Mundell's "International Economics": Adaptations and Debates Author(s): Russell S. Boyer and Warren Young Source: IMF Staff Papers, Vol. 52, IMF Conference in Honor of Michael Mussa (2005), pp. 160179 Published by: Palgrave Macmillan Journals on behalf of the International Monetary Fund Stable URL: http://www.jstor.org/stable/30035988 . Accessed: 11/04/2011 20:21 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=pal. . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

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Mundell'sInternational Economics: Adaptationsand Debates RUSSELL S. BOYER and WARREN YOUNG* Most of the chapters in Mundell's InternationalEconomics differ,owing to adaptation,from the original sources. The revisionsyield valuableinsights into the contributionsmade by the initialpublications. In this paper we look only at the changes that take the form of elisions of material. These outtakes are amusing but demonstratehow Mundell was willing to either irritate or ignore his discussants. Issues raised by them are important enough to warrant our further consideration.In doing so we question both the validityand the interpretationof some of the conclusionsin the Nobel-citedcapital mobilitypaper [JELB29, B31, E10, F41]

*RussellS. Boyeris Professorof Economicsat the Universityof WesternOntario,andWarrenYoung is AssociateProfessorof Economicsat Bar-IlanUniversity.This paperis a revisedversionof one prepared for the conferencehonoringMichaelMussaon the occasionof his sixtiethbirthday,heldJune4-5, 2004, at the International MonetaryFund,Washington,D.C. It is the firstoutputof a line of researchthatwas initiatedin responseto the awardingof the Nobel Prizeto RobertA. Mundellin 1999. We thankhim for conversationsandcorrespondence concerningthe keynoteaddressthathe presentedat Bar-IlanUniversity for theconferenceentitled"TheOpenEconomyMacromodel:Past,PresentandFuture."Boyerwouldlike to expresshis appreciationto JimBoughton,Bob Flood,andJ. J. Polakfor conversationsduringvisits to the IMF.The staff at the IMFArchiveswas invaluablein makingavailablesome of the early draftsof papersby FlemingandMundell.DavidLaidlerprovidedimportantinsightsaboutthe natureof exercises in the historyof thoughtbutspecificallywarnedof the dangersof constructingmemoirs.Boyerwouldlike to acknowledgehis debtto Alison Fleming,who providedsome of her father'sdiariesfor his inspection, andwho gave him the photothatappearswith this publication.He also heldfruitfulconversationson the topic of this paperwith JohnFloyd andGrantReuber.Youngwouldlike to thankBar-IlanUniversityfor financiallysupportingtravelthatexpeditedthis researchproject.Commentsfroma refereefor thisjournal helpedto correctsome mistakesin an earlierdraftandto sharpenup the argumentat certainpoints. None of these individualsor organizationsis responsiblefor the conclusionsthatthis papercontains.

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Note: Clockwise from left of the piglet: Gloria Fleming, Eugene Birnbaum,Elizabeth Johnson, J. Marcus Fleming, HarryG. Johnson,RobertA. Mundell,and Wassily Leontief.

ichael Mussa and I (Boyer) were graduatestudentstogetherat the Universityof Chicagofrom1966 to 1970. Muchof ourinteractiontook EconomicsWorkshop,whichwas organizedby Harry in place the International JohnsonandRobertA. Mundell.Thesewereamongtheworkshop'sgreatestyears, behaviorwitnessedin thissettingare andthefun,excitement,andunconventional this the that exemplifiedby photo accompanies paper.JohnsonandMundellarein the photo,butso too is anotherfamouscontributor to openeconomymacromodelwas arbiter of who wouldreceivethe majorJ. Johnson the Marcus ing, Fleming. in thisphoto ity of the creditfor developingthe crucialmodel,andappropriately he sits betweenFlemingandMundell. The firsttimeI heardFleming'snamewas fromJacobFrenkelin 1969in the corridoroutsidethe seminarroomin whichthe workshopmeteachMonday.The namecameup in the contextof a discussionof RichardCooper's(1969) newly Finance.A remarkable aspectof the publishedvolumeof readings,International volume,Jacobpointedout,was thatit did not containa singlepaperby Mundell. studentof international finance,I wonderedaboutthe Being a well-informed glaringomissionof Mundell'smagnumopus,"CapitalMobilityandStabilization PolicyUnderFixedandFlexibleExchangeRates"(1963d).Tomy surpriseCooper had foundan alternativefor thatpublicationin the formof a paperby Fleming (1962).I was convincedat the timethatthis was indeeda poorsubstitutefor the linkedin my mindthenamesFlemingand realthing,buttheepisodepermanently

M

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RussellS. Boyerand WarrenYoung model"hadbeen coined beforethe term"Mundell-Fleming Mundell,apparently 2003). (Boughton, the developmentof the open Thesetwo namesare centralto understanding economymacromodelduringthe 1960s,a periodof massiveupheavalin the subject. Thispaperexaminesthesetwo greateconomistsin an unorthodoxway.We in lightof thecontrastin theextentto whichrevisions considertheircontributions weremadeto theirworksas theywerereprintedin an adaptedform. The differencein thisregardis quitemarked.WhileFleming'sfamouspaper went from DepartmentalMemorandum(DM) (1961d)1to publication,with reprintsin two separatevenues,therehas been a minimalamountof reworking alongthe way.In contrast,Mundell'spapershavebeenextensivelymodifiedfrom theiroriginalforms(Mundell,1963a,1963b,1963c,1963d,1964,and1967)to their in adaptedformin International Economics(Mundell,1968a). publication aremerelyamusing,andto thesewe devotemost Someof Mundell'sadaptations of ourattention.Wedo thisby consideringthereworkingin theformof elisionof materialthatappearsin earlierversions.Evenso, thecommentsof discussantson theoriginalpapersareworthreviewing,andwe dothisin thecaseof McLeod(1964) (discussingMundell,1963d2)andFleming(1967)(discussingMundell,1967). Thetaskof dealingwithrevisionsthataddmaterialto Mundell'soriginalpublicationsis left for a subsequentpaper.

