지은이: Wynne Godley and Marc Lavoie
출처: Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth (Palgrave Macmillan, 2007)
※ 발췌 (excerpt):
* * *
PREFACE
The premises underlying this book are, first, that modern industrial economies have a complex institutional structure comprising production firms, banks, governments and households and, second, that the evolution of economies through time is dependent on the way in which these institutions take decisions and interact with one another. Our aspiration is to introduce a new way in which an understanding can be gained as to how these very complicated systems work ^as a whole^.
Our method is rooted in the fact that every transaction by one sector implies an equivalent transactions by another sector (every purchase implies a sale), while every financial balance (the difference between a sector's income and its outlays) must give rise to an equivalent change in the sume of its balance-sheet (or stock) variables, with every financial asset owned by one sector having a counterpart liability owed by some other. Provided all the sectoral transactions are fuly articulated so that 'everything comes from somewhere and everything goes somewhere' such an arrangement of concepts will describe the activities and evolution of the whole economic system, with all financial transactions (including changes in the money supply) fully integrated, at the level of accounting, into the processes which generate factor income, expenditure and production.
As any model which includes the whole range of economic activities described in the national income and flow-of-funds accounts must be extremely complicated, we start off by imagining economies which have unrealistically simplified institutions, and explore how these would work. Then, in stages, we add more and more realistic features unitl, by the end, the economies we describe bear a fair resemblance to the modern economies we know. In the text we shall employ the narrative method of exposition which Keynes and his followers use, trying to infuse with intuition our conclusions about how particular mechanisms (say the consumption or asset demand functions) work, one at a time, and how they relate to other parts of the economic system. But our underlying method is completely different. Each of our models, before we started to write it up, was set up with its own stock and flow transactions so comprehensively articulated that, however large or small the model, the ^n^th equation was always logically implied by the other n-1 equations. The way in which the system worked as a whole was then explored via computer simulation, by first solving the model in question for its steady state and then discovering its properties by changing assumptions about exogenous variables and parameters.
The text which follows can do no more than provide a narrative supplemented with equations, but we believe that reader's understanding will be enhanced, if not transformed, if they reproduce the simulations for themselves and put each model through its paces as we go along. It should be easy to downlad each model complete with data and solution routine.[n.1]
In Chapters 3-5 we present very elementary models, with drastically simplified institutional structires, which will illustrate some basic principles regarding the functioning of dynamic stock-flow consistent (SFC) models, and which incorporate the creation of 'outside' money into the income-expenditure process.
Chapter 6 introduces the open economy, which is developed seamlessly out of a model describing the evolution of two regions within a single country.
Chapter 7-9 presents models with progressively more realistic features which, in particular, introduce commercial banks and discuss the role of credit and 'inside' money.
The material in Chapter 10-11 constitutes a break, in terms of complexity and reality, with everything that has gone before. We first present models which describe how inside money and outside money interact, how firm's pricing decisions determine the distribution of the national income and how the financial sector makes it possible for firms and households to operate under conditions of uncertainty. The Chapter 11 model includes a repesentation of growth, investment, equity finance and inflation.
Finally, in Chapter 12, we return to the open economy (always conceived as a closed system comprising two economies trading merchandise and assets with one another) and flesh-out the Chapter 6 model with additional realistic feature.
It has taken many years to generate the material presented here. But we are painfully aware that this is only a beginning whih leaves everything to play for.
W.G. and M.L.
Background memories (by W.G.)
My first significant memory as an economist was the moment in 1944 when P.W.S Andrews, my brilliant teacher at Oxford, got me to extrude a question from my mind: Is output determined by the intersection of marginal revenue with marginal cost curves or is it determined by aggregate demand? Thus I was vouchsafed a precocious vision of the great divide which was to obsess me for years.
My first significant memory as an economist was the moment in 1944 when P.W.S Andrews, my brilliant teacher at Oxford, got me to extrude a question from my mind: Is output determined by the intersection of marginal revenue with marginal cost curves or is it determined by aggregate demand? Thus I was vouchsafed a precocious vision of the great divide which was to obsess me for years.
