Robert Mundel died on April 4, 2021, and the world has lost one of the greatest titans in economics. Widely regarded as the greatest macroeconomist of the second half of the last century, the next generation of John Maynard Keynes, Mundel was in rare territory. In fact, another credible contender for the title was the late Milton Friedman, his colleague at the University of Chicago, when Mundel taught there in the late 1960s. Mundel was awarded the Nobel Prize in Economic Sciences in 1999 for launching the European Common Currency. The timing is right, because, among many other successes, he is rightly known as the intellectual godfather of the euro.
Readers of this column over the past half-dozen years will learn about the key role that Bob (all of us, his students and friends, as he is called) has played in my life, as well as the importance of his research. It spanned over half a century. Readers may be interested in my admiration for the National Post ‘Leading Canadian Daily’ Economics Lost a Wonderkind and Prophet ‘(8 April 2021), which explains how Bob’s Canadian-ness is central to his work on macroeconomics.
Here, let me comment on the intellectual lineage of some of Mundel’s works. His relationship with Keynes was very direct, mediated by his disciple James Meade, who Bob learned as a visiting doctoral student at the London School of Economics in the late 1950s. He also learned about the important work of the future Nobel laureate Sir John Hicks, who compiled the main message of the Keynes General Theory of Employment, Interest and Money into a short-term explanation of scientific economic theory, which is well described in the long run. In fact, the famous Mundel-Fleming model, despite all the technological advances of recent decades, remains the primary tool used by economists to understand macroeconomic management in the open economy and is an extension of Hicks’ closed economy to the open economy IS-LM model.
It is no coincidence that Bob was born and spent his early years in Canada. As Bretton Woods was one of the few countries to experiment with flexible exchange rates and relatively open capital markets over the years, the country was a laboratory for open-economy macroeconomics before such arrangements became the norm.
Another aspect of Mundel’s intellectual development was that he left Keynes and went back to the classics in the early 1970s. In private correspondence, Martin Wolf, chief economics commentator for the Financial Times, speculated that the final collapse of the Bretton Woods international monetary system was one reason why then-US President Richard Nixon closed the gold window in 1971.
In a way, there is an interesting parallel with Friedman, retaining elements of Keynesian thought in the late 1960s, that policymakers could not exploit the relationship between inflation and unemployment — the so-called Phillips curve, which long emerged from Hicks’ IS-LM curve. Friedman ated for the ‘stagnation’ (combination of recession and high inflation) crisis of the 1970s.
When this happened, both Mundel and Friedman were involved in the change in economic policies undertaken by US President Ronald Reagan, albeit in different ways. Friedman’s liberal background — although he was a founding member of the Mont Pelarine Society, first met in 1947 by Archbishop Liberian economist and philosopher Frederick von Hayek – provided intellectual support for Reagan’s regulation of private entrepreneurship as a direct driver of economic growth. In the 1970s columnist Bruce Bartaulette (‘Remembering the Father of Supply-Side Economics’, 7 April 2021), as described recently in The New Republic, Mundel became the intellectual godfather of ‘supply side economics’ or ‘arithmetic of his discipline’ It was promoted by the popular endeavors of the unnamed Curve Fame.
The policy mix pursued by Reagan was not intended to cut demand, but toward productivity gains and long-term growth towards supply and a tight monetary policy to curb inflation, enacted by Federal Reserve Chief Paul Volker. That’s what Mundel called it in the 1970s. This policy mix is inconsistent with traditional Keynesian thought, reflecting Mundel’s idea that both economic and monetary policy are relaxed or tightened, and that monetary and monetary policy each have a unique role to play in macroeconomic policy management and are not alternatives. In traditional Keynesian thought.
The ideas of Bob Mundel (1932—2021) are very important in the history of economic power and policy.
Vivek Dehezia is a Mint columnist