I. TrashWorthReadingby Students To beginthis comparisonbetweenFlemingandMundell,we focus on two other dimensionsin whichtheydiffered:namely,theirdesireto createcontroversyand theirwillingnessto acknowledgethe originalityof others'work. Of Fleming'scelebratedpaper,Mundellremarked: Marcusthat year was active in the theater(literature,drama,and history were old avocations)but neverthelessmanagedto writea paperon the monetary-fiscalmix that built upon the subjectthat I had worked on, andhe produceda paperthatis still worthreadingtodayby students (Fleming, 1978, p. xix).

Flemingis somewhatmoreinclinedto see his own workas being a useful construct: The essay in Chapter9, writtenin 1962, was inspiredby a feeling that the Canadianexperimentwith a floatingexchangeratehadbeen vitiated

Memorandano longerareissuedat the IMF;theirfunctionhas 1Itshouldbe notedthatDepartmental beentakenoverby a workingpaperseriesthatconformsmoreclosely to whattheprofessionuses thatterm to describe.Perhapsthe most importantdifferencebetweenthe two duringthe 1960s was thatDMs were broadlyto mean specificallydesignatedto be used only internally,althoughthis guidelinewas interpreted thatboththegovernmentsandcentralbanksof membercountrieshadfull accessto them.In addition,it was not unusualfor authorsto distributetheirDMs to othereconomistswithwhomtheywerecorresponding. 2McLeodwas also the discussantof Mundell's(1963b) paperat the CanadianPolitical Science Associationmeetingsin QuebecCity on June6, 1963.

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AND DEBATES ECONOMICS: ADAPTATIONS MUNDELL'S INTERNATIONAL mix calledfora different by a failuretoobservethatsuchanarrangement from that were under of fiscalandmonetary those appropriate a policies rates of fixed 1971, 18).3 p. (Fleming, exchange regime While the emphasis in his paper is not on how capital mobility affects his comparativestatic results,Fleming does cover the polar case of perfect mobility both in the body of his paperand in a mathematicalappendix.Furthermore,his view of the importanceof capital mobility remained steadfast throughoutthe rest of his life, as his researchoutputmakes clear. Fleming was an internationalcivil servantwhose naturaltendencywas to avoid controversyif possible.In contrast,Mundellappearsto relishhis abilityto stirthings up, andhe gives as a primeexampleof this proclivityhis firstpaperwrittenas a new employee at the IMF (Mundell,1961d): thispapercreatedwithintheFund Itis hardto imaginetheconsternation in OctoberandNovember1961.It arrivedat conclusionsthatdid not exactlycoincidewithFundpolicy.... it was initiallyrejectedby Staff Papers... (Mundell,1968f,p. 493). That this paper was accepted for publication is credited to a senior member of staff, who wrote the following statementof support: thepubof theCommittee I understand thatsomemembers mayquestion Fund licationof thispiecebecausetheythinkit conflictswithestablished policy.I wouldfirstof all questionwhetherit doesconflictwithestabarticleprovidesa of Mundell's lishedFundpolicy... TheS.E.quadrant MansionHousespeech.... On forLordCromer's foundation theoretical if I thoughtthatStaffPapers theotherhand,I wouldbe mostconcerned validbutwhichmight wouldrejectan articlewhichwas theoretically conflictwithacceptedFundpractice..." (Mundell,1968f,p. 494). Mundell's complaintsaboutthe treatmentof his papermay not be completelyjustified. He acknowledgesit was writtenin a single week in Septemberor October 1961 (Mundell, 2001, p. 222). It was immediately approvedby Fleming, so that the DM appearedon November 8. If there was a fight about the paper,it did not last long: the paperwas publishedin the March 1962 StaffPapers.4 Mundell assertsthat the theoreticalframeworkin his paper demonstratedthe correctpolicy mix and that PresidentKennedymidway throughhis term in office reversed the settings of his policies to conform to the Mundell recommendation. Nonetheless, he later admitted(Mundell,2001, p. 222) thathis view all along was 3Boughton(2003) has notedthatFleming(1962) was essentiallyin its publishedform(except,perhaps, for its appendix)by Septemberor October1961. It is thereforeclear thatthe actualwritingdates from 1961 at the latest. 41ncontrast,Fleming'sfamouspaperwas issued as a DM also on November8, but it was not publisheduntil 12 monthslater.Perhapsthe titleof Mundell(1961d)is a casualtyof the speedwith whichthe DM was released.Thattitle is "TheUse of MonetaryandFiscalPolicyforInternalandExternalStability." Use of Monetaryand Forthe publishedversionof this paper(Mundell,1962)the titleis "TheAppropriate Fiscal Policy for InternalandExternalStability."The adaptationpublishedas Mundell(1968c) modifies Use of MonetaryandFiscalPolicy UnderFixedExchangeRates." the title furtherto "TheAppropriate

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RussellS. Boyerand WarrenYoung thathis paperwas "trash."5 Perhapsunawareof this attitude,some well-known economists,suchasFlood(2002),Johnson(1967),Kemp(1972),McCallum (1996), andTsiang(1975), have takenthe paperseriouslyenoughto give it a thorough review,or at leastto cite it.6 Suchreversalsarea bitjarringto readerswho firstencounterthem,butthose whoknowMundellareusedto thisaspectof his personality. Indeed,he usedWalt Whitman'sfamousquotationaboutself-contradiction to prefacehis talk to wellwishersat theAmericanEconomicAssociationluncheonhonoringhimforreceiving the NobelPrize. Butfew economistsareawareof theextentof Mundell'sreversalwithrespect to capitalmobility.In his capitalmobilitypaper,he writesthatthe assumptionof perfect capital mobility ". . . will overstatethe case, but it has the merit of posing

a stereotypetowardwhichinternational financialrelationsseem to be heading" view set the That research financefor at (1963d,p. 475). agendain international least 30 years.In starkcontrast,Mundell'sown researchmovedin just the opposite direction;he assumedthereafter thattheeconomyunderanalysiswas in a situationof zerocapitalmobility. is made:in his bartertheorypaper(Mundell,1967),which Suchanassumption the led to Mundell-Dornbusch literature(Dornbusch,1973);in his analysisof growthandthebalanceof payments(Mundell,197lb), whichlaidthe groundwork for the monetaryapproachto the balanceof payments;andin his "Uncommon forCommonCurrencies" (Mundell,1973).Whileit maybe truethatthe Arguments degreeof capitalmobilitydoesnotmakemuchdifferencein certainof thesepapers, it seemsunlikelythatthe argument in the commoncurrenciesdiscussionremains intactwhenthecountriesinvolvedhaveaccessto a nonmonetary marketinstrument for thataffordsthe opportunity international borrowingandlending.7