My apprenticeship was served in the British Treasury, where, from 1956 to 1970, I mainly worked on the conjuncture[n.2] and short-term forecasting. This was the heyday of 'stop-go' policies, when we tried to forecast what would happen during the following 18 months and then design a budget which would rectify anything likely to go wrong. Forecasting consisted of scratching together estimates of the component parts of real GDP and adding them up using, so far as we could, a crude version of the Keynesian multiplier. I now think the theoretical and operational principles we used were seriously defective, but the whole experience was instructive and extremely exciting. The main thing I derived from this work was an expertise with statistical concepts and sources while gathering a considerable knowledge of stylized factsㅡfor instance concerning the (non) response of prices to fluctuations in demand (Godley 1959; Godley and Gillson 1965) and the response of unemployment to fluctuations in output (Godley and Shepherd 1964). I also got a lot of contemporary history burned into my mindㅡwhat kind of year 1962 was and so onㅡand, always waiting for the next figure to come out, I learned to think of economy as an organism which evolves through time, with each period having similarities as well as differences from previous periods. I came to believe that advances in macro-economic theory could usefully take place only in tandem with an improved knowledge of what was actually happening in the real worldㅡan endless process of iteration between algebra and statistics. My perspective was very much enlarged by my close friendship with Nicholas Kaldor, who worked in the Treasury from the mid-sixties. Kaldor was touched by genius and, contrary to what one might suppose, he had an open min, being prepared to argue any question through with anyone at any time on its merits and eve very occasionally, to admit that he was wrong.
In 1970 I moved to Cambridge, where, with Francis Cripps, I founded the Cambridge Economic Policy Group (CEPG). I remember a damascence moment when, in early 1974 (after playing round with concepts devised in conversation with Nicky Kaldor and Robert Neild), I first apprehended the strategic importance of the accounting identity which says that, measured at current prices, the government's budget deficit less the current account deficit is equal, by definition, to private saving net of investment. Having always thought of the balance of trade as something which could only be analysed in terms of income and price elasticities together with real output movements at home and abroad, it came as a shock to discover that if only one knows what the budget deficit and private net saving are, it follows from that information alone, without any qualification whatever, exactly what the balance of payments must be. Francis Cripps and I set out the significance of this identity as a logical framework both for modelling the economy and for the formulation of policy in the ^London and Cambridge Economic Bulletin^ in January 1974 (Godley and Cripps 1974). We correctly predicted that the Heath Barber boom would go bust later in the year at a time when the National Institute was in full support of government policy and the London Business School (i.e. Jim Ball and Terry Burns) were conditionally recommending further reflation! We also predicted that inflation could exceed 20% if the unfortunate threshold (wage indexation) scheme really got going interactively. This was important because it was later claimed that inflation (which eventually reached 26%) was the consequence of the previous rise in the 'money supply', while others put it down to the rising pressure of demand the previous year.
However, far more important than any predictions we then made was our suggestion that an altogether different set of principles for managing the economy should be adopted, which did not rely nearly so much on short-term forecasting. Our system of thought, dubbed 'New Cambridge' by Richard Kahn and Michael Posner (1974), turned on our view that in the medium term there were limits to the extent to which private net saving would fluctuate and hence that there was a medium-term functional relationship between private disposable income and private expenditure. Although this view encountered a storm of protest at the time it has gradually gained some acceptance and is treated as axiomatic in, for example Garratt et al. (2003).
We had a bad time in the mid-1970s because we did not then understand inflation accounting, so when inflation took off in 1975, we underestimated the extent to which stocks of financial assets would rise in nominal terms. We made some bad projections which led people to conclude that New Cambridge had be confuted empirically and decisively. But this was neither correct nor fair because nobody else at that time seems to have understood inflation accounting. Our most articulate critic, perhaps, was John Bispham (1975), then editor of the ^National Institute Economic Review^, who wrote an article claiming that the New Cambridge equation had 'broken down massively'. Yet the National Institute's own consumption function under-forecast the personal saving rate in 1975 by 6 percentage points of disposable income! And no lesser authority than Richard Stone (1973) made the same mistake because in his definition of real income he did not deduct the erosion, due to inflation, of the real value of household wealth. But no ne concluded that the consumption function had 'broken down' terminally if at all.
