Two Great Economists: Raymond Firth (1901-2002) & James Tobin (1918-2002)

Listener 25 January, 2003.

History of Ideas, Methodology & Philosophy; Macroeconomics & Money; Maori;

I would start a beginning course in economics with Economics of the New Zealand Maori by Raymond Firth, who died last year. Not only is the book a part of our heritage but it confronts students with the classical Maori economy which answered the central economic problems of ‘what, how, for whom, where and when’ in quite different ways from today. Starting with an alternative to the narrow idealised version of the US economy which they are usually taught, would help students realise how special it is. It might even suggest that every economy is particular, and such general economic principles there are, need not result in the policies which slavishly follow from the idealised US one.

Firth went on to field work in Tikopia, the west Pacific Island recently devastated by a cyclone, to become one of the world’s greatest economic anthropologists. His PhD is important because it was the first English language study to use the notion of the ‘gift relationship’ developed by the French anthropologist, Marcel Mauss. The Maori did not ‘trade’, but exchanged on a reciprocal basis of gifting. This involves the participants knowing one another. In contrast, in a monetary economy one can sell a good or service without knowing anything about the trading partner, except the reliability of the currency being used.

The commercial world of the gift relationship has largely passed by, although it continues to lurk in intra-family relations and between close friends. One also sees glimpses of it on the marae. One public place where it still exists involves the donating of blood. Its classic study – another great study of the twentieth century – is The Gift Relationship by Richard Titmus, a colleague of Firth. (Economist Mike Cooper, a past Otago University professor, was another New Zealander involved in the development of the book.)

The Maori responded remarkably quickly to the market economy when it arrived with the Europeans. Money has two great advantages. It enables transactions between strangers, with the resulting increase in the market allowing specialisation of economic activity which, as Adam Smith observed in the making of pins, raises productivity.

While all economies are vulnerable to shocks from natural events such as earthquakes and weather, monetary economies also suffer from fluctuations known as ‘business cycles’. It was not until John Maynard Keynes that economists were sure that the cycles had an inherent monetary element (the challenger was Marx’s theory of the falling rate of profit). While Keynesian policy prescriptions can ameliorate the cycle to some extent, they have proved unable to eliminate them.

James Tobin who also died last year, was known as the ‘American Keynes’ – he famously (and modestly) summarised his contribution to the understanding of the complexity of financial assets (for which he was awarded a Nobel prize) as ‘dont put all your eggs in one basket’. He also contributed to statistics (Tobit regression), investment analysis (Tobin’s q) and he was one of the earliest to attempt to adjust GDP for environmental depletion, congestion and crime. (He also appears in the The Caine Mutiny as ‘Tobit’.)

Popularly, he is best known for the ‘Tobin Tax’, to be levied on financial transactions. Many see this as a new source of revenue (proceeds from the international version would go to the poor countries, they hope). But like his advocacy for a negative income tax, Tobin justified it using deep economic theory. The productive economy (the bit of that exists even under the classical Maori) operates at a different pace to monetary transactions. The deregulation of recent years might be thought of as aiming to speeding up transactions in the productive sector. But it is still not fast enough, so Tobin wanted to add some ‘grit’ to monetary transactions to slow their spinning to a rate closer to production.

Tobin’s tax may never be implemented internationally, because the political conditions may not exist. Even so, I was intrigued by a recent contribution by Jagdish Bhagwati, one of the most vigorous advocates of ‘free trade’ in the economic fraternity. He argues against freedom of capital movements, calling for controls – restrictions and prohibitions – on high spinning capital, in contrast to his position on the international trade of goods and services. A Tobin Tax would have a similar effect, because it is the high spinning transactions which would be taxed most often.

Today’s financial transactions do not always occur with money such as notes and coin. Tobin’s Nobel prize winning research recognised the spectrum of financial assets in theory but it is harder to recognize all the practical variations. We have moved a long way from the economy since the classical Maori. But ultimately money is a veil which hides the production and consumption which has been the real economic purpose of humankind.