II.TrueZen Master Soon afterMundellarrivedat theFundin September1961,Flemingprovidedcrucial supportfor Mundell'sresearch.In his ownDM, Fleming(1961)citeda paper forthcomingin the CanadianJournalof Economicsand PoliticalScience (Mundell,

1961c),andhe quicklyapprovedtheDM mentionedabove(Mundell,1961d). He continuedthis supportinto 1963by doingjointresearchwithMundellon in theforwardforeignexchangemarket(FlemingandMundell,1963). intervention In Marchof thatyearFlemingapprovedas a DM thefirstdefinitiveversionof the 5Tofill in the context,we shouldnote thatMundellsays ". .. thatI felt like Bizet afterhe hadwritten the ToreadorSong to Carmen:'If it's trashthey want,I'll give it to them!'" 6Perhapsthe most surprisingaspectof Mundell(1962) being used to justify the Kennedytax cut is that the model explicitly assumesthatthe economy underanalysisis small.This is hardlyan accurate descriptionof the UnitedStatesof thatera. 7Dornbusch(2000, p. 201) remarkedthatthe argumentsin the originaloptimumcurrencyareaspaper (Mundell,1961b)so militateagainstthe view thatEuropeshouldhave a single currencythatwe should not see Mundellas the godfatherof the eurobutrather"EurodespiteMundell."McKinnon(2002) notes how the discussionin Mundell(1973) does not use any of the termsthatwere employedin the famous paperwritten12 yearsearlier.

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capitalmobilitypaper(Mundell,1963a)8even thoughit had an unfinishedfeel, lackingreferencesandfootnotes.9 It is thereforea greatsurpriseto findthatin thespringof 1963Flemingdidnot approveas a DMthefirstof Mundell'szero-capital mobilitypapers.Thispaperin its andtheAdjustment originalpublishedformis titled"International Disequilibrium Process"(Mundell,1967). Two yearslaterFlemingwas calledon to playthe role of discussantfor this paper,even thoughhe hadalreadyreactednegativelyto it. Theoccasionwas the of thepaperby Mundellat a 1965WorldBankconference.Of course, presentation to expresshis havingseenthepapertwo yearsearlierFlemingwas well prepared in this and forum. The the discussants' comments arepubmisgivings public paper lishedin Adler(1967). Mundell'spaperappearsin an adaptedform in InternationalEconomics (Mundell,1968a)as Chapter8, andits titlehasbeenmodifiedto "BarterTheory and the MonetaryMechanismof Adjustment." The introduction to the paperis reworked,althoughthe bodyof the text is not.Whatmakesthe folsubstantially sectionseemstailoredto irrilowingouttakesinterestingis thatthe introductory tatethe discussant.He, in turn,respondsin a confidentandeven satiricalfashion, so thatto manyreadersFlemingwinsthisdebate. Thefollowingaretheopeningparagraphs of theoriginalpublication that,after adaptation,appearedas Chapter8 in InternationalEconomics.All citationsare fromMundell(1967). A Cupof Tea Nan-in,a Japanesemasterduringthe Meiji era (1868-1912) receiveda universityprofessorwho came to inquireaboutZen. Nan-in served tea. He pouredhis visitor's cup full, and then kept on pouring. Theprofessorwatchedtheoverflowuntilhe no longercouldrestrain himself."Itis overfull.No morewill go in!" "Likethiscup,"Nan-insaid,"youarefull of yourown opinionsand speculations.How can I show you Zenunlessyou firstemptyyourcup?" (p. 441). International monetaryeconomicsneeds to follow Nan-in'sadvice. We havean abundanceof theories,mechanismsandtechniquesforunderstandingit, but manyof them seem to be no betterrootedin theoretical thanthe opinionsandspeculationsof Nan-in'sguest.Too understanding as too few.Thesubjecthasbecome manytheoriesarealmostas debilitating so clutteredthatit does seem necessaryto emptyourcups (p. 441).

8Thereexists a still-earlierdraftof this paperin the form of a two-pageattachment(entitled"The Implicationsof InternationalCapitalMobility for StabilizationPolicy and TheoreticalEvaluationof EmpiricalEvidence,"datedJanuary4, 1963) to a notice of a seminarin the SpecialStudiesDivision of the IMFon January9, 1963. 9Thatthis versionwas indeedunfinishedis suggestedby the followingevidence.In less thanthree monthsthe manuscript(Mundell,1963a)had metamorphosed into a version(Mundell,1963b)thatis in roughlyits formas published(Mundell,1963d).In the processit hadmorethandoubledin length;tables, references,footnotes,anddiagramshadbeenadded;andthe texthadbeencompletelyreorganized.Within an additionalsix monthsthis new draft,with furtherminorchanges,was published.

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RussellS. Boyerand WarrenYoung It wouldbe a mistake,however,to emptyout two hundredyearsof tradetheoryandforgetaboutit. We needinsteadto sift it of international its extraneouselements,andto adda littleof whatappearsto be missing. In un-Zen-likefashion,then,we can beginby takinga brieflook at what has occurredsince Hume,andin particularat the effectson the development of internationalmonetaryeconomics of the classical distinction betweenthe monetarymechanismandthe theoryof barter(p. 441). The success of the dichotomy proved too overwhelmingepistemologically.In the hands of the successors of Ricardo-Mill, Marshall,Taussig,Viner,Meade,Johnson,etc.-the long-runbartertheory of tradedevelopedinto a carefullytooled andhighly sophisticated engine of analysis... internationalmonetaryeconomicanalysisnever receivedprecise mathematicalformulation.Restrictedto the raw logic of verbal analysis,it could not and did not develop the rigorousbase necessaryfor orderedprogressivescientificaccumulation(p. 443).