It was some time before we finally got the accounting quite right. We got part of the way with Cripps and Godley (1976), which described the CEPG's empirical model and derived analytic expressions which characterized its main properties, and which included an early version of the conflictual, 'target real wage' theory of inflation. Eventually our theoretical model was enlarged to incorporate inflation accounting and stocks as well as flows and the results were published in Godley and Cripps (1983) [n.3] with some further refinements regarding inflation accounting in Couttts, Godley and Gudgin (1985). Through the 1970s we gave active consideration to the use of import controls to reverse the adverse trends in trade in accordance with principles set out in Godley and Cripps (1978). And around 1984 James Tobin spent a pleasant week in Cambridge (finding time to play squash and go to the opera) during which he instructed us in the theory of asset allocation, particularly Backus et al. (1980), which thenceforth was incorporated in our work.
In 1983 the CEPG and several years of work were destroyed, and discredited in the minds of many people, by the ESRC decision to decimate our funding, which they did without paying us a site visit or engaging in any significant consultation.
Still, 'sweet are the uses of adversity', and deprived of Francis Cripps (perhaps the cleverest economist I have so far encountered) and never having touched a computer before, I was forced to spend the hours (and hours) necessary to acquire the modelling skills with which I invented prototypes of many of the models in this book.
In 1992, I was invited to join the Treasury's panel of Independent Forecasters (the 'Six Wise Men'). In my contributions I wrongly supposed that the devaluation of 1992 would be insufficient to generate export-led growth for a time. But I did steadfastly support the policies pursued by Kenneth Clarke (the UK Chancellor of the Exchequer) between 1993 and 1997ㅡperhaps the best time for macro-economic management during the post-war period. Unfortunately a decision was made not to make any attempt to explain, let alone reconcile, the divergent views of the Wise Men, with the result that their reports, drafted by the Treasury, were cacophonous and entirely without value.
Through most of the 1990s I worked at the Levy Economics Institute of Bard College, in the United States, where I spent about half my time building a simple 'stock-flow consistent' model of the United Statesㅡwith a great deal of help from Gennaro Zezzaㅡand writing a number of papers on the strategic problems facing the United States and the world economies. We correctly argued (Godley and McCarthy 1998; Godley 1999c), slap contrary to the view held almost universally at the time, that US fiscal policy would have to be relaxed to the tune of several hundred billion dollars if a major recession was to be avoided. And in Godley and Izurieta (2001), as well as in subsequent papers, we forecast correctly that if US output were to rise enough to recover full employment, there would be, viewed ^ex ante^, a balance of payment deficit of about 6% of GDP in 2006ㅡand that this would pose huge strategic problems both for the US government and for the world. The other half of my time was spent developing the material contained in this book. In 2002 I returned to the United Kingdom where I continued doing similar work, initially under the benign auspices of the Cambridge Endowment for Research in Finance, and more recently with the financial support of Warren Mosler, who has also made penetrating comments on drafts of this book.
My friendship with Marc Lavoie started with an email which he sent me out of the blue saying that he could not penetrate one of the equations in a paper I had written called 'Money and Credit in a Keynesian Model of Income Determination' which was published by the ^Cambridge Journal of Economics^ in 1999. The reason, I could immediately explain, was that the equation contained a lethal error! And so our collaboration began. Marc brought to the enterprise a superior knowledge of how the monetary system works, together with scholarship and a knowledge of the literature which I did not possess and without which this book would never have been written. Unfortunately, we have not been able to spend more than about two weeks physically in one another's presence during the past five yearsㅡand this is one of the reasons it has taken so long to bring the enterprise to fruition.
Joint authorship background (by M.L.)
The present book is the culminating point of a long collaboration that started in December 1999, when Wynne Godley made a presentation of his 1999 ^Cambridge Journal of Economics^ paper at the University of Ottawa, following my invitation. I had been an avid reader of Godley and Cripps's innovative book, ^Macroeconomics^, when it came out in 1983, but had been put off somewhat by some of its very difficult inflation accounting sections, as well as by my relative lack of familiarity with stock-flow issues. Nonetheless, the book clearly stood out in my mind as being written in the post-Keynesian tradition, being based on effective demand, nominal-cost pricing, endogenous money, interest rate targeting by the monetary authorities and bank finance of production and inventories. I could also see ties with the French circuit theory, as I soon pointed out (Lavoie 1987: 77). Indeed, I was later to discover that Wynne Godley himself felt very much in sync with the theory of the monetary circuit and its understanding of Keynes's finance motive, as propounded by Augusto Graziani (1990. 2003). A great regret of mine is that during my three-week stint at the University of Cambridge in 1985, under the tutelage of Geogg Harcourt, I did not take up the opportunity to meet Wynne Godley then. This led to a long span during which I more or less forgot about Wynne's work, although it is cited and even quoted in my post-Keynesian textbook (Lavoie 1992).
