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This timely biography of the economist Wynne Godley (1926-2010) charts his long and often crisis-blown route to a new way of understanding whole economies. It shows how early frustrations as a policy-maker enabled him to glimpse the cliff-edges other macro-modellers missed, and re-arm ‘Keynesian’ theory against the orthodoxy that had tried to absorb it. Godley gained notoriety for his economic commentaries - foreseeing the malaise of the 1970s, the Reagan-Thatcher slump, the unsustainable 1980s and 1990s booms, and the crises in the Eurozone and world economies after 2008. This foresight arose from a series of advances in his understanding of national accounting, price-setting, the role of modern finance, and the use of economic data, especially to grasp the interlinkage of stocks and flows. This biography also gives due attention to Godley's life outside academic economics – including his chaotic childhood, truncated career as a professional oboist, equally brief stints as a sculptor’s model and economist in industry, and a longer spell as as a Treasury adviser with a mystery gift for forecasting.
This first full-length biography traces Wynne Godley’s long career from professional musician to public servant, policymaker, tormentor of conventional macroeconomics and creator of a workable alternative – all after escaping a childhood of decaying mansions and draconian schools, and rescuing his private world from the legacy of two Freuds. Drawing on Godley’s published and unpublished work and extensive interviews with those who knew him, the author explores Godley's improbable life and explains the lasting significance of his work.



Table of Contents

Frontmatter

Chapter 1. Life Before Economics 1926–1955

Abstract
This review of Godley’s life before joining the Treasury begins with a brief tour of his illustrious ancestors (including the founder of New Zealand’s Christchurch colony, a private secretary to William Gladstone who ruled India without going there and Oxford’s most widely quoted Latin orator). It follows him through a chaotic childhood and fierce boys school education to successful studies at Oxford, and the discovery of oboe skills which lead him via the Paris Conservatoire to a seemingly bright career in the BBC Welsh Orchestra. The London and Dublin arts scenes lead him to acquaintance with Lucian Freud and marriage to Kitty, who has recently divorced Freud. When stage fright stalls his orchestral career, Godley takes a more stable job in industry and, rediscovering an interest in the economics he studied at college, applies successfully for a post in the UK Treasury.
Alan Shipman

Chapter 2. Under Treasury Rules 1956–1964

Abstract
Joining a small number of Treasury economists in the middle of a crisis, as the government encounters balance-of-payments problems that force it to slow the economy so as to stabilise the pound, Godley learns the hard way about the ‘stop-go cycle’ that is already punctuating the UK’s post-war economic recovery. He absorbs the Treasury’s commitment to maintaining full employment with low inflation and enough investment to keep productivity rising, but is quickly made aware of the obstacles to attaining these simultaneously, without encountering a balance-of-payments constraint. The 1959 Radcliffe Report confirms the Treasury view that fiscal policy is the main instrument of economic management, with little contribution from monetary policy.
Alan Shipman

Chapter 3. Short-Term Forecasting

Abstract
Although assigned a range of tasks, Godley quickly gains a reputation for assembling data and preparing the one-year forecast, which has become a central Treasury function and the anchor of its other activities. His data analysis skills are the Launchpad for some life-changing intellectual alliances, especially with Cambridge economist Nicholas Kaldor (government chief tax adviser from 1964) and eminent statistician Claus Moser. Encountering many limitations to forecast preparation and exploring the statistical estimation techniques now being made easier to implement by mechanical calculators, Godley secures a one-year secondment in 1963–1964 to the National Institute of Economic and Social Research (NIESR). In an intensive burst of research, he co-authors empirical studies on price-setting, import demand and productivity trends, to help improve the short-term forecast, and works more closely with Kaldor on the Selective Employment Tax.
Alan Shipman

Chapter 4. Public Expenditure

Abstract
The main purpose of short-term forecasting is to help Chancellors set the annual budget. But Godley quickly discovers the extent to which this can be undermined by the inability to anticipate expenditure, only half of which is under direct Treasury control. Above him, Treasury undersecretary Richard ‘Otto’ Clarke tackles the problem by taking a leading role in the Plowden Committee, which recommends major changes to public expenditure management in 1961. Central to these is an extension of forecasts to five years under the Public Expenditure Survey Committee (PESC) process. Hopes of more accurate longer-term projections form the basis of new attempts to boost UK growth through indicative planning, for which the Conservatives lay the foundation in 1961–1962.
Alan Shipman