After furtherdiscussion of this sort the introductoryportionof the paper finishes with the caveat thatthe assumptionsof the model ". .. limit the directapplicability

in the sense thatit of the conclusionsto a smallcountrythatis underdeveloped There differencefrom market" is a lacksan important (p. 445). capital noteworthy in version in the Economics thesectiontitled"TheClassicalCaseand International In thatsectionis a mentionof Mohametandhis mountain(p. 455), Devaluation." butotherwisethebodyof thepaperis muchas we findit in Mundell(1968a).10 The followingarecommentsby Fleming(1967): Commentson ProfessorMundell'sPaper ProfessorMundellbegins,withthe self-confidenceof a trueZenmaster,by tellingus to emptyourcupsof all we thoughtwe knewaboutinternationalmonetaryeconomicsin orderto receivethe milk-or ratherthe greentea-of thetruedoctrine.BeforeacceptingthissomewhatMessianic claim,however,andbendingourheadsmeeklyto receivethe thwacksof his mathematical"hossu,"we ought,I think,to ask ourselvesthe question, "Whatis so specialaboutMundell'sZen?"(p. 462). The paperbeforeus, like the body of the Buddha,manifestsitself at the threelevels-the level of disequilibriumanalysis,or Sambhogakaya, andthe level level of comparativeequilibriumanalysis,or Dharmakaya, of policy prescriptions,or Nirmanakaya.(The meaningI attachto these termswill be explainedanon.)(p. 463.) Now, in the worldof disequilibriumanalysis,thingsarenot exactly whatthey seem. It is a strangeworld,composedpartlyof ex post realities, like Imports,Exports,Prices,and Incomes,andpartlyof visionary entities of an ex ante charactersuch as Expenditure,which is really a piece of wishfulthinking,butneverthelesshas magnitudeandmixeshappily with the realentitiesin Mundell'sequationsanddiagrams(p. 463). ... Now I mustadmitto beingratherallergicto thiskindof disequilibriumanalysis,though,I admitit has a respectableancestryin economic thought.In Buddhistlore, this realmis called the Body of Enjoyment,

thatthecaveatis sufficiently elasticso thatduringthe conscientious readermaybe surprised 0oThe in 1963and1964as beinganexamwhichfollowedhispaperMundell citedItaly'sexperience discussion theverysameframework Inaddition, is usedto analyzethecase pleto whichthisanalysisin applicable. of Britainin 1964(Mundell, 1971a).

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AND DEBATES ADAPTATIONS ECONOMICS: MUNDELL'S INTERNATIONAL or theBodyof Enlightenment, butwhileI enjoyit I don'tfeel entirely enlightened (p.463). Mundellhadventured a littlemore OnecouldwishthatProfessor cloudsof verbalanalysis" (p.464). deeplyintowhathecalls"thecluttered of Wearenowin a positiontoclimboutof theambiguous half-lights of equilibrium thedisequilibrium analysis, processintothesunlituplands Void.I amsurethatourZenmasorHeavenly therealmof Dharmakaya, of terwouldadmitthatthisblissfulrealmcouldbe attained by a number different systemsof dynamicadjustment, paths.Inotherwords,different thatfollowedby theancientworthiesof theclassicaltradition, including Itis, therewiththesamesetof equilibrium arecompatible relationships. Mundell's of thispartof Professor thattheconclusions fore,notsurprising withinthe limitations imposed paper... arerelativelyuncontroversial, themostcrucialis thefull of whichperhaps by theirbasicassumptions, assumption (p.467). employment However,whenin the concludingsectionwe descendfromthe worldof of equilibrium rarefiedatmosphere analysisto theterrestrial wherepolicieshaveto be appliedby humanbeings,conNirmanakaya comethickandfast.Mostof thesepropositions troversial propositions of me,asanIMF thatit wouldbechurlish conservative aresoimpeccably man,to quarrelwith them;... (pp. 467-8).

Zenis its simiOnthewhole,whatstrikesmemostaboutMundell's withits lesson the Ancient the to that of Worthies, earlypatriarchs, larity Itis clearthattheteahewantsus to emptyout of wu-wei,orlaissezfaire. of ourcupsis theteaof thatun-Zen-like activist, Maynard Keynes(p.468). From a historicalpoint of view, it would be interestingto know who had the last chance to revise his contribution.Fleming seems like a meticulousworker,and so the miscitationsof the equationsin the papercome as a surprise.Maybe the numbering of the equationswas alteredin the final copyediting of the paper,without corresponding changes to the discussants' comments. Furthermore,Fleming's quotation ". .. the cluttered clouds of verbal analysis .. ." does not appear in any version of Mundell's paper that we have seen. Perhaps it was modified to ". .. raw

logic of verbal analysis... ." And, finally, who was copying whom when both authorsuse the expression "un-Zen-like"?Just a coincidence? For those readerswho are wonderingaboutall the referencesto Zen, we should mentionthatFleminghad a particularinterestin Zen Buddhism.This enjoyableand literatereparteeprovidesan unusualview of the interactionof these two economists. It is worthpursuingthis episode somewhatfurther,because it sheds some light on the difficulties a scholar has in pinning down the motivations of the agents involved."1We have not been able to find any writtensource by Fleming expressing his feelings about his two encounterswith the bartertheory paper.12

of Fleming'sreactionto this paperin the followingsources: "One can readMundell'sinterpretation and 2002, 2001, 225; 481; 1991, (Mundell, p. 13). p. p. 12Fleming'sprofessionalpapersat the IMF have not been cataloguedin the Archives,althoughthe of varioussortsarein the posprojectto organizehis writingsis underway.Diariesandcorrespondence sessionof his daughters,Alison FlemingandHilaryKnatz,butthesehave not yieldedany directinformation abouttheirfather'sreactionto theseevents.