As an aside, it should be pointed out that Wynne Godley himself has always seen his work as being part of the Cambridge school of Keynesian economics. This was not always very clear to some of his readers, especially in the 1970s or 1980s. [n.4] For instance Robert Dixon (1982-83: 291) argued that the ideas defended by the New Cambridge School, of which Godley was a leading figure, were virtually tantamount to a monetarist vision of income distribution, concluding that 'Doctrines associated with the New Cambridge School represent a dramatic break with the ideas of Keynes. New Cambridge theory seems to be more pertinent to long-run equilibrium than the world in which we have our being' (1982-83: 294). In addition, during a discussion of Godley (1983), two different conference participants claimed that Godley's model 'had a real whiff of monetarism about it' (in Worswick and Trevithick, 1983: 174), so that Francis Cripps, Godley's co-author, felt obliged to state that 'what they were doing was Keynesian monetary economics; it was not neoclassical let alone general equilibrium monetary economics' (in Worswick and Trevithick, 1983: 176). In retrospect, the confusion arose, so it seems, as a result of the insistence of New Cambridge School members upon stock-flow consistency and the long-run relationships or medium-run consequences that this required coherence possibly entailed. It is this focus on possible long-run results that led some readers to see some parallel with monetarism. But as is clearly explained by Keith Cuthbertson (1979), New Cambridge authors were opposed to monetarists on just about every policy issues, and the underlying structure of their model was cleary of Keynesian pedigree. Godley himself, more than once, made very clear that he associated himself with the post-Keynesian school. For instance, in a paper that can be considered to be the first draft of Chapter 10 of present book, Godley (1997: 48) claimed 'to have made, so far as I know for the first time, a rigorous synthesis of the theory of credit and money creation with that of income determination in the (Cambridge) Keynesian tradition. My belief is that nothing the paper contains would have been surprising or new to, say[,] Kaldor, Hicks, Joan Robinson or Kahn'. [n.5]
In the late 1990s Anwar Shaikh, who had been working at the Levy Institute, brought my attention to a working paper that had been written there by Wynne Godly (1996), saying that this was innovative work that was of utmost importance, although hard to follow. I ded get a copy of the working paper, and remember discussing it with my long-time friend and colleague at the University of OttawaㅡMario Seccarecciaㅡand arguing that this was circuit theory and post-Keynesian monetary economics, which at the time seemed to me to be in a sort of an impassse with its endless and inconclusive debates. When a substantially revised version of the working paper came out in June 1999 in the ^Cambridge Journal of Economics^, I was now ready to dig into it and put it on the programme of the four-person monthly seminar that we had set up in the autumn of that year, with Mario Seccareccia, Tom Rymes(TK), Colin Rogers (visiting from Adeleide), and myself. From this came out the invitation for Wynne to give a formal presentation at the end of 1999.
Wynne himself looked quite excited that some younger scholors would once more pay attention to his work. What I found stimulating was that Wynne's working paper and published article had managed to successfully integrate the flow aspects of production and bank credit with the stock feature of portfolio choice and money balancesㅡan integration that had always evaded my own effortsㅡwhile offering a definite post-Keynesian model, which I felt was in the spirit of one of my favorite authorsㅡNicholar Kaldor. Indeed, in contrast to other readers of the 1999 article, I thought that Godley's model gave substantial (but indirect) support to the so-called Kaldor-Moore accommodationist or horizontalist position, of which I was one of the few supporters at the time, as I have tried to explain in great detail recently (Lavoie 2006a).
