Tuesday, April 6, 2021

The Father of the Euro is Dead

Robert Mundell

The New York Times reports:

Robert A. Mundell, a Nobel Prize-winning economist whose theorizing opened the door to understanding the workings of global finance and the modern-day international economy, while his more iconoclastic views on economic policy fostered the creation of the euro and the adoption of the tax-cutting approach known as supply-side economics, died on Sunday at his home, a Renaissance-era palazzo that he and his wife restored, near Siena, Italy. He was 88.

Here is a 1999 take by Dr. Walter Block on Mundell's support for "optimal currency areas," which is behind Mundell's role in the creation of the euro:

 How does Robert Mundell fit into the gold standard picture? Apart from a historical appreciation of gold, his views on present policy are deeply flawed: he rejects the monetization of gold, contenting himself with attempts to bring greater accountability to a system that has long since been wrenched out of the hands of the market, and given over to the tender mercies of the political system.

In his particular case he advocates the "gold price rule" which is similar, in effect and in intention, to Milton Friedman's 3% "rule" for the fed. That is, it is an attempt to obviate government's natural tendency to inflate, without setting up a separation of money and state, as would exist under a pure gold standard.

Mundell is also noted for a general stance in behalf of economic freedom, and for that he deserves credit. But it is his work in the theory of optimal currency areas and his criticisms of floating exchange rates that attracted the attention of the Nobel committee. In particular, he is known for his 1961 article, "Optimal Currency Areas," appearing in the American Economic Review, Vol. 51, Sept., 1961, pp. 657-664. The question he has dealt with is: what geographical zone is appropriate for each type of money?

In his view, the "optimal currency area" is not the whole world. On the contrary, it encompasses far less territory than that. Right off the bat, that puts him in conflict with the gold standard view, which of course sees the optimal currency area for gold as the entire globe.

Thus, not only shouldn't the world be on the gold standard for Mundell; it should not operate on the basis of any one currency, no matter what it is, whether or not it is gold. We need, in his analysis, many currencies. But not competing ones, the Hayekian perspective. Instead, each one should be supreme, within its own area.

Here is Murray Rothbard on Mundell's supply-side economics: 


1 comment:

  1. Another supposed benefit of optimal currency areas was that they would discipline each other to prevent a race to the bottom of currency debasement. Instead, they have provided mutual cover for it.