Wynne Godley (1926-2010)

Francis Cripps and Marc Lavoie

Introduction

The Hon. Wynne Alexander Hugh Godley was the grandson of Hugh Alexander Godley, Permanent Under-Secretary of State for India for 26 years (1883-1909) during which time India, with tariff protection, became one of the world’s leading exporters (after the USA, UK, Germany, France, and the Netherlands).

Godley studied Philosophy, Politics and Economics (PPE) at Oxford (1947). He said he had two great teachers there, Isaiah Berlin and P.W.S. Andrews (Godley 2000). He first pursued a career as a professional oboe player, touring North America in the process, but stage fright induced him to revert to economics. He joined the Economic Section of the Treasury where, from 1956 to 1970, he developed methods for economic forecasting through continuous observation of monthly, quarterly, and annual statistics used to analyse the wide range of policy

We wish to thank Alex Izurieta and Gennaro Zezza for their useful comments.

F. Cripps (*)

Research Associate, Centre for Financial Analysis & Policy, Judge Business School, University of Cambridge, UK e-mail: This email address is being protected from spam bots, you need Javascript enabled to view it

M. Lavoie (*)

Professor of Economics, Department of Economics, University of Ottawa, Canada e-mail: This email address is being protected from spam bots, you need Javascript enabled to view it

R.A. Cord (ed.), The Palgrave Companion to Cambridge Economics,

DOI 10.1057/978-1-137-41233-1_42

issues for which the Treasury was responsible.^[1] As he explained much later in a 2008 interview recorded by Alan Macfarlane (2011), he learned how the economy worked without having much knowledge of economic theory. Indeed, because it was so antagonistic to what he learned about the British economy in the 1950s and 1960s, Godley could never make any sense of mainstream economics.

Given this background, it is hardly surprising that Godley saw government as the primary actor in macroeconomic systems. The anti-government tenor of mainstream economics did not impress him, and the dismal economic performance of the UK and many other countries in the 1980s was to him a clear demonstration of the futility of policies driven by simplistic theory rather than careful macroeconomic analysis. In his interview with Macfarlane, he repeated his belief that free markets alone will not provide solutions to problems confronting mankind and that the financial crisis then unfolding was a consequence of deregulation.

Godley brought his understanding and commitment to improve policymaking to Cambridge in 1970 at the suggestion of Nicholas Kaldor, becoming a Fellow of King’s College and the Director of the Department of Applied Economics (DAE), a position that he held for nearly two decades. There he formed the Cambridge Economic Policy Group (CEPG) as a consortium of full-time researchers with differing areas of expertise. The Group started work analysing the alarming combination of ‘stagflation’ and ‘deindustrialization’ in the UK with unemployment passing one million by the end of 1970 while public and private sector wages and prices continued to rise rapidly. The DAE had around 30 full-time research staff and assistants, many of whom were members of either the CEPG or the parallel Cambridge Growth Project.

Professional knowledge of data sources and data processing techniques placed the department’s staff in a different position from lecturers in the Faculty of Economics and Politics. Applied economics research as developed by the previous Directors, Richard Stone and Brian Reddaway, was a different discipline from the more abstract theoretical reasoning espoused by some academics. Nevertheless, the department’s work attracted considerable interest from graduate students who came to Cambridge from all over the world.

As a civil servant, Godley had been frustrated by the deficiencies of modelling and the policy mistakes which followed. He believed empirical investigation of the workings of the national macroeconomy was an urgent need and a precondition for improved management of the economy. Although national accounts provide the framework for analysis and forecasting, prediction of the impact of government policies requires explicit assumptions about behavioural variables such as exports and imports, inflation, employment, consumer spending, and private investment. In the 1950s and 1960s, most of these variables were estimated by official committees, making the compilation of consistent forecasts slow and cumbersome, especially when iteration was required. Godley was proud of an import equation developed with J.R. Shepherd (Godley and Shepherd 1965) during his sabbatical at the National Institute of Economic and Social Research (NIESR) and believed it should be possible to use institutional and statistical evidence to pin down the size and dynamics of other important behavioural macroeconomic relationships in a similar fashion.

Godley’s relationship with Kaldor started in the mid-1960s when Kaldor, acting as a senior adviser to the Chancellor, quickly discovered that Godley provided most of the Treasury’s figuring on macroeconomic issues. Their partnership was particularly close in 1966-1967 when Godley worked out detailed plans and forecasts for the 1967 sterling devaluation.^[2] A correlation between the balance of payments and the budget deficit used by Kaldor to provide a check on the appropriate budget balance following devaluation started a discussion that eventually led Godley to the key proposition about the private sector’s financial balance being close to zero. After overcoming his initial surprise, Godley deduced that the Treasury’s existing forecasting method might be defective as no attention had been paid to the financial balance implied by forecasts of corporate investment and profits.

