The Stock-Flow Consistent (SFC) Approach

Stock-flow accounting was not something that the CEPG pursued empirically in the 1970s. There were no time series on wealth and its breakdown by asset type in the UK. The concept of a stable ratio of private net financial assets to income was more a reflection on the observation of behaviour of the flows (income and net acquisition of financial assets) than anything else.

Initially, Godley emphasized the importance of assessing the cumulative effects of flow imbalances as a check on the plausibility of stock-flow projections rather than treating asset decisions as the driver for saving, investment, and trade flows. While Godley had met James Tobin in Cambridge, his interest in balance sheets and Tobin’s portfolio analysis developed later as a response to monetarism and as a necessary extension of the flow model to deal with academic criticism from the USA and later some groups in the UK.

Godleys efforts to truly integrate the real economy with the financial system gave rise to what is now called the Stock-Flow Consistent (SFC) approach, following the definition proposed in 2002 by Claudio Dos Santos in his PhD dissertation at the New School for Social Research on Tobin’s and Godley’s approaches. The SFC approach is perhaps a misnomer, as several other theories relate stocks and flows in a consistent way. What is the peculiarity of Godley’s SFC approach, or of what could be called the Post-Keynesian SFC approach, is that its models truly integrate the real and the monetary sides. To get a gist of what this SFC approach implied for Godley and his collaborators, we should recall some of the other names which were suggested at various stages of its development, such as the real stock-flow monetary model, the financial stock-flow coherent approach, or the sectorial stock-flow coherent approach. These names all purported to emphasize that stock-flow consistency was not just limited to the link between real investment and tangible capital, but involved most importantly the interrelated financial flows and stocks of assets and liabilities of the main economic sectors of the economy.

Whereas the principle of stock-flow consistency and the idea that there should never be any black hole in the accounting were already present in the 1983 Macroeconomics book, Godley considered that a 1985 paper (Coutts et al. 1985) was his first comprehensive attempt at writing down consistent accounting in a whole economic system, and thus constituted the first step towards a proper SFC approach. The paper was an extension of the chapters of the Godley and Cripps book that had dealt with inflation accounting, and it defined the conditions for inflation-neutral effects on income distribution and aggregate demand—which was of great concern following several years of double-digit inflation in the UK. But it offered an additional innovation, as it included a stock matrix where all the financial assets must have a liability as an exact counterparty and where only tangible assets appear in the net wealth of a (closed) economy.

Godley kept working on this topic in the 1980s, with the intention of writing, in collaboration with Coutts, a complete monograph that would integrate both the real and the financial sectors. The intention is confirmed in a paper published in 1993, where Godley announces that he is preparing a substantial monograph (again in collaboration with Coutts) and that there exists ‘a simulation model in which banks’ operations are fully articulated with income, expenditure and transfer flows together with asset demand functions’ (Godley 1993: 72). But no such simulations are shown in that paper.