p.671

Money and Economic Growth

James Tobin

Abstract

In non-monetary neo-classical growth models, the equilibrium degree of capital intensity and correspondingly the equilibrium marginal productivity of capital and rate of interest are determined by "productivity and thrift," i.e., by technology and saving behavior. Keynesian difficulties, associated with divergence between warranted and natural rates of growth, arise when capital intensity is limited by the unwillingness of investors to acquire capital at unattractively low rates of return. But why should the community wish to save when rates of return are too unattractive to invest? This can be rationalized only if there are stores of value other than capital, with whose rates of retrun the marginal productivity of capital must compete. The paper considers monetary debt of the government as one alternative store of value and shows how enough saving may be channeled into this form to bring the warranted rate of growth of capital down to the natural rate. Equilibrium capital intensity and interest rates are then determined by portfolio behavior and monetary factors as well as by saving behavior and technology. In such an equilibrium, the real monetary debt grows at the natural rate also, either by deficit spending or by deflation. The stability of the equilibrium is also considered.