When Waterloo Found Its Napoleon

Email last week brought a copy of The Gypsy Economist: The Life and Times of Colin Clark, by Alex Millmow. Starting in the 1930s, Clark (1905-1989) was an important student of global economic development who, though born in London, spent most of his career in Australia. The same mail brought news, too, of the death of international macroeconomist Robert Mundell. He was 88, a Canadian who spent 45 years at Columbia University.

Another decade or two will pass before an even-handed biography of Mundell arrives, but it will be worth the wait. Mundell was a brilliant student of the rapid evolution of the international monetary system in the years after 1960 and was sometimes described as “father of the Euro.”  He became the enigmatic guru of “supply side economics,” and plumped for a return to the gold standard as well.  As a Nobel laureate in 1999, Mundell entertained guests by concluding his banquet speech by singing a few lines of My Way.

While waiting for a thorough, absorbing, and graceful appraisal of a remarkable life (I have in mind, as an example, David Ricardo: A Biography, by David Weatherall, though Mundell was no Ricardo), we have the Nobel Committee’s own explanation. We have as well the testimony of the economist who did more than any other person to make Mundell’s Nobel Prize come about,  Rüdiger Dornbusch, of the Massachusetts Institute of Technology. A year after Mundell was recognized, Dornbusch described his contributions in the Scandinavian Journal of Economics

“Mundell’s central claim to fame is to have recast entirely the way we think about the functioning of an economy with an open capital account, including the stark implications for policy.  That is the purely intellectual part.  But there is also the marketing department: the wonderful skill to capture the story in a few equations, a simple diagram. Just as [Nobel laureate] John Hicks… brilliantly summarized [in 1937] the essence of Keynesian economics in the IS-LM diagram, Mundell’s models likewise reduce to the textbook level a dramatically new view of the open economy.”

Mundell had come to economics at the right time, Dornbusch wrote. He graduated from MIT in 1956, “after two decades of formalization had clarified the distinction between goods and asset markets.”  Postwar capital controls were giving way to convertibility under the Bretton Woods system.  It helped, too, that Mundell was Canadian.  Canada had shifted from fixed to floating rates in the 1950s, offering him a wealth of practical problems to ponder.

Mainly Mundell entered with alacrity into the policy debates in international trade and finance that heated up as global growth surged in the early 1960s.  A two-year stint in the research department of the International Monetary Fund, 1961-63, served him especially well.  Two papers in 1963 – “Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates” and “”Inflation and Real Interest Rates” – made his reputation. Mundell arrived at the University of Chicago in 1965, and for the next several years, as the international system of convertibility to gold via dollars under Bretton Woods Agreement gave way to flexible exchange rates, he was, as the saying goes, the straw that stirred the drink. “He did not shy away from the difficult task of setting out a framework for policy thinking,” wrote Dornbusch.  “There was no international monetary issue of the 1960s and 1970s in which he was not prominently and decisively involved.”

Departmental friction, probably mainly with Milton Friedman, led Mundell to quit Chicago and accept a position at the up-and-coming University of Waterloo in southwestern Ontario,  starting in 1971. Ricard Caves, of Harvard University, who had recently edited a volume of Readings in International Economics for the American Economic Association, memorably cracked wise: “At last Waterloo has met its Napoleon!”

In 1974, Mundell accepted an offer from Columbia University. Once in New York, he struck up a conversation with the Editorial Page of The Wall Street Journal. A 1970 lecture to a full house at the University of Chicago – “The Dollar and the Policy Mix” – had “failed to convince,” Dornbusch wrote; there had been no model, no carefully spelled-out assumptions, just assertions – tax cuts would foster growth on the supply side, tight money would diminish inflationary expectations.

But after Princeton’s economic department published the lecture as a pamphlet in 1971, its argument gathered force, especially after WSJ editorial writer Jude Wanniski anointed it as the “Mundell-Laffer hypothesis” in an article in The Public Interest in 1975. (Arthur Laffer had been a Chicago colleague). Mundell had become “guru for a movement that may not have much intellectual appeal,” Dornbusch wrote in 2000, “but it certainly has changed the world.” As for Mundell’s advocacy of gold, Dornbusch added, it was hard to tell if he was serious. But, he continued, Mundell always had an undeniable streak of the enfant terrible.” [

Left behind in Chicago in 1972 were Mundell’s students, Dornbusch, Jacob Frenkel, and Michael Mussa; his faculty colleagues, Harry Johnson, a fellow Canadian ten years his senior, Stanley Fischer, Arnold Harberger; and the deeper theorists whose work had influenced Mundell’s conversion from classical Keynesian view to those of a global monetarist.  Dornbusch and Fischer moved the next year to MIT and taught the next generation of international economists, Kenneth Rogoff and Maurice Obstfeld, who in turn wrote the text for the generation after that.  Frenkel went to the IMF and prepared the way for future policymakers at the Bretton Woods institutions, including Fischer, Mussa, Rogoff, Obstfeld, and, in the present day, Gita Gopinath at the IMF; and Carmen Reinhart, at the World Bank.

Might the Swedes somehow have diluted Mundell’s contribution?  Or turned a blind eye to it altogether? Marcus Fleming, IMF deputy research director, who shared credit for “the Mundell-Fleming model,” died in 1976; Harry Johnson in 1977; Robert Triffin in 1993.  Dornbusch undertook to the epochal transition to the open-economy world would not be overlooked. With Obsfeld, and Guillermo Calvo, of Columbia University, he organized a 1997 Festschrift conference (published as Money, Capital, Mobility, and Trade); and a campaign among those who had been invited to submit nominations

It worked. Mundell was recognized and went on to twenty years of enhanced celebrity, generating ample material for the later chapters of that future biography.

Dornbusch died of cancer, in 2002, at 60, after a courageous struggle. Interesting as was his life, significant as were his contributions to international economics (his work on exchange rate “overshooting,” as well as that of his student Pentti Kouri, was mentioned in the background information that accompanied Mundell’s prize), he is unlikely to get a biography of his own. He was, however, one of the best-loved economists of his generation. And the story of his service to economics is a reminder of how the profession works.


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