Around that time I was working on improving Kaldor's (1966) well-known neo-Pasinetti growth model, in which corporate firms keep retained earnings and issue stock market shares. I had successfully managed to incorporate explicit endogenous rates of capacity utilization (Lavoie 1998), but was experiencing difficulties in introducing money balances into the model, while taking care adequately of capital gains on the stock market. These accounting intricacies were child's play for Wynne, who offered to help out and build a model that would provide simulations of this modified Kaldorian model. This became our first published joint effortㅡthe Lavoie and Godley (2001-2) paper in the ^Journal of Post Keynesian Economics^. This gave rise to a very neat analytical formalization, with a variety of possible regimes, provided by Lance Taylor (2004b: 272-8, 303-5), another keen admirer of the methodology propounded by Wynne Godley. In my view, these two papers taken together, along with the extensions by Claudio Dos Santos and Gennaro Zezza (2005), offer a very sold basis for those who wish to introduce debt and stock market questions in demand-led models, allowing them, for instance to tackle the issues brought up by Hyman Minsky with his financial fragility hypothesis.
At the time of our first meeting Wynne himself was trying to put together a small book that would summarize his main methodological and economic ideas, by lining up a string of elementary models that would emphasize the key relationships between produces, banks and households, as well as the government and the external sectors. The first draft of this book was sent to a number of friends and researchers in February 2000. The models of Chapters 3-6 in the present book very closely resemble the models of the draft. Towards the end of 2000, as our collaboration on the Kaldorian model seemed to be going verl well, Wynne asked me to embark on his book project and to become a co-author. In particular, I was to provide the links with the existing post-Keynesian literature.
A substantial portion of the book was written during 2001-03, but progress got bogged down by other commitments, the difficulties of communicating from a distance, some disagreements on contents, a slowdown due to illness and some unexpected problems encountered when trying to model and simulate what seemed at first sight like simple and obvious concepts (for instance the model of Chapter 11 had to be completely revamped). In the end both of us had to recognize that we would never achieve a perfect product, and that it was better to publish a book with some imperfections than no book at all. The completion of the book was also both helped and slowed down by the fact that after 2003 we worked very hard at writing together three papers on stock-flow consistent open-economy models.
I would like to take the opportunity to acknowledge, both in my name and in that of Wynne, the support and keen interest of a variety of colleagues (such as Ken Coutts, Anwar Shaikh, Tom Palley, Duncan Foley, Mario Seccareccia) who induced us to move forward and achieve our task. By giving us the opportunity to present our work and/or by asking us regularly whether we had completed the manuscript, many colleagues helped us realize that it was important that we did so. Alex Izuieta provided encouragement and a lot of very helpful technical advice, without which in particular we could not have imported the charts; Claudio Dos Santos made a lot of suggestions and provided references to previous related literature of which we were unaware; Gennaro Zezza organized a conference on stock-flow-consistent modelling, and gave his time to translate our models into Eviews; Fernando Pellerano and Juan Carlos Moreno-Brid provided an everlasting dose of enthusiasm about the importance and relevance of our work for economists in semi-industrialized or less developed countries; Jacques Mazier, thanks to his student Michael Clevenot, provided both of us with generous opportunities to present our work on several occasions to a large number of siminar participants. And finallly, Geoffrery Harcourt offered his support and gave us a ^coup de pouce^, inducing us to submit a book proposal and complete the project, while two PhD students of mine, Jung-Hoon Kim and Jun Zhao, made sure that no reference and no notation were omitted and that the bibliography was in proper form.
To close this preface, it should be pointed out that all the models were run and figures charted with the MODELER software, which was provided us free of charge by Charles G. Renfro. MODELER is a wonderful tool to do econometrics, simulations and charts.
In 1970 I moved to Cambridge, where, with Francis Cripps, I founded the Cambridge Economic Policy Group (CEPG). I remember a damascence moment when, in early 1974 (after playing round with concepts devised in conversation with Nicky Kaldor and Robert Neild), I first apprehended the strategic importance of the accounting identity which says that, measured at current prices, the government's budget deficit less the current account deficit is equal, by definition, to private saving net of investment. Having always thought of the balance of trade as something which could only be analysed in terms of income and price elasticities together with real output movements at home and abroad, it came as a shock to discover that if only one knows what the budget deficit and private net saving are, it follows from that information alone, without any qualification whatever, exactly what the balance of payments must be. Francis Cripps and I set out the significance of this identity as a logical framework both for modelling the economy and for the formulation of policy in the ^London and Cambridge Economic Bulletin^ in January 1974 (Godley and Cripps 1974). We correctly predicted that the Heath Barber boom would go bust later in the year at a time when the National Institute was in full support of government policy and the London Business School (i.e. Jim Ball and Terry Burns) were conditionally recommending further reflation! We also predicted that inflation could exceed 20% if the unfortunate threshold (wage indexation) scheme really got going interactively. This was important because it was later claimed that inflation (which eventually reached 26%) was the consequence of the previous rise in the 'money supply', while others put it down to the rising pressure of demand the previous year.
