RIP, Robert Mundell: The economist BJP needs to adopt

It is a measure of our times that the passing of great intellects attracts almost zero attention, while the antics of motormouth celebrities are reported incessantly.

I am referring to an economist whose contributions to modern economic outcomes stand next only to John Maynard Keynes and Milton Friedman. That is why, just as the Congress adopted Keynes, the BJP needs to adopt Robert Mundell who won the economics ‘Nobel’ in 1999, though far later than he should have. He died on April 4. There was near-zero mention of this in our media.

Mundell’s work is great because of major areas that he lit up as none before him had. He has left as permanent a mark on policy as Keynes and Friedman have.

Four major contributions

His first big work in 1962 was along with another economist, Marcus Fleming. It is known as the Mundell-Fleming model. This model foreshadowed John Taylor’s trilemma by three decades.

It extended the Hansen-Hicks IS-LM model--which was about output and interest rates in a closed economy--by opening it up to international trade. Mundell added the exchange rate as the third variable.

This is what Narasimha Rao and Manmohan Singh, quite unconsciously, had done with their 1991 reforms. But because it was inadvertent, they failed to pay adequate heed to the rest of Mundell’s body of work regarding his other major contribution, namely supply side economics. China didn’t make that mistake.

The second contribution was in the late 1960s. It laid the theoretical groundwork for the Euro in whose creation he actively assisted. The model discussed optimum currency areas.

This was about integrating the currencies of different countries in a region into a single currency so that greater efficiency of all economic and financial transactions could be achieved. It has been a runaway practical success. (Mr Modi should, in my view, aim for this with the Saarc countries. Pakistan will be like Britain is to the Eurozone).

Mudell’s third major contribution has come to be known as supply side economics wherein you incentivise the agents in the economy to produce more at lower cost. As Bill Cinton’s copy writer might have said, “It’s incentives, stupid”.

Mundell’s fourth major contribution was another theorem known as the Mundell-Tobin effect. This said something Ms Nirmala Sitharaman and Mr Shaktikanta Das need to bear in mind, especially now. They too need the theoretical hatstand on which to hang their policies on.

The theorem says that as money supply increases, real interest rates don't keep pace with inflation because as prices increase people switch their money from bank deposits to other assets. We can see this happening now.

Basically, Mundell showed, for the first time, that inflationary expectations have very real economic effects via savings behaviour.

The relevance for the BJP

It has been a huge problem for the BJP, not just now but since its inception as Jana Sangh, that it has not had the intellectual framework within which to formulate its policies. As a result, in economic matters it has looked bereft and has been overshadowed by the Congress.

One reason for this is that the BJP under Mr Modi has confused intellect with intellectuals. Simultaneously, it has equated intellectuals with Leftists, if not Marxists.

Robert Mundell was an intellectual’s intellectual and he was exactly what the BJP needs today to legitimise its economic policies because at long last Mr Modi has begun to give the private sector a big role in the economy. But in order to achieve for it the legitimacy that the Congress did for its policies it needs a giant intellect to depend on.

Robert Mundell is the economist it needs to turn to.