for the "long run.

But as Thomas Sargent 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 re- jecting 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 pre- announced. 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 introduc- tory 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 postu- lates 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 re- tains the capacity to induce short-run dis- ruptions of the sort documented by Fried- man 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 Fried- man-Phelps long-run with a Keynesian short-run: There is simply nothing Keynes- ian 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 denuncia- tion of a heresy. Much of his criticism is directed at the level of abstraction of these models. (By "abstract" I do not mean "rig- orous," of course, but "leaving a lot of im-



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 observations as 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 individ- uals 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 in- sight 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 un- apologetically, 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 artificial world 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

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 applica- bility, 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 class of models in which systematic activist monetary and fiscal policy has no ability to stabilize the economy has exactly the same ability to fit time series as do stan- dard, 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 Keynes- ian econometric models) is no evidence at all. These multipliers we use in advising heads of state are meaningless numbers, just as were the trade-offs we 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 frankly ad- vertised.

A second lesson is not so much an impli- cation 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."



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 particular rules these economists advocated are better than other possibilities).

These are rather less sweeping pro- nouncements 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 constitu- tional 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 frame- works capable of enforcing them? Ab- stract 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 sharply and once posed, they need to be faced.

II Lecture II contains a section entitled

"Rational Expectations Without Market Clearing," which I found difficult to 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 period- by-period in competitive markets, but take expectations to be rational and other- wise closely match the "new classical" assumptions. These models all produce the Friedman-Phelps conclusions for the "long run" yet leave some scope for effec- tive, activist monetary policy due to the fact that people are locked into a nomi- nally 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 con- jecture is that when reasons for this are found they will reduce to the kind of infor- mational difficulties already 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 stressful way to familiarize themselves



with the implications of rational expectations.

Some imaginative simulations by Taylor (1979 and 1980), using the model he pre- sented 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's simulations re- quire 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 rational expectations model prom- ises reliable predictions of agents' re- sponses to policy changes only under cir- cumstances 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 Tay- lor'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 crite- rion are not fixed money growth rules but rules which direct monetary policy to lean against the wind in a pre-announced fash- ion.

Is this what Tobin and others now mean by a Keynesian model? If so, then we have come a very long way toward restoring seriousness to our discussions of 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 ex- plain this. It would please me to learn that this guess is wrong.

III Tobin's third and fourth lectures are re-

lated to the theme of the second, in the sense that they consciously contrast his own mature and thoughtful style in apply- ing economic theory with what he pre- sents 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 bur- den 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 classical school" 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 under- stand 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 stra- tegic 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



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 atten- tion to various topics in this review in pro- portion 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 simplification offered by genuine clarity. I hope my own evident role in this debate will make it easier for the reader to undertake necessary correc- tions.

The archeologist Heinrich Schliemann, the discoverer of Troy, became con- vinced, 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 thrust it in the faces of his uncon- structive critics: "Alright then, if he is not Agamemnon, who is he?"

If we cannot trust economists guided by Keynesian doctrine to direct the for- tunes 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 conven- tional macroeconomic analysis with a caricature of the alternative offered by the "new classicals." It is an answer that struck me as false, but not because I am con- vinced that the "new classicals" have suc- ceeded 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 unreli- able and speculative as to render it unus- able 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 re- sponsibility 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 de- vising institutional arrangements which can make these limits stick. The capitalist democracies have paid dearly for their ne- glect 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

BARRO, 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. 99- 122.

FRIEDMAN, MILTON. "The Role of Monetary Policy," Amer. Econ. Rev., 1968, 58(1), pp. 1-17.

FRIEDMAN, MILTON AND SCHWARTZ, ANNA J. A monetary history of the United States, 1867-1960. Princeton: Princeton University Press for the Na- tional Bureau of Economic Research, 1963.

KYDLAND, FINN E. AND PRESCOTT, EDWARD C.



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

LUCAS, ROBERT E., JR. "Expectations and the Neu- trality of Money," I. Econ. Theory, 1972, 4-5(2), pp. 103-24.

. "Methods and Problems in Business Cycle Theory," J. Money, Credit and Banking, 1980a forthcoming.

. "Rules, Discretion, and the Role of the Eco- nomic Advisor," in Stanley Fischer, ed., Rational expectations and economic policy. Chicago: Uni- versity of Chicago Press for the National Bureau of Economic Research, 1980b, pp. 199-210.

PHELPS, EDMUND S. "Money-Wage Dynamics and Labor-Market Equilibrium," J Polit. Econ., July/ Aug. 1968, 76(4), pp. 678-711.

ET AL. Microeconomic foundations of employment and inflation theory. New York: Norton, 1970.

AND TAYLOR, JOHN B. "Stabilizing Powers

of Monetary Policy under Rational Expectations," I. Polit. Econ., 1977, 85(1), pp. 163-90.

SARGENT, THOMAS J. "A Classical Macroeconometric Model for the United States,"J. Polit. Econ., 1976a, 84(2), pp. 207-37.

. "The Observational Equivalence of Natural and Unnatural Rate Theories of Macroeconomics," J Polit. Econ., 1976b, 84(3), pp. 631-40.

AND WALLACE, NEIL. "'Rational' Expecta- tions, the Optimal Monetary Instrument, and the Optimal Money Supply Rule,"J. Polit. Econ., 1975, 83(2), pp. 241-54.

