and Development (EBRD), attended by Tobin, Mark Cutis of the EBRD and Brian Reading and Gabriel Stein of Lombard Street Research Ltd, Tobin mentioned that "in common with most American economists, [he] did not read anything in a foreign language] and that "in common with most post-War economists [he] did not read anything published before World War II". He was therefore greatly embarrassed when he discovered that in the 1920s, the Swedish economist Gustav Cassel, had introduced a ratio between a physical asset's market value and its replacement value, which he called 'q'. Cassel's q thus antedates both Kaldor's and Tobin's by a number of decades. Tobin's marginal q Tobin's marginal q is the ratio of the market value of an additional unit of capital to its replacement cost. Price-to-book ratio (P/B) In inflationary times, q will be lower than the price-to-book ratio. During periods of very high inflation, the book value would understate the cost of replacing a firm's assets, since the inflated prices of its assets would not be reflected on its balance sheet. Criticism Olivier Blanchard, Changyong Rhee and Lawrence Summers found with data of the US economy from the 1920s to the 1990s that "fundamentals" predict investment much better than Tobin's q. What these authors call fundamentals is however the rate of profit, which connects these empirical findings with older ideas of authors such as Wesley Mitchell, or even Karl Marx, that profits are the basic engine of the market economy. Doug Henwood, in his book Wall Street, argues that the q ratio fails to accurately predict investment, as Tobin claims. "The data for Tobin and Brainard’s 1977 paper covers 1960 to 1974, a period for which q seemed to explain investment pretty well," he writes. "But as the chart [see right] shows, things started going away even before the paper was published. While q and investment seemed to move together for the first half of the chart, they part ways almost at the middle; q collapsed during the bearish stock markets of the 1970s, yet investment rose." (p. 145) See also P/E ratio Dividend yield List of finance topics Notes References Further reading Investment Valuation: Tools and Techniques for Determining the Value of Any Asset External links Tobin's Q Moderately Bullish on U.S. Equities (as of March 2009) The Manual of Ideas Launches Tobin's Q Research Service Based on James Tobin's Q Indicator Robert Huebscher