A critical analysis of the contributions of James Tobin to economics and its relevance to the South African economy.

Abstract

This study reviews three of Tobin’s major contributions to economics, namely; Tobin’s q , liquidity preference as a behavior towards risk, and Tobin’s global transaction tax on foreign exchange transactions to identify any potential unifying features. The original suggestion of this thesis, given Tobin’s last contribution, is the role of savings that links all three contributions. The extension of this study aims to review these contributions so as to come up with po ssible links between them and apply the theory of q to a sample of forty five South African firms to a ssess firm diversification and performance measurement when it comes to monopoly profits, as well as the stability of any exchange rate when it comes to the Tobin tax issue, given South Africa’s links to the Pound, Dollar and Euro. Our findings out of the empirical analysis performed hints at investors how to go abo ut in maximizing profit in the South African market based on the diversification s trategies they can adopt. Indeed non-diversified firms have a higher risk involved a nd performed better than diversified ones from 2007 to 2009. Our results bas ed on book values are also of great relevancy to entrepreneurs in assessing the degree of diversification optional to them. The deviation of q from unity is another interesting point to note wh en it comes to ordinary profits for monopoly firms like Eskom. Tobin’s q and risk are indeed connected through discounting and the relationship between risk and a transaction tax imposed on international financial transactions is taxation itself. In order for economic growth to arise into an economy, investment is cruc ial and this is achieved if volatility in financial markets is reduced, and hence the impo rtance of reviewing the Tobin tax. The focus here is to link savings, the Tobin tax an d the issue of international financial market liberalization to determine the impact on gl obal developments and trace these through to the South African situation. We also rev iew Tobin’s q and its important link to the IS/LM framework which differs from the normal textbook a nd Keynesian view. In other words we explore in detail, Tobin’s (1969) general equilibrium approach to monetary policy and look at how financi al policies and events can influence aggregate demand, through an effect on th e valuation of physical assets relative to their replacement cost. As the review h opes to find a common theme, in the three contributions, we present a discussion of eac h original article in some detail. Chapter Two and Three includes Tobin’s q and portfolio decisions respectively. Chapter Four covers the tax on foreign exchange tra nsactions in greater detail, and vii attempts to view this as a solution to the passing current world economic crisis. A final chapter provides a summary of our results and modest macroeconomic proposals for South Africa.