TAYLOR, JOHN B. "Estimation and Control of a Mac- roeconomic Model with Rational Expectations," Econometrica, 1979, 47(5), pp. 1267-86.

. "An Econometric Business Cycle Model with Rational Expectations: Policy Evaluation Results," Columbia University Working Paper, 1980.

TOBIN, JAMES AND Ross, LEONARD. "Living with Inflation," New York Rev. of Books, May 6, 1971, pp. 21-26.


Article Contentsp. 558p. 559p. 560p. 561p. 562p. 563p. 564p. 565p. 566p. 567

Issue Table of ContentsJournal of Economic Literature, Vol. 19, No. 2 (Jun., 1981), pp. 491-973Front MatterEditor's Note [pp. 491 - 492]Output Fluctuations and Gradual Price Adjustment [pp. 493 - 530]The Exchange Rate and Macroeconomic Policy: Changing Postwar Perceptions [pp. 531 - 557]Tobin and Monetarism: A Review Article [pp. 558 - 567]Book Reviews000: General Economics; Theory; History; Systemsuntitled [pp. 568 - 570]untitled [pp. 570 - 572]untitled [pp. 572 - 573]untitled [pp. 573 - 574]untitled [pp. 574 - 576]untitled [pp. 576 - 577]untitled [pp. 577 - 578]untitled [pp. 578 - 580]

100: Economic Growth; Development; Planning; Fluctuationsuntitled [pp. 580 - 581]untitled [pp. 581 - 583]untitled [pp. 583 - 584]untitled [pp. 584 - 586]

200: Quantitative Economic Methods and Datauntitled [pp. 586 - 587]untitled [pp. 587 - 588]untitled [pp. 588 - 590]untitled [pp. 590 - 592]untitled [pp. 592 - 593]

300: Domestic Monetary and Fiscal Theory and Institutionsuntitled [pp. 593 - 595]untitled [pp. 595 - 596]

400: International Economicsuntitled [pp. 596 - 598]untitled [pp. 598 - 600]untitled [pp. 600 - 602]untitled [pp. 602 - 605]

500: Administration; Business Finance; Marketing; Accountinguntitled [pp. 605 - 607]

600: Industrial Organization; Technological Change; Industry Studiesuntitled [pp. 607 - 609]untitled [pp. 609 - 611]untitled [pp. 611 - 613]untitled [pp. 613 - 614]

700: Agriculture: Natural Resourcesuntitled [pp. 614 - 616]untitled [pp. 616 - 617]untitled [pp. 617 - 620]

800: Manpower; Labor; Populationuntitled [pp. 620 - 621]untitled [pp. 621 - 623]untitled [pp. 623 - 624]

900: Welfare Programs; Consumer Economics; Urban and Regional Economicsuntitled [pp. 624 - 626]untitled [pp. 626 - 627]untitled [pp. 627 - 628]

New Books: An Annotated ListingClassification System for Books [p. 629]000: General Economics; Theory; History; Systems [pp. 630 - 641]100: Economic Growth; Development; Planning; Fluctuations [pp. 641 - 649]200: Quantitative Economic Methods and Data [pp. 649 - 653]300: Domestic Monetary and Fiscal Theory and Institutions [pp. 653 - 658]400: International Economics [pp. 659 - 664]500: Administration; Business Finance; Marketing; Accounting [pp. 664 - 666]600: Industrial Organization; Technological Change; Industry Studies [pp. 666 - 670]700: Agriculture: Natural Resources [pp. 670 - 676]800: Manpower; Labor; Population [pp. 676 - 682]900: Welfare Programs; Consumer Economics; Urban and Regional Economics [pp. 682 - 688]Related Disciplines [pp. 689 - 691]New Journals [pp. 691 - 692]

Contents of Current Periodicals [pp. 693 - 745]Classification System for Articles and Abstracts [pp. 746 - 749]Subject Index of Articles in Current Periodicals000: General Economics; Theory; History; Systems [pp. 750 - 766]100: Economic Growth; Development; Planning; Fluctuations [pp. 766 - 777]200: Quantitative Economic Methods and Data [pp. 777 - 784]300: Domestic Monetary and Fiscal Theory and Institutions [pp. 784 - 800]400: International Economics [pp. 800 - 810]500: Administration; Business Finance; Marketing; Accounting [pp. 810 - 815]600: Industrial Organization; Technological Change; Industry Studies [pp. 816 - 827]700: Agriculture; Natural Resources [pp. 827 - 839]800: Manpower; Labor; Population [pp. 839 - 855]900: Welfare Programs; Consumer Economics; Urban and Regional Economics [pp. 855 - 867]

Selected Abstracts000: General Economics; Theory; History; Systems [pp. 868 - 887]100: Economic Growth; Development; Planning; Fluctuations [pp. 887 - 893]200: Quantitative Economic Methods and Data [pp. 893 - 898]300: Domestic Monetary and Fiscal Theory and Institutions [pp. 899 - 911]400: International Economics [pp. 911 - 921]500: Administration; Business Finance; Marketing; Accounting [pp. 921 - 923]600: Industrial Organization; Technological Change; Industry Studies [pp. 923 - 930]700: Agriculture; Natural Resources [pp. 930 - 933]800: Manpower; Labor; Population [pp. 933 - 946]900: Welfare Programs; Consumer Economics; Urban and Regional Economics [pp. 946 - 956]

Index of Authors of Articles in the Subject Index [pp. 957 - 973]Back Matter

Documents

Lucas Tobin