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RussellS. Boyerand WarrenYoung One can arguethatFleming'sreactionwas merelyto particular aspectsof an unpolishedfirstdraft,andthatwith suitablerevisionshe wouldhavewarmedto thepaperandapprovedits distribution as a Departmental Memorandum. Thiswas the of the comments he made in a memorandum 1963 entitled apparently purpose "LamentforEconomics."'3 Accordingto one versionof thestory(Mundell,1991, p. 481), this "lament"was the basisfor Fleming'sdiscussantcommentsthatare excerptedabove.14 AnotherpossibilitymightexplainFleming'saversionto Mundell'spaper.This explanationgainscredenceon examinationof theproblematic way Mundellcites his paperin his inaugural Lecture(Mundell,2001).Thecitation Mundell-Fleming in the list of referencesis as follows: , 1963a,"BarterTheoryandthe MonetaryMechanismof asChapter 8 of Mundell(1968).Alsopublaterpublished Adjustment," lishedas "International andtheAdjustment Process," Disequilibrium in Capital Movementsand EconomicDevelopment:Proceedingsof a Conferenceheld by the InternationalEconomicAssociation, ed. by

JohnH.Adlerwiththeassistance ofPaulW.Kuznets Macmillan; (London: NewYork:St.Martin's Press,1967),pp.441--68.15

The citationis misleadingin thatthe titleof the paperpresentedin the IMFseminarin 1963was "International .. ."Thetitle"Barter Disequilibrium. Theory.. ." does not appearuntil the paperwas adaptedfor publicationin InternationalEco-

nomicsin 1968.Furthermore, thefirstsectionof the 1963versionwas likelysimilarif notidenticalto thatwhichwe havedescribedabove:namely,the versionin theAdlervolume.16 It thereforecontainedtheZenmasterconversation as we have laidit out.If one looksinsteadat the 1968version,thereaderfindsquitea different introductory section,whichleadsone to thinkthatFlemingwas overreacting to this paper.Indeed,Fleming'scommentsappearto be very strangeif the paragraphabouttheZenmasterthattriggeredthemis nottakenintoaccount.Suchan outcome is guaranteedfor readerswho rely on InternationalEconomics, as this

materialhas beenelidedfromthe originalpaperin theprocessof adaptation. A questionwhichcan be raisedconcernsthe datingof the eventsdescribed above.Mundellclaimsthatthebartertheorypaper,whichuses a classicalmodel, was formulatedaftertheappearance of thecapitalmobilitypaper,whichemploys a Keynesianframework. He saysthatthisnewpaperrepresented a shiftin research directionwhichFleming"reallydisliked"(Mundell,2002, p. 13). But new evidencecastingdoubton thisclaiminvolvesthedateon whichPerJacobssonhada heartattack,April28, 1963.Whenthis dateis combinedwithMundell'saccount 13Suchis the descriptionof Mundell(1991, p. 481). In contrast,Mundell(2001,p. 225) describesthis expressionas being pencileddirectlyonto Fleming'scopy of the manuscript.The expression"lamentfor economics"mustbe an allusionto the bookby Wootton(1938). 14Weareunableto corroboratethis versionof these eventsas we have been unsuccessfulin finding any materialsdealingwith this paperexceptthosewrittenby Mundell. 15Thepaperitself covers only pages 441-62, with the rest of the pages containingFleming'scommentsas the formaldiscussant(462-68). Discussionfromthe flooris in pages468-71. 16Thisconjecturewas corroborated furthersupportingeviby a usuallyreliablesource.Unfortunately dence aboutthe eventssurrounding this paperhas not been available.

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(2002,p. 13) of theseevents,the authorsfindthatthe seminarfor the bartertheof the familiarform orypaperprobablytookplacebeforethedateof presentation of the capitalmobilitypaper,June6, 1963.SinceMundelllaterwas immersedin in September1963(Mundell, bothhisBancaNazionaledelLavoropaper(published and his extension of the 1963c)) capitalmobilitypaper(publishedin August1964 a more balanced view is thatduringthis periodhe workedon (Mundell,1964)), bothclassicalandKeynesianmodelscontemporaneously. Lookingat the papers whichFlemingpublishedduringthis time (Fleming,1971),the authorsfind that Flemingseemsto havedonelikewise.

III.Mundell'sMandalas Anotherway in whichFlemingandMundelldifferis in theiruse of diagrams.It anddeployment. is generallyagreedthatMundellis a masterin theirconstruction the Wewill see in a momentthatFlemingwas quitethe opposite.Acknowledging the Mundell's of and following: says drawings, Fleming elegance impenetrability tothediagrams AtthispointI wouldliketomakeanallusion illustrating are mandalas" WhatI wouldliketocall"Mundell's theadjustment process. of and 5 1 below], alwaysworthyobjects contemplation, Figure [Figure whichillustrates theadjustment process,is noexception(Fleming,1967, p. 464).

Figure 1. The AdjustmentProcess

M

X

B

Q

S

X

w

B P

Source: Mundell, Robert A., 1967, "InternationalDisequilibrium and the Adjustment Process," in Capital Movements and EconomicDevelopment,ed. by John H. Adler (London:Macmillan),Figure 5, p. 452. Credit:Reproducedwith the permissionof PalgraveMacmillan.

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RussellS. Boyerand WarrenYoung In contrast,the threediagramsby Flemingthataccompanyhis discussantcomments(Fleming,1967,pp.465-7) capturepolarcaseswhenmoneyis assumedto Thenature haveextremeeffectson thebalancebetweenincomeandexpenditure. of these assumptionsis such thatthe resultingdiagramsare ungainlyand awkand the possibilityof ward.The eleganceof the earlierfigurehas disappeared, is now raised.17 instability WhileMundellis a masterof thisart,we thinkit shouldbe saidthatwhenhe does not devoteenoughtimeto his creations,a few errorscan creepin. Figure2 belowcomesfromMundell(1968d): Canall five errorsin this figurebe easilyidentified?No, theycannot.That's becausetwo of themaredueto denotationsof variablesin thepaperthataredifferentfromwhatis shownin the figure. The errorsareas follows: X 1. is usedfortwo conflictingpurposes.It is usedbothto measurealongthehorizontalaxisandto denotetheinternalbalanceline. 2. y appearson theverticalaxis,andyl andy2appearon thehorizontal axis. X. 3. yl andy2areusedto indicatevaluesmeasured by 4. Intheappendixto thepapery is theletterusedto denoteoutput,whichin thefigureis measured by X. 5. In theappendix,t is usedto denotetheexchangerate,butin thefigurethisvariableis measured by y.18 Finally,Mundellat timesmakeshis own diagrammoreobscureby including extraneouslines or arrows.Weprovidean examplein theformof Figure3 below (the secondfigurein Mundell(1968e)).In this figureit can be seen thatthe FF Itsmanyshiftsmerelyconfusetheissue, locusin thebottompanelis unnecessary. as we areboundto end up at the intersection betweenthe relevantverticaldotted line andtherelatedXXlocusin thebottompanel. Despitethese errors,it is clearthatMundellis moremasterfulin diagrammaticanalysisthanis Fleming.So how do theirpowerscomparewhenit comes to equations?