Chapter 5. Planning, Tax Reform and Structural Change

Abstract
Godley’s forecasting skills rescue him from a threatened shake-out of Treasury economists when Labour appoints outside economic advisers on regaining office in 1964 and transfers longer-term responsibilities from the Treasury to the new Department of Economic Affairs. When its government launches a National Plan with bold targets for growth-rate improvement after 1964, Godley is drawn into new tax design and other initiatives designed to promote manufacturing industry, which Kaldor’s work has highlighted as essential for driving productivity growth and containing the trade deficit which has undermined previous accelerations. However, his refinement of Kaldor’s work strongly suggests that National Plan growth targets are unattainable, without improbable rates of investment and employment growth. Having decided against devaluation in 1964, new balance-of-payments problems make it inevitable by 1967, and Godley is commissioned to calculate how far the pound should fall.
Alan Shipman

Chapter 6. Gatecrashing the Cambridge Tradition

Abstract
Having shifted focus from short-term forecasts to longer-term analysis in his later Treasury years, Godley accepts an invitation from Kaldor to move to Cambridge as director of its Department of Applied Economics (DAE). He takes over and expands a group of externally funded researchers, set up by Keynes but long divided over the right empirical approach to developing his analysis. Godley sets up the Cambridge Economic Policy Group (CEPG), which within ten years is its largest unit, producing regular policy assessments which gain national publicity for their scathing verdicts on the likely consequences of Conservative and Labour policies through the 1970s. Francis Cripps, recruited to the Economics Faculty by Kaldor, crosses to the DAE to join the group, becoming an essential contributor of analysis and computer programming for the CEPG policy simulation model, which the DAE houses alongside a separate forecasting model run by the Growth Project under its former director Richard Stone.
Alan Shipman

Chapter 7. Public Expenditure Revisited

Abstract
Towards the end of his time at the Treasury, Godley devised a series of improvements to the Survey Committee (PESC) planning process, mainly to remove anomalies in the ‘survey prices’ used to convert future years’ spending plans into current prices when they arrive. Returning to the Treasury from the DAE as a consultant, he finds former colleagues struggling with these adjustments, especially on multi-year capital projects. Tensions erupt when his calculation of a consequent £5bn overspend under the 1970–1974 government, put to a parliamentary Select Committee, appears in the press. They subside enough for Godley and Cripps to advise on the 1976 local government financing review, where they find themselves back on the Treasury’s side. But Godley and the CEPG are thereafter treated with caution by Chancellor Denis Healey, who blames the Treasury for an excessively loose first budget which forces subsequent tightening, as the external deficit renews pressure on the pound. And Godley goes against the grain again when, with King’s College colleague Adrian Wood, he refutes the business case for tax relief on gains from stock appreciation.
Alan Shipman

Chapter 8. Sector Balances and ‘New Cambridge’

Abstract
Although instantly dismissed by the theorists at Cambridge’s Economic Faculty, who regard him as a mere technician and ‘conjuncturist’, Godley starts a serious search for analytical foundations for his macroeconomic intuitions. He finds them in the ‘sector balance’ idea, a simple accounting identity for the whole economy, which shows that the government deficit (or surplus) plus the private-sector deficit (or surplus) must be exactly matched by the current-account deficit (or surplus). Kaldor had shelved his use of the concept, despite sensing its importance, due to lack of immediate linkage to causal theories. Godley sees a way to provide these, by identifying stable longer-run stock-flow ratios and the associated household and firm behaviour. Applying the identity, the CEPG finds a link between the current-account deficit and the fiscal deficit, due to an apparent stability in private-sector asset holding. This ‘New Cambridge’ approach causes a very public argument with other Cambridge Keynesians, who view it as incorrectly rejecting the use of fiscal policy.
Alan Shipman

