Macroeconomics: The 1983 Book

In the early 1980s, Godley got the support of Frank Kermode, like himself Fellow of King’s College and a well-known literary critic, to write a definitive book that would prove his case. He believed that once the need for consistent accounting is recognized, the scope of disagreement about what is or is not conceivable in the real world is greatly diminished. What remained to be done—modelling of behaviour such as fluctuations of exports, imports, inventories, output, and employment—was a more pragmatic observational matter. The disciplines set out in the book would leave no scope for the naive and highly theoretical thinking espoused by Friedman, Lucas, and others who had subverted mainstream academia and exerted an extremely damaging influence on government policy.

The book was faithful to the CEPG’s computer model of the UK economy but was formulated in abstract algebraic terms. Godley wrote the main textual expositions and checked the presentation of equations carefully. In some places, the equations became somewhat tortuous, as Lavoie later observed, due to a possibly perverse aspiration to set out the model in a form that could readily be quantified for any particular country and time period using standard national accounts data.

One interpretation of Godley’s theoretical work is that it is a quest for the Holy Grail of Keynesianism. Keynesians of all stripes had for a long time mentioned the need to integrate the real and the monetary sides of economics. Integration was all the talk, but for a long time, little seemed to be achieved. Stinted by the rise of monetarism in the 1970s, with the monetarists claiming that the Keynesians had no clue about the role played by financial aggregates, Kaldor was forced to sharpen his views on endogenous money while Godley wanted to discover how money got into the economy. The main purpose of the Godley and Cripps’s 1983 book is to amalgamate the real and the financial sides, providing a theory of real output in a monetary economy. This is clearly stated in the book’s introduction, where Godley and Cripps (1983: 17) claim that ‘our present synthesis may be broadly characterized by saying that we make a “monetarist” financial system (based on the behaviour of stocks of money, financial assets and debts) drive a “Keynesian” flow system based on the response of expenditure to income’, and it is reiterated in the Epilogue, when they claim ‘to have provided a framework for an orderly analysis of whole economic systems evolving through time’ (ibid.: 305). Indeed, in the very first sentence of the book, they point out that ‘macroeconomics is the study of how whole economic systems function’ (ibid.: 13).

Godley believed that Keynesian orthodoxy ‘did not properly incorporate money and other financial variables’ (ibid.: 15). Godley and Cripps and their colleagues ‘found quite early on that there was indeed something deficient in most macroeconomic models of the time’, including their own, ‘in that they tended to ignore constraints which adjustments of money and other financial assets impose on the economic system as a whole’ (ibid.: 16). Interestingly, Godley was aware of the work being carried out at about the same time by Tobin and his Yale colleagues, as well as by others such as Buiter, Christ, Ott and Ott, Turnovsky, and Blinder and Solow, who emphasized, as Godley and Cripps (ibid.: 18) did, that ‘money stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole’. Still, Godley thought that the analysis of the authors in this tradition was overly complicated, in particular because they assumed some given stock or growth rate of money, ‘leaving an endogenous rate of interest to reconcile’ this stock of money with the fiscal stance (Godley 1983: 137). Godley and Cripps (ibid.: 15) were also annoyed by several of the behavioural hypotheses found in the work of these more orthodox Keynesians, as they ‘could only give vague and complicated answers to simple questions like how money is created and what functions it fulfils’. The Cambridge authors thus wanted to start from scratch, with their own way of integrating the real and the financial sides, thus avoiding these ‘tormented replies’ (ibid.).

A review by Lester Thurow (1983) cast doubt on the assumption that different schools of thought could be persuaded on the basis of a formal model. His prognosis was certainly correct. The book failed to find its way onto the macroeconomics curriculum in UK universities, first because it looked overly original relative to existing standard macroeconomic texts, and second because the economics profession was taken by storm by the Lucas micro-foundations revolution and the rational expectations hypothesis, although the book did gradually build up a following among macroeconomists who could not accept the neoclassical consensus. Ultimately, Godley’s desire to present a definitive treatise based on consistent macroeconomic accounting gave rise, nearly 25 years later, to the Monetary Economics book (Godley and Lavoie 2007a), a volume that was reviewed quite favourably by Lance Taylor (2008: 639) who looked at it as ‘a major update’ of the previous synthesis found in Macroeconomics.