This article was originally published in Maclean's Magazine on October 25, 1999
Mundell Wins Nobel Economics Prize
At an age when most people are winding down, Robert Mundell suddenly finds himself with a new lease on life. Ideas he pioneered almost four decades ago were recognized last week at the highest international level, as the Royal Swedish Academy of Sciences awarded the 67-year-old Ontario native this year's NOBEL PRIZE in ECONOMICS. And if any more proof of Mundell's vigour is needed, it appears in full colour on his Columbia University Web site. The predictable curriculum vitae and list of publications are dominated by something much more lively - a photograph of the professor's beaming 22-month-old son, Nicholas. "It's remarkable," says Mundell's older son William who broke the news about the Nobel Prize to his father. "He has a whole new life."
A new life - and $1.4 million from the Nobel committee. Mundell was cited for prophetic work he did in the early 1960s on exchange rates and international trade - theories that have grown more and more relevant as economies have become increasingly intertwined. He anticipated globalization long before it became shorthand for the massive waves of money that wash around the world in the 1990s. "Bob was writing about a world of capital flows and trade that hardly existed then," said Tony Deutsch, a professor of economics at Montreal's McGill University who worked alongside Mundell in the mid-1960s. "Now, it does, and that qualifies him as a visionary." Erling Norrby, secretary general of the Nobel committee, put it this way: "The world has caught up with Mundell's idea." Much of his thinking has had very practical results. Economists credit him with laying the intellectual basis for creation of the euro, the common European currency that was born last Jan. 1.
Mundell was - until last week, at least - little known in Canada. Governments and bankers as far away as South America called on him for advice, he complained at times to friends, but in the land of his birth his ideas found little resonance. In recent years, too, he was dismissed as an eccentric by many mainstream economists - both for his ideas and for his flamboyant personal style that includes spending much of his time at a sprawling 16th-century palazzo near Siena, Italy. In the United States, though, he is an intellectual hero to those who championed the so-called supply-side economics of the Reagan and Thatcher years. Along with Arthur Laffer of the University of Chicago, he developed ideas in the early 1970s that led to a radical rethinking of economic policy. Frustrated by the stagnation of Western economies, Mundell and Laffer urged a combination of tax cuts and higher interest rates - the formula that eventually sparked the boom of the 1980s.
Mundell's biggest booster, economic consultant Jude Wanniski, hails him as nothing less than the greatest economist of the 20th century, eclipsing even John Maynard Keynes. "If it were not for Mundell," Wanniski wrote to his clients last week, "Ronald Reagan would not have been elected president, there would have been no supply-side tax cuts, here or around the world, and we would not be smiling at a Dow Jones industrial average above 10,000 with no inflation."
Mundell has spent most of his life outside Canada, but he is still a Canadian citizen and credits his upbringing as the son of an army sergeant-major in small-town Ontario and British Columbia for some of his early insights. Over breakfast last week in Stockholm, where he was addressing a conference organized long before the Nobel committee made its announcement, he even harked back to his experience as a teenager working a summer at a cheese factory in the town of Latimer, just outside Kingston, Ont. Farmers delivering their milk worried aloud about middlemen taking most of the profits - planting ideas about trade flows in the head of the young man. Later, in the Fraser Valley town of Maple Ridge, B.C., Mundell saw how vulnerable a regional economy was to international developments. "Coming from a small country, open to trade, gave me a perspective on the international economy that people who live inside large economies don't have," he told Maclean's.
Like so many Canadians, though, Mundell left the country to fully develop his ideas. After studying at the University of British Columbia, he did graduate work at the University of Washington in Seattle and the Massachusetts Institute of Technology, then taught at McGill, the Johns Hopkins Center in Bologna, Italy, the University of Waterloo, Stanford University, the University of Chicago and, since 1974, at Columbia in New York City. But it was when he was just 29, the whiz-kid chief international economist at the International Monetary Fund in Washington, that he first published the ideas that led to last week's prize.
It was 1961, and Mundell argued in a seminal paper titled "A Theory of Optimal Currency Areas" that a nation-state was not necessarily the best area for a single currency. That paper set out radical new thinking about how a national economy could be affected by money moving without hindrance across borders - and laid the theoretical basis for creation of the euro. His ideas, along with similar ones by a Scottish economist, Marcus Fleming, were later dubbed the Mundell-Fleming model. It summarized the relationship between exchange rates and monetary policy, showing that when capital flows easily across borders, governments must choose between a stable exchange rate and an independent monetary policy - but cannot have both. Those ideas, said the Nobel committee, "constitute the core of teaching in international economics."