IV.WonderfulSkill Dornbusch(2000, p. 199) praisedMundell's". .. wonderfulskill to capturethe story in a few equations.... ." Dornbusch presents the whole argumentin the capital

17Weagree with Mundell'scomment,made duringthe generaldiscussionof the paper,that even when BB is vertical,the economymustconvergeon the equilibrium(Adler,1967, p. 470). This means thatthe ungainlydynamicpathshownin Fleming'sChart1 (1967, p. 465) is not consistentwith theequations implicitin the model.In contrast,Fleming(1967, p. 465) appearsto be correctin his discussionsof his Chart2 (1967, p. 466) concerningthe confusionthatMundell'smodelpresentsaboutthe connection betweenan intoleranceof excess supplyanddemandfor moneyandthe relationshipbetweenincomeand expenditure. '8Thecarefulreadermayalso wantto identifythepointP as an errorin thisdiagram.Whilethecasual observerbelieves that point is the fixed exchangerate equilibrium,it is not so identifiedin the paper. Nonetheless,the conclusionof the papermakesclaimsas to the natureof an unspecifiedfixed exchange rateequilibrium.

170

ANDDEBATES ECONOMICS: ADAPTATIONS INTERNATIONAL MUNDELL'S Figure2. The Effectof Fiscal Policy on Employment

Y X

X'

F Q'

Q

RATE

P

F EXCHANGE

X

X'

OUTPUT yI Y2

X

Source: Mundell, RobertA., 1968, InternationalEconomics (New York:Macmillan),Figure 17-3. Credit:Reproducedwith the permissionof PearsonEducation,Inc.

mobility paper (Mundell, 1963d) using two equations: MIP = L(i, Y); i = i* (Dornbusch,2000, p. 202). There are two problemswith this demonstration.As we will see momentarily, this equationdoes not appearin the paper.In addition,as Swoboda (1972) argued convincingly, the ineffectiveness of expansionarymonetary policy under fixed exchange ratesis independentof the degree of capitalmobility,so basing the argument on perfect capital mobility (as the second equationindicates) hides the fact that this assumptioncontributesnothing to the conclusions. Let's see how this wonderfulskill is exemplified in the original version of the capital mobility paper(Mundell, 1963d). The only equationsin the text are in the form of a squaretable with five separatelistings on each side. In each case, both horizontallyand vertically,the sum of the elements in the table is zero. There are 10 equationsas a result, but the majorityof them are misleading as to the way the analysis is actuallyconductedin the text. The one equationthat is of some help is familiar: (T - G)+(S-

I)+(M

- X)+ *= 0.

19Thispresentation putsin a horizontalformatan equationthatis writtenverticallyin the tablein the 1963b,p. 476). An asteriskis usedto denotea negligiblemagnitudethatis (Mundell, originalpublication includedfor completeness.

171

RussellS. Boyerand WarrenYoung Figure3. FiscalPolicy

rl

i

L

XA

L' It-

P

Fa

P

F

'X'

L/ L'

X Y

XA

A3~C F'

F1

f'0I

6IR F'

Q

P

F' 4F'

F

'X' 'I

'X

Source: Mundell, RobertA., 1968, InternationalEconomics (New York:Macmillan),Figure 18-2. Credit:Reproducedwith the permissionof PearsonEducation,Inc.

172

AND DEBATES MUNDELL'S INTERNATIONAL ECONOMICS: ADAPTATIONS

Thisis the equilibrium conditionin the domesticgoodsmarketandwhenplotted in (Y r) or (Y, t) space(whereY is output,r is the rateof interest,andntis the we have exchangerate)is denotedby XXindicatinginternalbalance.Inparticular, notedthis locus in Figures2 and3 above.This line is well knownfrommacroeconomicanalysisandis oftencalledtheIS curve. Usually,thesecondcurvein themacroeconomic diagramis denotedby LM,and in the capitalmobilitypaperit unexceptionally is calledLL.Problemsarisewhen one attemptsto determine,fromthe bodyof the paper,whichequationis usedto drawthislocus.Thepaperproceedsalongtwo linesthatappearto be inconsistent. The firstis thatthe money marketis in equilibriumwhen ". .. the communityis will-

theincreasein themoneysupplyofferedby thebankingsystem" ing to accumulate of theforeignexchangemarket, (Mundell,1963d,p. 477).As withthespecification occursin the moneymarketwhenthe rateof this view suggeststhatequilibrium changeof supplyis equalto therateof changeof demand.Thisstatementappears alsoto coincidewiththe flow natureof the equationsin the tableandin particular thatreads: withtheequationunderthecolumntitle"Market/Money" + Privatedishoarding + * + Monetary Government expansion= 0. dishoarding

in themoneymarketis Thealternative descriptionin thepaperof equilibrium the conventionalone. It states thatequilibriumoccurs ". .. when income has risen

sufficientlyto inducethe domesticcommunityto hold the increasedstock of money createdby the bankingsystem"(Mundell,1963d, p. 477). As to the is thatit "... dependsonlyon incomeandthe demandfor money,the assumption rateof interest" (Mundell,1963d,p. 476). Weshouldnotethatthedemand-for-money functionthatthisphrasedescribes is quitegeneral;so muchso thatdemandcouldconceivablydependnegativelyon incomeandpositivelyon interestrates.We will not pursuesuchpossibilitiesbut insteadassumethattheseresponseshavetheirusualsign.Butthekey pointis that nowheredoesthepaperstatethatdemandformoneyis assumedto be unitaryelastic in income.Becausesuchan assumptionis not made,we will questiona specific resultthatis repeatedin the latersectionsof the capitalmobilitypaper.