The relationship between Godley and Kaldor continued through the 1970s as both were committed to provision of advice on policy issues formally or informally to the government and in Godley’s case to parliamentary committees and the broader public. Although the advice that they gave sometimes differed,^[3] their analysis of predicaments confronting the UK was shared and both were shocked by the shift of politics and academia towards laissez-faire and liberalism.

Godley’s interest in research on other aspects of government policy such as planning of public expenditure and finance of local government eventually gave way to an exclusive focus on macroeconomics (fiscal and monetary policy, incomes policy, exchange rate, and trade policy). Responding to the intensified academic criticism, even by fellow Keynesians, of what came to be dubbed by Richard Kahn and Michael Posner (1974a, b) as the New

Cambridge approach, Godley began to develop more formal and abstract presentations of his model, eventually concentrating on balance sheet and portfolio analysis but without ever giving up his interest in macroeconomic policy issues and prospects of the UK and, later, the USA.

Godley was dismayed by the termination of funding for the CEPG in 1983 and a subsequent enquiry into the DAE which eventually ended the department’s independent status and merged it into the Faculty of Economics,^[4] but he was stubborn enough to argue back for the rest of his life. He deplored reduced-form models in which identities were dispensed with and accounting identities went unchecked; he went on writing columns or letters for newspapers on economic policy. In particular, Godley wrote a critique of the London School of Economics (LSE) price-setting labour demand model, showing that he could reproduce its neoclassical results (an inverse relationship between employment and real wages) by simulating an economy where prices were set as a markup over unit labour costs and where employment was unrelated to real wages by construction (Anyadike-Danes and Godley 1989); thus, as recalled by Felipe and McCombie (2013: 302), in his own way, Godley did participate in the Cambridge capital controversies. He also continued his work as a conjoncturiste. His insightful forecasting ability was finally recognized during his last year at Cambridge, in 1992-1993, when he was named one of the six wise men advising the Chancellor of the Exchequer.

During his 1991 sabbatical, Godley had been a visiting scholar at The Levy Economics Institute of Bard College, situated two hours north of New York City, the intellectual climate of which he found more congenial than that at Cambridge. On his retirement at Cambridge in 1993, when he was named Emeritus Professor in Applied Economics, Godley felt that he could still make many more contributions to economic policy and economic theory, and hence he happily took the Distinguished Scholar position that was being offered to him by Dimitri Papadimitriou, the President of the Levy Institute. Godley stayed in the USA until 2002. His main task there was to construct and update a stock-flow consistent (SFC) empirical model of the US economy and of the world economy (first devised by Cripps in 1979), as well as to produce strategic reports based on it. Thereafter, he returned to England as Visiting Senior Research Fellow at Cambridge, having been seduced by John Eatwell into joining the newly founded Cambridge Endowment for Research in Finance (CERF) at the Cambridge Judge Business School, where he was asked to replicate his work on the US economy and adapt it to the UK. While in England, Godley continued to write strategic reports on the US economy for the Levy Institute. When his health and that of his wife, Kitty Epstein, started to deteriorate, Godley moved to live in Northern Ireland with his daughter Eve and his son-in-law.

While pursuing this empirical and applied work, Godley simultaneously chased another objective close to his heart, that of providing a method for constructing theoretical models that would fully integrate the real and the financial sides of the economy and that could be simulated. An earlier attempt had given rise to the book Macroeconomics (1983), written with his CEPG collaborator Francis Cripps. Drafts of the revised project were written in the 1990s, but it was only completed in 2006, five years after the start of a collaboration with Marc Lavoie which yielded Monetary Economics (Godley and Lavoie 2007a).

The next two sections of this chapter review Godley’s career working in the Treasury and then at Cambridge as an applied economist concerned with live UK policy issues rather than macroeconomic theory. A description of the methodology that he followed and passed on to the CEPG is followed by an outline of the macroeconomic model that he developed with many collaborators, eventually summarized in a more abstract and theoretical form in the book on macroeconomics published in 1983. The last section describes some of his work on the US economy, but it mainly focuses on Godley’s progression from macroeconomics to monetary economics and his search for what he most likely considered to be the Holy Grail of economic theory.

[1] Mata (2012) provides an account of the process by which Godley formed his basic understanding of ‘how the economy works’.
[2] Godley had previously collaborated closely with Kaldor in preparing the implementation of the SelectiveEmployment Tax and Regional Employment Premium.
[3] See the account by Maloney (2012) of advice given by Kaldor and Godley to the Treasury in the 1970s.
[4] See Mata (2012: 24-25) and Godley (2000). Incidentally, James Tobin also saw his funding cut off inthe USA in the very same year.