Exploring Economic History

with Palgrave Macmillan

Wynne Godley: Reviving a Realistic Account(s) of Macro-economics

The principles of accounting were already well advanced by 1600, driven by the management needs of large landowners, merchants and bankers. It took early industrialisation, a century later, for serious enquiry to begin into what causes the flow of money, goods, expenditures and incomes around the economy, and what determines the price of firms’ products or the value of their assets. By the time it was realised, early in the 20th Century, that the ‘macro’ economy could not be understood as a simple aggregation of firms and households in the ‘micro’ economy, double-entry book-keeping and other accounting principles had been shunted to a separate discipline. When economists decided to tackle the ‘aggregation problem’ by building up from individual representative agents, dispensing with intermediate layer of households, firms and financial institutions, they lost sight of agents’ balance-sheet constraints – and of the origins of money, which slid from a tradable debt to a passive medium of exchange. When they chose to view output and employment fluctuations as features of the short term, of which the long term was just a succession, economists sealed-in the habit of analysing flows without attention to the corresponding changes in stocks.

Wynne Godley (1926-2010) was never an obvious candidate for re-uniting macro-economics with macro-accounting, or for tracing-out the remarkable consequences of the two-way connection between accounting flows (investment, consumption, profit and interest) and the financial and real stocks to which they add or subtract. The youngest child of chaotic aristocrats whose estate was reduced to a decaying Irish mansion, Godley was happily set up as an orchestral musician when stage-fright forced the switch to an industrial career. A chance adeptness at predicting tin prices led to his recruitment by the Treasury, where his facility for forecasting – and marshalling the underlying data in a pre-computer era – made him the backroom mastermind for difficult ministerial decisions. The shy One-Nation Tory became the architect of the Labour government’s clever new taxes and 1967 sterling devaluation, working closely with main Treasury economic adviser Nicholas Kaldor.

When Kaldor enticed him to Cambridge in 1970, to head the Department of Applied Economics (DAE), Godley envisaged escaping the day-to-day data delve and joining the intellectuals refining high theory around the high table. He was especially keen to develop a fundamental insight into macro-economic sector balances which Kaldor had identified, but not yet followed up. If the government ran a budget surplus, the private sector had to run an equivalent deficit – letting its saving exceed its investment – unless the economy ran an excess of exports over imports so that the surplus flowed abroad. But Godley’s academic ambition met with derision from the Cambridge Faculty, who viewed him as lowly practitioner, conflating his interest in macro accounting matrices with the Growth Project already running under former DAE director Richard Stone. The wounded Godley returned to a focus on short-term policy, assembling an Economic Policy Group and continuing to work closely with the Treasury as it grappled with the suddenly stagnant and inflation-hit 1970s economy.

There followed a disastrous 15 years in which small misunderstandings dragged Godley into bitter arguments with Treasury friends and Cambridge colleagues, apocalyptic forecasts of the Conservatives’ new ‘monetarist’ approach cast him with the Keynesian enemies of the Thatcher government, funds were abruptly pulled from his forecasting group, and his path breaking 1983 Macroeconomics book went unappreciated and unread. But in these wilderness years he built major new research strands at the DAE (including those on deindustrialisation and industrial restructuring led by Ajit Singh, the subject of another new Palgrave biography (Ajit Singh of Cambridge and Chandigarh: An Intellectual Biography of the Radical Sikh Economist by Ashwani Saith, 2019), and rebuilt a forecasting record that earned his recall to Treasury’s ‘Wise Man’ advisory team. While still writing incessant commentaries and letters to the press, Godley finally began to integrate his key theoretical insights – macro sector balances, stock-flow-consistency, inflation accounting, and a modern financial sector with endogenous money creation – using newly available computer simulation techniques. In his last fifteen years, from new bases in Cambridge and at the Levy Institute in upstate New York, Godley led a global network of new thinkers (including Marc Lavoie, Gennaro Zezza, Alex Izurieta, Ken Coutts, Graham Gudgin and Bill Martin) to create a new post-Keynesian research programme. Their addition of behavioural theories to macro-accounting has created one of the most powerful alternatives to conventional general-equilibrium-based macroeconomics, with particular applications to the integration of global economic with global environmental modelling; while their attention to key stock-flow ratios foresaw the crises in the Eurozone and world economies that still dominate current economic and political debate.

Alan Shipman is a lecturer in economics at the Open University. He is author of Wynne Godley: A Biography (Palgrave Macmillan, 2019), and his previous books include Capitalism Without Capital: Accounting for the Crash (Palgrave Macmillan, 2015).