V. CuriousOuttake WepresentedaboveremarksfromFlemingputtingin perspectivethecontribution of anopeneconomy'smacroperthathis famouspapermakesto ourunderstanding formance.WhatdoesMundellsee as theimportant newresultsin his capitalmobility paper? Mundellconcludesthatthe importantmechanismthatneeds to be heeded in an open economy revolves aroundthe degree of capitalmobility.He states,"Wehave demonstratedthat perfect capital mobility implies differentconcepts of stabilization policy from those to which we have become accustomed in the post-World WarII period"(Mundell,1963d, p. 484). Presumably,he is referringto the ineffectiveness resultshe derives for monetarypolicy underfixed exchange rates and for fiscal policy underflexible exchange rates.A more satisfactorybasis for this claim 173

RussellS. Boyerand WarrenYoung would have included a demonstrationthat less-than-perfectcapital mobility generates quite differentresults. Here is where Swoboda's conclusion is again worth noting. If monetarypolicy's effectiveness under fixed exchange rates is always zero, independentof the degree of capital mobility, doesn't it serve as a counterexample to Mundell's claim? In the same vein, if capital mobility is as important as is asserted, then why did Mundell assume zero capital mobility in all his subsequentresearch? Similarlyto Fleming, Mundellpoints to the Canadiansituationas an example for which his analysis ". .. should have a high degree of relevance .. ." (Mundell, 1963d, p. 475). As does Fleming (1962, p. 372), Mundell (1963d, p. 485) cites Rhomberg'swork in this regard,stating, "Perhapsthe most complete verification of the applicabilityof the conclusionsto the Canadiancase is providedby an econometricpaperby R. Rhombergto be publishedin the Journalof Political Economy." In one of the more curious outtakesin the Chapter18 adaptation,the citation to Rhomberg'swork (Rhomberg,1964) is deleted,andthe interestedreaderis pointed in the directionof a Royal Commission Reportby ClarenceBarberwith the title "TheCanadianEconomyin Trouble"(Barber,1962) andof a speech titled "Canada in a ChangingWorldEconomy,"which Mundellclaims HarryJohnsondeliveredto the CanadianClub of Torontoin November 1962 (Johnson,1962).20

VI.TheoryIsthe Poetryof Science While many of the problemswe have identifiedin the capitalmobility papercontinue throughoutits variousincarnations,some of its conclusionsare buttressedby a subsequentpublicationthatextends the model to a world made up of two countries. This publication,titled"AReply:CapitalMobilityandSize" (Mundell,1964), provides additional, better-specified equations and replicates some of the small country results by taking the two-country conclusions to the limit when one of the countries is very small relative to the other. While International Economics includes this paperas an appendixto Chapter18, it fails to include the comments by Alex N. McLeod (1964) that sparkedthe reply.The commentswere apparently welcomed in that they affordedan opportunitythatMundell exploited. But, as we will see, McLeod's comments and the responses to them are interestingon their own. They constitutethe outtakesfrom the adaptationin InternationalEconomics that we include below. McLeod did not think highly of the capital mobility paper,as is apparentin the following excerpts: Mundell'sarticle,however,is notprimarily addressed to thisproblem; insteadit is a comparativestudyof monetaryand fiscal policies on the basisof a numberof simplifyingassumptions,of whichtheperfectmobility of capitalis only one-and not necessarilythe mostradical(p. 413). Mundell's rigid demand-for-money function, when coupled with the

assumptionthatthe interestrateis given, throwsus backon something 20Thistalkappearsto be miscitedin all versionsof thecapitalmobilitypaper(Mundell,1963b,1963d, and 1968e).Thelikelycorrectcitationof thisworkis givenin thelist of referencesbelowas Johnson(1962).

174

ADAPTATIONS AND DEBATES ECONOMICS: MUNDELL'S INTERNATIONAL fromone of thecruderformsof the quantitytheory hardlydistinguishable of money(pp.414-5). Evenwithinthe limitationsimposedby his simplifyingassumptions, however,thelogic of Mundell'sanalysisis farfromrigorousandhis results areby no meansdefinitive.His descriptionof the outcomeunderthe various circumstanceshe considersmay be plausibleenough,providedcertainconditions(notalwaysfully specified)aredeemedto obtain,butthey are not the only possible and not necessarilythe most probableresults (pp. 415-6). This is inexcusable,and can only bringdiscrediton the economics professionif allowedto go unchallenged(p. 420). Mundell's reply (1964) to this onslaught is as ethereal as it is unresponsive. Theoryis the poetryof science.It is simplification,the essentialabstraction, the exaggerationof truth.Throughsimplificationtheorycreatesa caricatureof reality.Throughdeductionthe premisesof the caricatureare translatedinto empirical-and thereforerefutable-generalizations.The caricatureitself is not the real world-it mocks it. Yet mind truethings by theirmockeries!Thecaricaturemocksreality;the deductionsfromthe caricatureilluminateit (p. 421). I hope, too, that my conclusionsare tautologicalcreationsof my assumptions.Thatmeansmy deductionsarefreeof logicalerror(p. 421). I shallnow exploitthis opportunityto extendmy previouswritings on the subjectto cover a point which McLeod and othershave raised concerningthe influenceof size (p. 423).

