Last week, The Economist named the “impossible trinity” one of the greatest ideas in economics of the past half-century. Here’s the definition. Having these three things at once is unachievable: a fixed exchange rate; no capital controls; and an independent monetary policy. A country/currency area can have any two, but not the third. The articulators of the idea, in the 1960s, were International Monetary Fund economist J. Marcus Fleming and his understudy Robert A. Mundell, the 1999 economics Nobelist.
Mundell is a central figure in my and Larry Kudlow’s JFK and the Reagan Revolution: A Secret History of American Prosperity, out this week. Mundell was one of the economists who encouraged Kennedy to “reverse” his policy mix from loose money and fiscal austerity to a dollar good against gold and a big across-the-board tax cut. Out of the work that Mundell did in the Kennedy-era debates came the concept of the impossible trinity.
Mundell (who once again, in July, brilliantly hosted his yearly big-think conference in Tuscany) has long had to accept, with thanks, the characterizations of others as to his own views. A Mundell epigone once suggested that the great economist’s career had “periods,” a compliment Mundell took with a suggestion: perhaps it is painters who have periods. “Blue” Picasso and so forth. Mundell has offered that most of his ideas from over the years are elaborations of the chapters of his 1956 MIT dissertation in Industrial Economics.
It has never been clear that Mundell is in accord with the proposition that he put forward an “impossible trinity.” For across his vast output, it is obvious that Mundell adores fixed exchange rates and (with most normal people) thinks capital controls are the stuff of banana republics. The resume of Mundell’s views from over the decades yields this distillation: secure fixed exchange rates and the free flow of private money.
Where does this leave monetary policy? Nowhere, of course. It’s hard to find anywhere in the Mundell oeuvre where he has advocated monetary stimulus, regardless of the consequences against the exchange rate in particular. He always says let capital flow and defend exchange rates. A great example may be seen here, where I sat next to Mundell and heard all about the mistakes of 2008.
This stuff about the “impossible trinity” is a red herring. The impossible trinity is cover for the fact that monetary policy is a falsehood. Have it, and things go wrong. It is incompatible with either fixed exchange rates (i.e., the gold standard) or people investing as they wish. No kidding: monetary policy is a fiction cooked up by governmental busybodies and by its nature negative with respect to economic performance and development. It is not compatible with things in general.
But monetary policy is also savvy about its own survival. As an imposter whose real responsibility is to stop existing per Durkheim’s altruistic suicide, one of its persistence techniques is to get notions out there that our thinking is backward, that a “trilemma” (play on “dilemma”) puts monetary policy on the same par with commonsense things like fixed exchange rates and free capital movements. Legitimacy by association. Hey, if he’s with these gals he must be OK.
The evolutionary world sees this sort of stuff, these games from parasitic downers, all the time. In the realm of human intelligence, the point in Socratic method is to clear out the false friends and the occlusions, including their strategies to pose as legitimate.