Remembering Wynne Godley
Progressive economists everywhere should say a thank you this week to Wynne Godley, who passed away May 13. He started out his career as an economist working for the U.K. Treasury, then got to know Nicholas Kaldor and moved over to Cambridge to help establish the Department of Applied Economics there (from which he retied in 1993). His more recent work was published through the Levy Institute in New York State. His final major volume (published by Palgrave in 2007) was a tour de force of heterodox macro theory, co-written with Canada’s (and the PEF’s) own Marc Lavoie: Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth.
Like Minsky, he can say “I told you so” to the whole neoclassical profession – although unlike Minsky, Godley could do this while he was still alive. (But he was hardly gleeful about that, given the human hardship which the failure of orthodoxy has begot.) I met him when I was a student at Cambridge in the mid-1980s. He was passionate about inserting pragmatic heterodox ideas into real-world debates (wasting less time than most on arcane philosophical disputes). He paid serious attention to the relationships between stocks and flows in heterodox macro models (and between balance sheets and incomes). His work exploring the implications of basic macro identities (such as the basic but oft-ignored fact that all sector deficits in the economy have to sum to zero in equilibrium, and hence not all sectors can be paying down debt simultaneously – someone must be increasing their debt to keep the money flowing) has influenced heterodox writers of all stripes (post-Keynesan, structuralist, and Marxist). That approach has proven especially timely in the current crisis: it’s at the core, for example, of my recent post here on deleveraging.
Thanks Wynne from all of us.
Yes, indeed Wynne Godley was very passionate and serious about economics. When I first started to work with him in 2000, when he was 73, we would go through exhausting work sessions, with Wynne always looking fresher than I did. Unfortunately, time caught up, and by 2006, he was the one who was getting tired after working sessions.
In 1999, Wynne wrote a famous research paper about seven unsustainable processes, and when I was with him at the Levy Institute in 2000, every morning he looked disappointed because the stock market had not yet crashed. But it did about a year later, and it took another five years for the housing market in the US to go in the same direction. Besides the current account deficit of the US, Wynne was worried by the rising debt to disposable income ratio of US households, driven by higher ratios of new loans to personal income, thinking that it could not go on forever (Wynne’s theoretical work was not based on optimizing conditions, but rather on the notion that economic agents tend to follow norms). The rising ratio of new loans meant higher spending and higher economic activity in the short run, but, unless interest rates were dropped down, it also meant a rising debt burden and hence less spending and falling economic activity in the long run. Wynne feared that when the reversal would occur,the long-run negative effects of the debt burden would be combined with the short-run negative effects of the reduction in new borrowing and in the propensity to consume — the perfect storm!
As Jim said, his applied work relied on a macroeconomic flow identity, that basically says that the financial saving of the private sector cannot but be equal to the public deficit plus the current account surplus, or in other terms, what the private domestic sector lends must be equal to what the government borrows plus what foreigners borrow from us. This identity had suddenly dawned on Wynne when he was working at the Treasury in the UK, in the 1960s, and as Wynne told me it was a “great revelation”, that put order in what seemed like incoherent open-economy macroeconomics. This identity can now be found in some textbooks (the Baumol and Blinder US edition of Principles of Macro, and of course the Canadian edition made by myself and Mario Seccareccia), and also in some of the analyses of Goldman Sachs, and in many other places, as Jim points out, including of course the Levy Institute, where Gennaro Zezza upkeeps the Godley tradition.
Those who go through various heterodox blogs have certainly realized that there is a tight relationship between this fundamental macro identity and the some of the claims made by theorists of the modern monetary economy (MMT), as can be found on the blog of UMKC economics, with Randall Wray, and Billy’s blog, the blog of Bill Mitchell in Australia. This is not surprising since Wynne and Randall interacted for a while at the Levy Institute. Also, Steve Keen did spend some time on a sabbatical at the Levy Institute, where Wynne showed him that with his clumsy DOS software he could reproduce whatever complex mathematical models Steve could produce with his fancy modern software!
During his last years at the Levy Institute and the few years that he spent again at Cambridge, in a research institute run by John Eatwell, Wynne’s productivity was greatly enhanced by the assistantship and collaboration of Alex Izurieta, who had obtained a PhD in a department in the Netherlands where his supervisors were greatly concerned with the coherence between the national accounts and the flows of funds. I remember reading Alex’s CV and the job description advertisement at the Levy: it was as if the job had been written for Alex, whereas the two did not know each other at all.
Wynne was very stubborn. It took us a long time to write the book, first because we lived in different places, but also because we had some theoretical standoffs. Indeed, when we started writing the book, some people at the Levy thought we would never managed to finish it, as Wynne had carried various drafts of the first chapters, without ever being able to get them done. During these standoffs, after a few months without writing a line, I would tell Wynne: “If we don’t move forward, you are going to be the loser, because you have a much greater probabillity of dying before I do, and if this ever happens before the book is finished, then I will be able to write whatever I want anyway”! Some compromise would then be reached.
As I said, Wynne was stubborn — but luckily for us, because he held onto his intuitions, acquired through years of applied work for the Treasury, despite not being part of the mainstream or not being recognized (for a long while) by most heterodox authors. I read his wonderful (and surprising) little book published in 1983, which he wrote with Francis Cripps, just before going to the University of Cambridge for a 4-week stay in 1985. When I asked around how I could meet Wynne, I was told by someone I admired that it would be a waste of time because Godley was “an ignorant fool” (this did not stop him from becoming one of the “wise men” advising the Treasury around 2000). Being still young, I gave up, and hence ended up meeting Wynne only 14 years later, thus wasting 14 years! This was a true loss, because I think I learned more with Wynne during the 6 years that we spent writing our book than during the first 20 years of my carreer. My other regret is that I had planned to go and see Wynne in June, in Northern Ireland, where he stayed with his daughter, being unable to walk anymore. But this was too late — a lesson for all of us who have elders and who hesitate to visit them for whatever reason!
Marc, thanks for all the work you have put into developing the book with Wynne and all the material you have put up on your website. It has been very helpful to me in trying to get a handle SFC modeling.
I only discovered Godley via the 2008 Strategic analysis, but was immediately impressed with his method, which brought together all the views I held about the “recovery” in a coherent, workable and accurate way. After that I noticed his ideas being used by Jan Hatzius at Goldman Sachs to make his award winning predictions (most accurate economic forecaster for 5 years running), in Martin Wolf’s columns, etc. I think that his theories are going to become more and more popular as time passes.
Marc, if you don’t mind me asking, what were the major differences you and Wynne had during the writing of your book, and how were they resolved?
Fred, thanks for the comments on the book. As far as I can remember, most of our differences turned around the definition of profits, found in chapter 8. The way we got around this was to discuss and assess the various possible definitions of profits in the chapter, including the one favoured by Wynne, and the one found in national accounting. There was also some discussion about whether or not to include chapter 7 at all, since Wynne suddenly became very unhappy about it; the main closed-economy chapter with growth, chapter 11, also produced some tensions, as we produced a couple of different versions that were judged unsatisfactory before we built a much different one in our last week spent together.