December 12, 1999
Coming in from the cold
By David Warsh, Globe Columnist, 12/12/99
STOCKHOLM - Back in the late 1960s, Robert Mundell was trying to find a university where he would be comfortable. He was then approaching 40. Having attended the London School of Economics, Mundell received his PhD from MIT in 1956. He then caromed from the University of Chicago to Stanford University to a couple of European institutes and, in between, the International Monetary Fund, before returning finally to Chicago, which he left after five years of increasingly bitter feuding with his colleagues.
In a pique and facing a personal crisis of considerable proportions, he then accepted a position at an unranked university in his native Canada, the University of Waterloo near Kitchner, Ontario. Whereupon a fellow economist famously remarked, ''At last, Waterloo has met its Napoleon.''
In a ceremony here last week, Mundell received the Nobel Prize in economics, the 13th in a line of economists with close connections to the University of Chicago to receive the award in the 31 years since it was first given. Friedrich Hayek, Milton Friedman, Theodore Schultz, George Stigler, James Buchanan, Merton Miller, Harry Markowitz, Ronald Coase, Gary Becker, Robert Fogel, Robert Lucas, and Myron Scholes preceded him.
Though Mundell had been among the first to glimpse the possibilities of the revolution, which has unfolded during the past 25 years, in the understanding of how politics affects economics - the first, it could be argued, in a certain sense - he is perhaps the last Chicagoan of his generation who will be recognized by the Swedes.
There are reasons for that, and they make an instructive story. For Mundell is far better known to the literate public by a couple of pejorative epithets - as a supply-sider and as a gold bug - than as a technical economist.
The Nobel citation mentions two main contributions, both made in the early 1960s. First, a series of papers explored the economics of stabilization in ''open'' economies - those in which capital movements, to and fro, were freely permitted. Trade economics was done virtually without money in those days, strictly in terms of flows of goods and services. With a relatively simple model, Mundell conclusively demonstrated that fiscal and monetary policies inevitably would have very large and very different effects, depending on whether exchange rates were fixed or floating.
The point seemed somewhat academic in the early 1960s, when the system ratified at Bretton Woods constituted the rules of the game; it turned out to be ''almost prophetic'' in the 1970s (in the words of the citation), after Bretton Woods broke down.
Also in 1961, Mundell posed the question of an ''optimum currency area'': For what reasons might a number of regions find it advantageous to join - or leave - a common currency? The paper only briefly mentions the advantages of widely shared money; it describes the disadvantages in far greater detail. Mundell was a Canadian, after all, and had been profoundly struck by the ill effect on the provinces of the devaluation of sterling in 1949.
Yet at a time when sovereignty and a national currency were simply equated and taken for granted, Mundell's paper got other economists thinking, Ronald Mckinnon of Stanford and Peter Kenen of Princeton in particular, according to the Swedes. In due course, in other hands, monetary economists made the case for the introduction of the euro, for currency boards and ''dollarization'' in some cases became compelling.
The Swedes also dwelt on Mundell's teaching. The years he spent in Chicago - from 1966 until 1971 - were a period of great ferment in economics, as a new generation sought to discard the short-term one-thing-at-a-time analysis of their teachers in favor of a dynamic ''general equilibrium'' approach. Mundell exhorted his students to study the international economy's adjustments over time, and they did. A sea change in international economics was the result.
When his students honored him with a Festschrift - a celebratory book - at the height of the Asian fiscal crisis in the fall of 1997, the best international economists of the next generation, including Rudiger Dornbusch, Jacob Frenkel, and Michael Mussa, presided. Meanwhile, their students dashed for the phones to make sense of a crisis that, in strictly Mundellian terms, was not supposed to happen.
For all his brilliance, Mundell couldn't handle the rigors of university life. He spun off into the wilderness for a time, drinking heavily, his personal life a shambles. He bought a decrepit castle in Italy. His intellect never failed him, however, and he brought a steady stream of visitors to Italy, often for informal conferences of his own devising. In 1973 he was invited to give the prestigious Marshall Lectures at Cambridge University; the next year Columbia University hired him as a professor. After a three-year interregnum, he was back in the game.