However, far more important than any predictions we then made was our suggestion that an altogether different set of principles for managing the economy should be adopted, which did not rely nearly so much on short-term forecasting. Our system of thought, dubbed 'New Cambridge' by Richard Kahn and Michael Posner (1974), turned on our view that in the medium term there were limits to the extent to which private net saving would fluctuate and hence that there was a medium-term functional relationship between private disposable income and private expenditure. Although this view encountered a storm of protest at the time it has gradually gained some acceptance and is treated as axiomatic in, for example Garratt et al. (2003).
We had a bad time in the mid-1970s because we did not then understand inflation accounting, so when inflation took off in 1975, we underestimated the extent to which stocks of financial assets would rise in nominal terms. We made some bad projections which led people to conclude that New Cambridge had be confuted empirically and decisively. But this was neither correct nor fair because nobody else at that time seems to have understood inflation accounting. Our most articulate critic, perhaps, was John Bispham (1975), then editor of the ^National Institute Economic Review^, who wrote an article claiming that the New Cambridge equation had 'broken down massively'. Yet the National Institute's own consumption function under-forecast the personal saving rate in 1975 by 6 percentage points of disposable income! And no lesser authority than Richard Stone (1973) made the same mistake because in his definition of real income he did not deduct the erosion, due to inflation, of the real value of household wealth. But no ne concluded that the consumption function had 'broken down' terminally if at all.
It was some time before we finally got the accounting quite right. We got part of the way with Cripps and Godley (1976), which described the CEPG's empirical model and derived analytic expressions which characterized its main properties, and which included an early version of the conflictual, 'target real wage' theory of inflation. Eventually our theoretical model was enlarged to incorporate inflation accounting and stocks as well as flows and the results were published in Godley and Cripps (1983) [n.3] with some further refinements regarding inflation accounting in Couttts, Godley and Gudgin (1985). Through the 1970s we gave active consideration to the use of import controls to reverse the adverse trends in trade in accordance with principles set out in Godley and Cripps (1978). And around 1984 James Tobin spent a pleasant week in Cambridge (finding time to play squash and go to the opera) during which he instructed us in the theory of asset allocation, particularly Backus et al. (1980), which thenceforth was incorporated in our work.
[n.3] A rhetorically adverse and unfair review of this book, by Maurice Peston (1983), appeared in the ^Times^ simultaneously with its publication.In 1979 Mrs Thatcher came to power largely on the grounds that, with unemployment above one million, 'Labour [wasn't] working', Britain was subjected to the monetarist experiment. We contested the policies and the theory underlying them with all the rhetoric we could muster, predicting that there would be an extremely severe recession with unprecedented unemployment. The full story of the Thatcher economic policies (taking the period 1979-92) has yet to be told. Certainly the average growth rate was by far the lowest and least stable of the post-war period while unemployment rose to at leat four million, once the industrial workers in Wales and the North who moved from unemployment to invalidity benefit are counted in.
In 1983 the CEPG and several years of work were destroyed, and discredited in the minds of many people, by the ESRC decision to decimate our funding, which they did without paying us a site visit or engaging in any significant consultation.
Still, 'sweet are the uses of adversity', and deprived of Francis Cripps (perhaps the cleverest economist I have so far encountered) and never having touched a computer before, I was forced to spend the hours (and hours) necessary to acquire the modelling skills with which I invented prototypes of many of the models in this book.