Chapter 9. Balance of Payments, Deindustrialisation and Protection

Abstract
Despite the pain of being branded a ‘monetarist’ by some of his colleagues, despite an equally hostile reception from monetarists when presenting ‘New Cambridge’ ideas in the USA, Godley continues to view the ‘Keynesian’ remedy of expansionary fiscal policy as seriously flawed unless the problem of fast-rising imports is solved. He finds support from another Cambridge group working in problems of deindustrialisation, whose acceleration in the UK has made it impossible to keep full employment without an external deficit, and restrained productivity growth. Negative evaluations of the effectiveness of past devaluations, and the uncomfortable experience of designing one in 1967, leave Godley convinced that UK problems cannot be solved without direct control of imports, a policy he continues to advocate despite coming under almost universal fire.
Alan Shipman

Chapter 10. Spectating on Thatcher and Major

Abstract
The Conservatives’ 1979 election victory sidelines the CEPG, as the Thatcher government turns to ‘monetarism’ as its solution to inflation, and deep budget cuts as the way to deliver it. Godley completely rejects the idea that money supply determines inflation or is a stock that governments can control, having long ago recognised that most money is created ‘inside’ the system by bank lending rather than introduced from ‘outside’ by government borrowing. His advice is now wholly ignored by the Treasury, although Chancellor Geoffrey Howe’s decision to tighten the 1981 budget in the depths of recession gives the Cambridge Keynesians a foe to reunite against. CEPG analysis spells disaster for the economy as monetary targeting and North Sea oil strengthen the exchange rate, igniting faster deindustrialisation. When strong recovery from 1983 under Chancellor Nigel Lawson allows the Conservatives to claim an economic miracle, Godley becomes their most vociferous critic, pointing to the looming imbalances that cause renewed collapse into recession and inflation as the decade ends.
Alan Shipman

Chapter 11. ‘Macroeconomics’

Abstract
A sidelining from policy advice and weekly squash games with a noted editor give Godley a commission for a book that will distil the revised approach to the macroeconomy that has taken shape through work on the CEPG’s model and policy reviews. Godley turns to Cripps as co-author, and in 1983 they publish the book which they hope will bring their views to the attention of other economists, challenging the mainstream. The book contains innovations which they believe can show the flaws in the ‘neoclassical’ explanations of economic stabilisation and growth and set out the groundwork for a Keynesian alternative. These include endogenous money creation, mark-up price setting, assessment of the whole system for stock-flow consistency by including balance sheets with income flows and a system of inflation accounting enabling the separation of ‘real’ effects from those of price changes. Despite their hopes of refounding the subject, the book is ignored or misunderstood by most Keynesians and condemned by other economists, its abstraction and technical demands ruling out a wider public audience.
Alan Shipman

Chapter 12. The Research Council Showdown

Abstract
A further disaster strikes when the Social Science Research Council, for ten years the main source of funding for Godley and his group, withdraws financial support, rejecting his appeals that their work is making progress and about to yield substantial advances. The Group dissolves as leading members, including Cripps, seek new opportunities elsewhere, and Godley has to reorganise the DAE around other projects. While the SSRC says its decision reflects changes in macro modelling direction which Cambridge has missed, and the new scope for funding forecasting services commercially, Godley suspects he has been punished for the series of accurate but critical forecasts of Conservative policy outcomes and ambushed by econometricians who do not acknowledge that their models lack sequential reality and stock-flow consistency.
Alan Shipman

Chapter 13. Wilderness and Wisdom

Abstract
Forced to continue his macroeconomic research with diminished resources after losing his core grant, Godley continues to direct the DAE until 1988, but begins the search for an alternative base from which to pursue a second attempt at the subject’s reconstruction. Alternative sponsorship enables him to retain a Cambridge foothold at the university’s new management school, but he is increasingly drawn abroad, as interest in his new approach to the macroeconomy—and especially its ability to incorporate enlarged portfolios under financial deregulation—wins commissions to build models for central banks in Denmark and the Caribbean. He also makes his first visit to the Levy Economics Institute in New York State, connecting with Hyman Minsky’s ideas on financial fragility. Even without a large model, Godley can now detect the build-up of imbalances that will lead to build up of excessive debts and recession when they have to be paid back. His successful use of this to predict the end of the UK’s Lawson boom, and the pound’s disorderly exit from the European Exchange Rate Mechanism, wins him a recall to government as a member of the Chancellor’s independent panel of forecasters.
Alan Shipman

