James Tobin on Macroeconomic Instability: An Old Keynesian Changes Ground

From 1975 onwards, James Tobin changed his interpretation of the Keynesian case that active stabilisation policy is sometimes needed to restore full employment, offering a new interpretation that drew on Keynes’s General Theory and on Irving Fisher’s 1933 debt-deflation theory of depressions to argue that wage and price flexibility could be destabilizing. Like Hyman Minsky and Peter Howitt, Tobin stressed the previously underappreciated Chapter 19 of The General Theory, where Keynes argued that faster adjustment of prices and money wages could be destabilising. The basis of Keynesian macroeconomics was coordination failure and instability, not irrational money illusion or an arbitrary assumption of a fixed money wage.