VII.McLeod,Mundell,and Classical QuantityTheory McLeod'sanalysisraisesthreespecificissuesthatdeservefullerdiscussion.The firstpointwe cover,takenfromMcLeod(1964),is as follows: andfiscalpolicies ontheuseof monetary Insummary, thereallimitation in anopeneconomyturnsoutto be to expandincomeandemployment

simplythe old familiar"foreigndrain"thathas playedsuchan important

foratleastthirty-five roleintheliterature years,notto mentionthemuch cashdrain" that thesameideainthe"external olderversionof essentially in purelyinstitutional limitscreditexpansion theory money-and-banking controversies (p.419). goingbackatleastto thebullionist

Mundell asserts the unusual natureof the equilibriageneratedby perfect capital mobility,withoutclinchinghis case by makinga comparisonwiththe situationwhere mobilityis less thanperfect.In this regardit is worthpointingout that Mundell has earlier papers of a comparativestatic naturein which capital mobility is considered. For example, his Kyklospaper (Mundell, 1961a) includes capital mobility, but the thrustof its message is that capital mobility does not alter the essence of the adjustmentmechanismwith which we have been familiarsince the writingsof Hume. While alterationsin the level of income may be part of the process determining the flow of reserves, and these can be in additionto or insteadof the influences thatrely on price movements,the natureof the adjustmentmechanismis not fundamentallyalteredby the introductionof capital mobility. 175

RussellS. Boyerand WarrenYoung In light of the contrastingresultsin boththe Kyklosarticleandthe flexible exchangeratepaper(Mundell,1961c),somereadersareinclinedto see theclaimsin thecapitalmobilitypaperas somewhatexaggerated. Theyarewaryaboutendorsing the argumenttoo fully,in anticipation of furtherreversalsin the future.21 Mundell (1963d,p. 485) saysthat".. . my conclusionsareblackandwhiteratherthandark andlightgrey."In addition,as we notedabove,Mundellthereafter abandoned the view in out his research carrying perfectcapitalmobility agenda. A secondpointby McLeod(1964)is worthconsideringin detail: Butis it truethatundera fixedexchangeratethe authorities mustabandon theireffortsto expandincomeandemploymentby monetarypolicy?No, not as long as they areableto borrowabroad,becauseforeignborrowing is an effectivealternativeto the depletionof exchangereserves(p. 417).

Mundelldismissesthis idea as due to "confusion"on McLeod'spart(Mundell, of a logi1964,p. 422), butin factMcLeodis providinga reasonableparaphrase cal exerciseconcerninga policy presentedin the originalarticle.In the flexible exchangeratecase,Mundellsaysforeignexchangemarketoperations(".... 'open marketoperations'in foreignexchange...") shouldbe viewedas an "alternative form of monetarypolicy"(Mundell,1963d,p. 478). The consequencesare the sameas fora standard openmarketoperationin domesticsecurities, expansionary with the one exceptionthatsuch an alternativeoperationincreasesthe level of international reserveholdings. Suchan operationcan be carriedout underfixed exchangeratesas well, and on furtherconsideration onerealizesthattheconflictbetweeninternalandexternal balancegoes awaywhensuchoperationsareused.The increasein the supplyof moneytendsto increasedomesticoutput,andthepurchaseof foreigncurrencyby thecentralbankraisesthelevelof international reserves.Thoughsuchreserveswill be depletedovertime,theirlevel can be restoredby merelyrepeatingthe foreign borrowingoperationas needed.22 ThefinalpointthatMcLeod(1964)makesreturnsus to theminimalistspecificationof the assetmarketsthatthe capitalmobilitypaperemploys: However,this conclusionis in fact nothingbut a tautologicalcreationof his assumptions;by hypothesisincome and money supplymustvary in exact proportion... (p. 418).

Thepointhereis thatMundelldoesnotassumethatthedemandformoneyis unitaryelasticin income.As a result,theconclusionthatincomeandthemoneysup21Krueger(1965), while noting the resultsof Mundell(1963d), focuses her attentionon Mundell as we notedabove.Sohmen(1969) sees (1961c) instead.Swoboda(1972)is an importantcounterexample, boththe Fleming(1962) andthe Mundell(1963d)resultsas validin particularcircumstances.Dornbusch as an importantfactorin the wide recognition (2000, p. 199) mentionsMundell's"marketing department" his workhas received. 22Itshouldbe notedthatthis processcannotbe pursuedindefinitelywhile we maintainthe assumption of perfectsubstitutability of domesticand foreignmarketinstruments.Therewouldcome into play mechanismsarisingfromthe intertemporal budgetconstraintfor an open economy,a pointthatis key to recentinsightsaboutthe natureof currencycrises. But becauseMundelldoes not mentionwealthin his analysis,faultingMcLeodfor a failureto anticipatethis recentliteratureseems unwarranted.

176

AND DEBATES MUNDELL'S INTERNATIONAL ECONOMICS: ADAPTATIONS

is notan implicationof the modelin thecapital ply mustvaryin exactproportion The mobilitypaper. overlyspecificclaim,whichMundellhas calledthe Classical QuantityTheoryconclusion(Mundell,1968d,p. 261), is as follows: thismeansthatincomemustrise Becausetheinterestratesareunaltered, in proportion to theincreasein themoneysupply,thefactorof proportionalitybeingthe givenratioof incomeandmoney(incomevelocity) (Mundell,1963d,p. 477). This point is one that Fleming (1962, pp. 374 and 379) makes in his discussion of monetarypolicy underflexible exchangerates,in the perfectcapitalmobilitycase. It is a correct deduction in that paper precisely because the demand for money

relationis expressedin termsof a velocityfunctionthatis assumedto dependonly on the rate of interest. The sameis nottruein the Mundellmodel,because,as we notedabove,the spec-

of unitary ificationof themoney-demand functiondoesnotincludetheassumption would not be worth with to income. This elasticity belaboring except respect point thatthe claimappearsat leastfive timesin the capitalmobilitypaper(Mundell, atleasttwicein Mundell(1964, 1963d,pp.477,479, 481, and484).It is mentioned pp. 430 and 431).

VIII.Conclusion This paper has examined two of the chaptersin InternationalEconomics to get a

bettersense of theirroles in the developmentof the theoryof open economy macro.We havedonethis throughnotingthe differencesbetweenthosechapters andthematerialin theoriginalsources.Butas a resultwe havedoneless thanhalf of the job, because our focus has been entirelyon the words that have been elided in the process of adaptation. The largertasks remainof identifyingthe materialthat is addedin the process of revising the papersand of explaining why those changes were made. Because Mundell'sInternationalEconomicscontinuesto be cited as an important source for insights about the developmentof the open economy macromodel, we feel that such an exercise is well worththe effort.

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