Chapter 14. Cassandra Across the Atlantic

Abstract
When the ‘Wise Men’ of the Chancellor’s panel are dispersed, Godley’s intellectual base becomes the Levy Institute, his family moving to the New York for extended periods as he engages with the followers of Minsky who are re-thinking the macroeconomy around a fuller understanding of endogenous money. He works on developing their forecasting model, introducing stock-flow-consistent treatment in time to detect that the lauded budget surpluses built up by President Clinton are the counterpart of rising private-sector deficits. Calculating that these will lead to sharp downturn when the debt-to-income ratio goes too far above sustainable norms, Godley and his Levy team accurately anticipate the turn-of-the-century stock market downturn. When fiscal and monetary expansion keep the ensuing recession much shallower than expected, they focus on the emerging combination of public and private-sector deficits, which seem to point the way to an even bigger crash. The Godleys also find in New York life a cultural and social dimension that was lacking in Cambridge, with Kitty finally realising her own artistic talent.
Alan Shipman

Chapter 15. The Long Road to Redemption

Abstract
All through his work on policy assessment and forecasting—on both sides of the Atlantic—after stepping down from the DAE, Godley has been working on the side to extend and improve the ideas that sank without trace in 1983. Helped by long collaborations with CEPG members who remained in Cambridge (notably Ken Coutts), and long correspondences with others (notably Treasury ex-colleague Brian Hopkin), what started as an improved second edition of Macroeconomics turns into a much wider project—building stock-flow consistent matrices which, allied to much-enlarged computing capacity, can simulate an economy, with a range of financial assets and differentiated public, household, corporate, bank and international sectors. The full pattern of stocks and flows takes years to work out and match to available data, with further time needed to work out the behavioural relationships that can realistically close the model. But with the help of Levy Institute colleagues in the late 1990s, remaining theoretical puzzles are worked out. A collaboration with Canadian post-Keynesian economist Marc Lavoie moves the project towards final completion in 2007, with an early offshoot enabling them to diagnose the built-in imbalance that will soon haunt Europe’s move to a single currency.
Alan Shipman

Chapter 16. Monetary Economics and After

Abstract
The publication in 2007 of Monetary Economics, which builds up a series of stock-flow consistent macro models that can chart the short-run dynamics and longer-term outcomes of policy changes and ‘shocks’, gives Godley closure on his two decades of work to model monetary systems realistically. The results presented by Godley and Lavoie demonstrate ‘Keynesian’ effects, showing how employment levels and growth rates may be demand-constrained even in the longer run, but leave scope for other behavioural closures. The launch of the book leads immediately to quests to write a shorter, more popular version, and to apply it to policy analysis. Unable to travel easily to the Levy Institute, Godley explores options for resuming a small research programme in Cambridge, before ill health forces him and Kitty to retreat to family homes in Suffolk and then Northern Ireland. Less than a year after the new book emerges, the USA is plunged into a global financial crash whose origins were fully spelt out in Godley’s analyses at the Levy Institute, which now places his work alongside Minsky’s as the foundation of its assessments. While still battling a resistant mainstream, he lives to see a new generation of post-Keynesian scholars take up and further develop the new approach.
Alan Shipman

Chapter 17. The True Self

Abstract
This final chapter reviews the long-hidden aspect of Godley’s private life: a psychoanalysis aimed at dispelling his ‘false self’ which ran for ten years from, the late 1950s, whose adverse effects he concealed until going public in the early 2000s. His account of the episode prompted the psychoanalysts in the UK and USA into a major reassessment of professional practices, but the stresses surrounding its revelation added to the complications of bringing his economic work to completion.
Alan Shipman

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