In 1992, I was invited to join the Treasury's panel of Independent Forecasters (the 'Six Wise Men'). In my contributions I wrongly supposed that the devaluation of 1992 would be insufficient to generate export-led growth for a time. But I did steadfastly support the policies pursued by Kenneth Clarke (the UK Chancellor of the Exchequer) between 1993 and 1997ㅡperhaps the best time for macro-economic management during the post-war period. Unfortunately a decision was made not to make any attempt to explain, let alone reconcile, the divergent views of the Wise Men, with the result that their reports, drafted by the Treasury, were cacophonous and entirely without value.
Through most of the 1990s I worked at the Levy Economics Institute of Bard College, in the United States, where I spent about half my time building a simple 'stock-flow consistent' model of the United Statesㅡwith a great deal of help from Gennaro Zezzaㅡand writing a number of papers on the strategic problems facing the United States and the world economies. We correctly argued (Godley and McCarthy 1998; Godley 1999c), slap contrary to the view held almost universally at the time, that US fiscal policy would have to be relaxed to the tune of several hundred billion dollars if a major recession was to be avoided. And in Godley and Izurieta (2001), as well as in subsequent papers, we forecast correctly that if US output were to rise enough to recover full employment, there would be, viewed ^ex ante^, a balance of payment deficit of about 6% of GDP in 2006ㅡand that this would pose huge strategic problems both for the US government and for the world. The other half of my time was spent developing the material contained in this book. In 2002 I returned to the United Kingdom where I continued doing similar work, initially under the benign auspices of the Cambridge Endowment for Research in Finance, and more recently with the financial support of Warren Mosler, who has also made penetrating comments on drafts of this book.
My friendship with Marc Lavoie started with an email which he sent me out of the blue saying that he could not penetrate one of the equations in a paper I had written called 'Money and Credit in a Keynesian Model of Income Determination' which was published by the ^Cambridge Journal of Economics^ in 1999. The reason, I could immediately explain, was that the equation contained a lethal error! And so our collaboration began. Marc brought to the enterprise a superior knowledge of how the monetary system works, together with scholarship and a knowledge of the literature which I did not possess and without which this book would never have been written. Unfortunately, we have not been able to spend more than about two weeks physically in one another's presence during the past five yearsㅡand this is one of the reasons it has taken so long to bring the enterprise to fruition.
Joint authorship background (by M.L.)
The present book is the culminating point of a long collaboration that started in December 1999, when Wynne Godley made a presentation of his 1999 ^Cambridge Journal of Economics^ paper at the University of Ottawa, following my invitation. I had been an avid reader of Godley and Cripps's innovative book, ^Macroeconomics^, when it came out in 1983, but had been put off somewhat by some of its very difficult inflation accounting sections, as well as by my relative lack of familiarity with stock-flow issues. Nonetheless, the book clearly stood out in my mind as being written in the post-Keynesian tradition, being based on effective demand, nominal-cost pricing, endogenous money, interest rate targeting by the monetary authorities and bank finance of production and inventories. I could also see ties with the French circuit theory, as I soon pointed out (Lavoie 1987: 77). Indeed, I was later to discover that Wynne Godley himself felt very much in sync with the theory of the monetary circuit and its understanding of Keynes's finance motive, as propounded by Augusto Graziani (1990. 2003). A great regret of mine is that during my three-week stint at the University of Cambridge in 1985, under the tutelage of Geogg Harcourt, I did not take up the opportunity to meet Wynne Godley then. This led to a long span during which I more or less forgot about Wynne's work, although it is cited and even quoted in my post-Keynesian textbook (Lavoie 1992).
