It was first introduced by Nicholas Kaldor in 1966 in his paper: Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani.
The line shows the ratio of the US stock market value to US net assets at replacement cost since 1900.
High Tobin's q values encourage companies to invest more in capital because they are "worth" more than the price they paid for them.
John Mihaljevic points out that "no straightforward balancing mechanism exists in the case of low Q ratios, i.e., when the market is valuing an asset below its replacement cost (Q<1).
In the case of the stock market as a whole, rather than a single firm, the conclusion that assets should be liquidated does not typically apply.
A low Q ratio for the entire market does not mean that blanket redeployment of resources across the economy will create value.
This is largely because firms do not blindly base fixed investment decisions on movements in the stock price; rather they examine future interest rates and the present value of expected profits.
[5] In the paper Kaldor writes: The "valuation ratio" (v) [is] the relation of the market value of shares to the capital employed by corporations.
Kaldor is clearly laying out equilibrium condition by which, ceteris paribus, the stock of savings in existence at any given time is matched to the total numbers of securities outstanding in the market.
Prior to this he had asserted that "the share of investment in total income is higher than the share of savings in wages, or in total personal income" is a "matter of fact" (i.e. a matter of empirical investigation that Kaldor thought would likely hold true).
This fits nicely with the fact that Kaldor's v and Tobin's q tend on average to be below 1 thus suggesting that Pasinetti's inequality likely does hold in empirical reality.
Finally, Kaldor considers whether this exercise give us any clue to the future development of income distribution in the capitalist system.
The neoclassicals tended to argue that capitalism would eventually liquidate the capitalists and lead to more homogenous income distribution.
Kaldor lays out a case whereby this might take place in his framework: Has this "neo-Pasinetti theorem" any very-long-run "Pasinetti" or "anti-Pasinetti" solution?
So far we have not taken any account of the change in distribution of assets between "workers" (i.e. pension funds) and "capitalists" - indeed we assumed it to be constant.
While this is a possible interpretation of the analysis Kaldor warns against it and lays out an alternative interpretation of the results: But this view ignores that the ranks of the capitalist class are constantly renewed by the sons and daughters of the new Captains of Industry, replacing the grandsons and granddaughters of the older Captains who gradually dissipate their inheritance through living beyond their dividend income.
Given the difference in the rates of appreciation of the two funds of securities-and this depends on the rate at which new corporations emerge and replace older ones-I think it can be shown that there will be, for any given constellation of the value of the parameters, a long run equilibrium distribution of the assets between capitalists and pension funds which will remain constant.
Tobin's marginal q is the ratio of the market value of an additional unit of capital to its replacement cost.
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.
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.