Robert Mundell (1932—2021) gave economists an invaluable policy toolkit for an open economy
Robert Mundell passed away on 4 April 2021, and the world lost one of the great titans of economics. Widely considered the greatest macro economist of the second half of the last century, in the generation after John Maynard Keynes, Mundell was in rarefied terrain. Indeed, the only other credible contender for this title would be the late Milton Friedman, who was his colleague at the University of Chicago when Mundell taught there during the late 1960s. Mundell was awarded the Nobel Prize in economics in 1999, timed to coincide with the launch of the European common currency. The timing was apposite, as, among many other accomplishments, he is rightly credited as the intellectual godfather of the euro.
Readers of this column over the last half-dozen years or so will be aware of the vital role that Bob (as all of us, his students and friends, called him) played in my life, as well as the seminal importance of his research that spanned more than a half-century. Readers may also be interested in my appreciation for the National Post, a leading Canadian daily, ‘Economics loses a Wunderkind and prophet’ (8 April 2021), which elucidates how Bob’s Canadian-ness was central to his work on macroeconomic analysis in an open economy.
Here, let me comment on the intellectual lineage of some of Mundell’s work. His connection to Keynes is quite direct, mediated through his disciple, James Meade, whom Bob got to know during a stint as a visiting doctoral student at the London School of Economics in the late 1950s. He also became acquainted with the important work of Sir John Hicks, himself a future Nobel laureate, who synthesized the main message of Keynes’ General Theory of Employment, Interest and Money as a description of the short-run with classical economic theory, which better described the long-run. Indeed, the celebrated Mundell-Fleming model, which, despite all the technical developments in recent decades, remains the basic toolbox used by economists to understand macroeconomic policy management in an open economy, and is an extension to the open economy of Hicks’ closed economy IS-LM model.
The fact that Bob was born and spent his formative early years in Canada is not incidental to his accomplishments. As one of the few countries to experiment with flexible exchange rates and relatively open capital markets during the Bretton Woods years, the country was a laboratory for open-economy macroeconomics much before such arrangements became the norm.
The other aspect of Mundell’s intellectual development was his turn away from Keynes and move back toward the classics, starting around the early 1970s. In private correspondence, Martin Wolf, chief economics commentator of the Financial Times, has speculated that the final collapse of the Bretton Woods international monetary system, triggered by then US president Richard Nixon’s closing of the gold window in 1971, might have been a reason.
There is, in a sense, an interesting parallel with Friedman, who, while retaining elements of Keynesian thinking, stressed, starting in the late 1960s, that policymakers could not exploit the putative relationship between inflation and unemployment—known as the Phillips curve, and itself deriving from Hicks’ IS-LM curve—over the long run. Friedman anticipated the ‘stagflation’ (a combination of a recession and high inflation) crisis of the 1970s.
As it happens, both Mundell and Friedman have become associated with the shift in economic policies undertaken by US president Ronald Reagan, albeit in different ways. While Friedman’s libertarian background—he was, after all, a founding member of the Mont Pelerin Society, first convened in 1947 by arch-libertarian economist and philosopher Friedrich von Hayek—provided intellectual support for Reagan’s deregulatory drive that aimed to restore primacy of place to private entrepreneurship as a driver of economic growth, Mundell’s link was much more direct. As elaborated in a recent piece in The New Republic by columnist Bruce Bartlett (‘Remembering the Father of Supply-Side Economics’, 7 April 2021), who was on the scene in the 1970s, Mundell emerges as the intellectual godfather of what would be called ‘supply side economics’, or ‘Reaganomics’, abetted by the popularizing efforts of his disciple Arthur Laffer of the eponymous curve fame.
The policy mix that Reagan pursued—tax cuts, not just intended as demand stimulus but as a supply-side push for productivity gain and long-term growth, and tight monetary policy to curb inflation, put into effect by Federal Reserve chief Paul Volcker—was exactly what Mundell had been calling for throughout the 1970s. This policy mix was incongruous with conventional Keynesian thinking, by which fiscal and monetary policy are both loosened or tightened together, and reflected Mundell’s thinking that fiscal and monetary policy each had a distinct role to play in macroeconomic policy management, and were not substitutes, as in conventional Keynesian thinking.