Nobel Given for ‘Prophetic’ Work on Globalization

Columbia University professor Robert A. Mundell won the Nobel Memorial Prize in Economic Sciences on Wednesday for his pioneering study of how domestic economies respond when money flows across international borders.

His remarkably hardy models, developed in the early 1960s, provided some of the theoretical underpinnings for the creation this year of Europe’s new 11-nation currency, the euro. And they helped explain the turmoil of the 1997-98 Asian financial crisis, which struck nearly 40 years after he published his study.

In 1963, when Mundell first devised his theory of how national economies would be affected by what is now part of the phenomenon of globalization--burgeoning foreign trade and free flows of foreign capital--the world was a very different place. Exchange rates were fixed, international capital movements were highly restricted and foreign trade was far less important to the U.S. economy than it is now.

Mundell’s early work was largely theoretical. But the Swedish Academy said it has proved “almost prophetic” as foreign exchange controls have disappeared and the economy has gone global. Today, economists routinely use the so-called Mundellian Framework as a standard tool in trying to understand international economic events.

“In the early 1960s, when Mundell published his contributions, [they] must have seemed like an academic curiosity,” the Swedish Academy said in announcing the award. “Although dating back several decades, Mundell’s contributions remain outstanding and constitute the core of teaching in international economics.”

Mundell, 67, who was in London on Wednesday to speak to a gold producers trade organization, told Associated Press he was surprised by the award. He said he would use some of the $960,000 prize money to repair a palazzo he owns outside Siena, Italy.

Not only was Mundell a pioneer in modeling the effects of globalization, but he also started thinking seriously about currency unifications back in the early 1960s--a time when six countries in Western Europe had formed a common trading zone but almost no one was talking about a shared currency.

In 1961, Mundell published a paper on what it would take to make national leaders give up their monetary sovereignty and start using a shared currency. One of the hypothetical cases he examined was that of a currency union--precisely what 11 nations in Europe established on Jan. 1 when they replaced their national currencies with the euro.

Not everyone in Europe has been delighted with the disappearance of their marks and francs, or with the prospect of foreign officials meddling in their homelands’ economic affairs. Of the 15 member countries in the European Union, four have declined to participate in the euro’s launch this year. As policymakers have debated the pros and cons of the shared currency zone, and how to make it palatable to a wary public, they have routinely turned to Mundell’s paper as a starting point.

“The way Mundell formulated the problem has continued to influence generations of economists,” the Swedish Academy said.

Mundell is Canadian by birth, though he has spent most of his professional life in the United States, earning his doctoral degree from the Massachusetts Institute of Technology. But colleagues say it was his special perspective as a Canadian--a citizen of a sparsely populated country that often feels overwhelmed by its superpower neighbor--that gave him his unusual early insights.

In the 1950s, when most countries of the world were linked together in a system of fixed exchange rates--called the Bretton Woods Agreement--Canada allowed its currency to float against the U.S. dollar for a few years.

The data Canada collected from this experience gave Mundell the building blocks for his subsequent, broader theories about the effects of free global capital flows. Those theories, in turn, began getting real-world testing in the 1970s, when the Bretton Woods system broke down, foreign exchange markets opened up and capital started moving instantaneously around the world.

Mundell, meanwhile, was jumping off into new intellectual territory. As inflation began to appear at the end of the 1960s, he joined the faculty of the University of Chicago, a school known for its promotion of what came to be known as monetarism. Monetarists argued that central banks should have greater power to fight inflation by restricting the availability of money and credit.

When the Federal Reserve finally embarked on a painful tight-money course at the end of the 1970s, “monetarist” became a dirty word in some circles. But today, few would question that the Fed’s bitter medicine worked.

“He anticipated the idea which, long afterwards, has become generally accepted,” said the Swedish Academy. “Namely, that the central bank should be given decentralized responsibility for price stability.”

In the years since, Mundell has continued to surprise. He joined fellow Chicago school economist Arthur B. Laffer in developing the theories known as supply-side economics. Some of those prescriptions were picked up by political conservatives and promoted during the presidency of Ronald Reagan. But these ideas have gone out of fashion.

“He likes crazy people,” said Rudiger Dornbusch, a former student of Mundell’s who is now an MIT professor and author of a standard economics text. “He is an intellectual adventurer, very creative, who likes to move into new areas and plant bombs. He likes to stun people by saying the opposite of what they think.”

The Swedish Academy made it clear that it was honoring Mundell for his work on international capital flows and foreign exchange, not for his newer ideas involving gold and supply-side economics.

“Robert Mundell’s most important contributions were made in the 1960s,” the Swedish Academy said, without mentioning the more recent, controversial theories.

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Mundell’s Impact

Some contributions by Robert A. Mundell, below, winner of the 1999 Nobel Memorial Prize in economics: Mundell’s research, dating back nearly 40 years, constitutes the core of teaching in international economics and remains highly relevant to policy-makers, most recently in talks on setting up Europe’s economic and monetary union.

He was the first to question fixed exchange rates, the inactivity of capital and the need for national currencies. In a 1961 article, Mundell mentioned the advantages of a common currency.

His work questioned countries with fixed but adjustable exchange rates - prophetically, given the way countries from Thailand to Russia have had to abandon currency pegs in recent years.