Three and a half decades later, Mundell is still vitally concerned about the role of currencies. He wrote widely last year in support of the euro when it was about to be adopted by 11 European countries, and argues that Canada should fix its exchange rate with the U.S. dollar. In Stockholm last week, the morning after being feted at an impromptu reception by Canadian Ambassador Philippe Kirsch, he said he does not believe Ottawa would agree to a joint currency with the United States - but it doesn't need to: "You can have all the advantages of a single currency with a fixed exchange rate. If we don't peg the Canadian dollar, it will keep depreciating. In 20 years, it will be worth only 50 American cents."
Those who have worked closely with Mundell describe him as a restless thinker who tosses off ideas at a startling rate. "Being around Bob was a non-stop intellectual feast," said Robert Kerton, dean of arts at the University of Waterloo who taught economics with Mundell from 1972 to 1974. Kerton recalls Mundell zipping around campus in a vintage Mercedes, and starting a regular bulletin called Common Sense Economics aimed at general readers. "His first article for it was simply called 'Knowledge,' " said Kerton. "He was a very broad thinker, really a Renaissance man."
At the same time, Mundell was developing theories that came to be known as supply-side economics. Along with Laffer, he began suggesting ways that the U.S. economy could break out of its persistent "stagflation" (inflation combined with high unemployment and slow growth). Their prescription was tight money to slow inflation and deep tax cuts to boost growth. That formula ran counter to the conventional Keynesian thinking of the time - and it took almost a decade before such policies were implemented by Ronald Reagan in the United States and Margaret Thatcher in Britain.
Mundell's ideas were popularized among American conservatives by the editorial page of The Wall Street Journal, which last week acknowledged that for a generation it has "preached economics from the gospel by Robert Mundell." Wanniski, then an editorial writer for the Journal, recalls regular dinners at a Manhattan steakhouse called Michael 1 at which the paper brought Mundell and Laffer together to thrash out their ideas. The debate became so heated at one point, Wanniski says, "that the restaurant eventually turned off the lights and left them yelling at each other in the dark."
In 1974, the Journal began promoting Mundell's ideas, converting advisers to Reagan and Thatcher to his thinking. In Canada, however, they fell on deaf ears. Trudeau-era policy-makers were in thrall to orthodox economic thinking, and Mundell's theories were largely ignored. "Bob was a visionary who was too far in front," said Waterloo's Kerton. "He was two decades ahead of everyone."
None of Mundell's supply-side thinking, in fact, was cited by the Nobel committee in awarding its prize to him. Since its political triumph in the 1980s, much supply-side theory has been called into question by other economists. And other ideas propounded by Mundell in recent years have been dismissed, including much of his thinking about exchange rates. He has at times advocated a return to the gold standard, and colleagues who hail his pioneering work are more reticent when asked about his recent thinking. "There are many eccentric things about Bob," says McGill's Deutsch.
One is the abandoned Renaissance palace that Mundell bought in 1969 in the hills above Siena as a hedge against inflation for the equivalent of just $10,000. When he purchased the building, it was a crumbling structure with no electricity or running water. Over the years, he has poured tens of thousands more into updating the ancient villa. Nowadays, he says with satisfaction, "Palazzo Mundell" is worth more than 100 times what he paid for it. "With the possible exception of Microsoft or Intel," he chuckled last week, "I don't think I could have made a better choice in the stock market."
Mundell's private life, too, has sometimes been in turmoil. In 1972, he divorced his first wife, Barbara, with whom he had three children. He became bored with academic theory and took up painting. Friends say he also let his hair grow shaggy, and drank and ate too much. "He looked like the Pillsbury Doughboy," recalls Winniski. "He was puffed and white, on a cholesterol diet with a pitcher of martinis at night. People started rumours that he was washed up, a drunk." Mundell's 38-year-old son, William, an economic consultant in Los Angeles, says that picture of his father at the time is "really overblown. I never saw any evidence of it." Whatever the truth, it had a happy ending. A few years later, Mundell met his current wife, Valerie Natsios, a poet two decades younger than he is, and repaired his personal life. In December, 1997, they had their first son, Nicholas.
Mundell has never been wealthy, and says he intends to use his prize money to keep working on his villa. He may also help out William, a Republican who plans to run for the U.S. Senate or the governor's mansion in California, having made millions as a consultant. (His other grown children - Paul, 40, a computer designer, and Robin, 37, a screenwriter - also live in the Los Angeles area.) And, he says, there will be enough left over to buy young Nicholas his very own pony next summer. For Mundell, international acclaim may have come late - but it is no less sweet for that.
Maclean's October 25, 1999