It was at Columbia that he was discovered by Jude Wanniski, then an editorial writer for The Wall Street Journal, and eventually by Robert Bartley, Wanniski's boss. Wanniski had been searching for the world's greatest economist; Arthur Laffer, a former University of Chicago student serving in the Office of Management and Budget, had told him about Mundell, who meanwhile had become convinced that his most important contribution had been a little-noted IMF staff paper published in 1962. ''The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability'' had laid the groundwork for the recipe of tax cuts and gold standard that Wanniski and Bartley soon enough were calling supply-side economics.
Not much is known with any confidence of him in these years. Mundell must be the only Nobel laureate not to publish a curriculum vitae. But from his list of publications his waning influence within the profession clearly can be seen. His last appearance in a refereed major journal was in 1965. A couple of books followed, then many edited volumes, essays in collections edited by others, articles in newspapers, bank letters, a working paper from the Center for Economic Policy Studies of St. Vincent College in Latrobe, Pa., an article in the premier issue of the Zagreb Economic Journal, and so on.
Did he consult to Paul Volcker after Volcker became chairman of the Federal Reserve Board? ''I can't say I was a big buddy, but I was an admirer,'' Volcker recalled last week. ''He called on me a couple of times when I was in office. Nothing very momentous. I will say he had a very useful skepticism: that floating exchange rates would solve all problems, that competitive devaluations were always the right approach'' to trade imbalances. At the height of the policy debate in Washington in the early 1980s, Mundell apparently was holding forth mainly to The Wall Street Journal, consulting to the Uruguayan central bank.
Mundell's rehabilitation has been underway for years. Former students argued for the centrality of his work to present-day international marcroeconomics. Remarriage and a baby stabilized his personal life. Mundell continues to press his case for gold, but in less dogmatic ways. ''For most economists gold goes in teeth, around the neck, or on the pinkie,'' says his friend and student Dornbusch at MIT. ''In Mundell's rendition it has a more central place as the monetary standard in a world otherwise without an anchor. Whether he is quite serious about this is open to doubt. He does like on occasion to be outrageous intellectually and delights in leaving an audience baffled.''
In his Nobel lecture, ''A Reconsideration of the Twentieth Century,'' Mundell briefly surveyed the reign of gold over two millennia and then zeroed in on a centurylong escape from the ''anonymous monarch'' that heretofore had facilitated the practice of ''creative nationalism.'' Most of the talk was unexceptionable, for Mundell is one of the leading living experts on the gold standards. Only occasionally, when narrating the history of events since the 1980s, did Mundell veer toward controversy, and then not very far. He ventured that the leading source of instability in monetary systems in the next century will be exchange rates among the dollar, the euro, and the yen.
Looking back, Mundell's prescient radicalism in the 1960s can be seen more clearly in his 1968 book ''Man and Economics'' than in any other single work. He wrote the book to argue the importance of capital mobility to a lay audience. In it can be glimpsed the deep skepticism of governmental motives later argued by James Buchanan; the extension of economic analysis to unfamiliar provinces of choice that is associated with Gary Becker; the emphasis on expectations of Robert Lucas; that on transaction costs and externalities of Ronald Coase.
When Torsten Perrson, professor of economics at Stockholm University, presented Mundell to the audience at the award ceremonies, he congratulated him for having ''examined the ways in which monetary and fiscal policy can be decentralized, by asking how instability in the economy over time might be avoided.'' It was tantamount to acknowledging that Mundell had anticipated, however faintly, the new emphasis on the political aspects of the economy - and as close as anyone came all week to mentioning supply-side economics.
Nobelists have been cranks before. There was Linus Pauling and his preoccupation with vitamin C, Theodore Shockley and his eugenics. At one point last week, Mundell mentioned that he hopes to use a portion of his prize money - it will be reduced from nearly $1 million to something like $500,000 after taxes if he pays New York rates - to create a foundation. Perhaps he will get those conferences at his Italian castle going again. ''They were fun,'' recalled Volcker, who attended a couple of them. ''You could tell him what you thought of his ideas and he would tell you what he thought of yours.''
This story ran on page E01 of the Boston Globe on 12/12/99.