As an aside, it should be pointed out that Wynne Godley himself has always seen his work as being part of the Cambridge school of Keynesian economics. This was not always very clear to some of his readers, especially in the 1970s or 1980s. [n.4] For instance Robert Dixon (1982-83: 291) argued that the ideas defended by the New Cambridge School, of which Godley was a leading figure, were virtually tantamount to a monetarist vision of income distribution, concluding that 'Doctrines associated with the New Cambridge School represent a dramatic break with the ideas of Keynes. New Cambridge theory seems to be more pertinent to long-run equilibrium than the world in which we have our being' (1982-83: 294). In addition, during a discussion of Godley (1983), two different conference participants claimed that Godley's model 'had a real whiff of monetarism about it' (in Worswick and Trevithick, 1983: 174), so that Francis Cripps, Godley's co-author, felt obliged to state that 'what they were doing was Keynesian monetary economics; it was not neoclassical let alone general equilibrium monetary economics' (in Worswick and Trevithick, 1983: 176). In retrospect, the confusion arose, so it seems, as a result of the insistence of New Cambridge School members upon stock-flow consistency and the long-run relationships or medium-run consequences that this required coherence possibly entailed. It is this focus on possible long-run results that led some readers to see some parallel with monetarism. But as is clearly explained by Keith Cuthbertson (1979), New Cambridge authors were opposed to monetarists on just about every policy issues, and the underlying structure of their model was cleary of Keynesian pedigree. Godley himself, more than once, made very clear that he associated himself with the post-Keynesian school. For instance, in a paper that can be considered to be the first draft of Chapter 10 of present book, Godley (1997: 48) claimed 'to have made, so far as I know for the first time, a rigorous synthesis of the theory of credit and money creation with that of income determination in the (Cambridge) Keynesian tradition. My belief is that nothing the paper contains would have been surprising or new to, say[,] Kaldor, Hicks, Joan Robinson or Kahn'. [n.5]
In the late 1990s Anwar Shaikh, who had been working at the Levy Institute, brought my attention to a working paper that had been written there by Wynne Godly (1996), saying that this was innovative work that was of utmost importance, although hard to follow. I ded get a copy of the working paper, and remember discussing it with my long-time friend and colleague at the University of OttawaㅡMario Seccarecciaㅡand arguing that this was circuit theory and post-Keynesian monetary economics, which at the time seemed to me to be in a sort of an impassse with its endless and inconclusive debates. When a substantially revised version of the working paper came out in June 1999 in the ^Cambridge Journal of Economics^, I was now ready to dig into it and put it on the programme of the four-person monthly seminar that we had set up in the autumn of that year, with Mario Seccareccia, Tom Rymes(TK), Colin Rogers (visiting from Adeleide), and myself. From this came out the invitation for Wynne to give a formal presentation at the end of 1999.
Wynne himself looked quite excited that some younger scholors would once more pay attention to his work. What I found stimulating was that Wynne's working paper and published article had managed to successfully integrate the flow aspects of production and bank credit with the stock feature of portfolio choice and money balancesㅡan integration that had always evaded my own effortsㅡwhile offering a definite post-Keynesian model, which I felt was in the spirit of one of my favorite authorsㅡNicholar Kaldor. Indeed, in contrast to other readers of the 1999 article, I thought that Godley's model gave substantial (but indirect) support to the so-called Kaldor-Moore accommodationist or horizontalist position, of which I was one of the few supporters at the time, as I have tried to explain in great detail recently (Lavoie 2006a).
Around that time I was working on improving Kaldor's (1966) well-known neo-Pasinetti growth model, in which corporate firms keep retained earnings and issue stock market shares. I had successfully managed to incorporate explicit endogenous rates of capacity utilization (Lavoie 1998), but was experiencing difficulties in introducing money balances into the model, while taking care adequately of capital gains on the stock market. These accounting intricacies were child's play for Wynne, who offered to help out and build a model that would provide simulations of this modified Kaldorian model. This became our first published joint effortㅡthe Lavoie and Godley (2001-2) paper in the ^Journal of Post Keynesian Economics^. This gave rise to a very neat analytical formalization, with a variety of possible regimes, provided by Lance Taylor (2004b: 272-8, 303-5), another keen admirer of the methodology propounded by Wynne Godley. In my view, these two papers taken together, along with the extensions by Claudio Dos Santos and Gennaro Zezza (2005), offer a very sold basis for those who wish to introduce debt and stock market questions in demand-led models, allowing them, for instance to tackle the issues brought up by Hyman Minsky with his financial fragility hypothesis.
At the time of our first meeting Wynne himself was trying to put together a small book that would summarize his main methodological and economic ideas, by lining up a string of elementary models that would emphasize the key relationships between produces, banks and households, as well as the government and the external sectors. The first draft of this book was sent to a number of friends and researchers in February 2000. The models of Chapters 3-6 in the present book very closely resemble the models of the draft. Towards the end of 2000, as our collaboration on the Kaldorian model seemed to be going verl well, Wynne asked me to embark on his book project and to become a co-author. In particular, I was to provide the links with the existing post-Keynesian literature.
A substantial portion of the book was written during 2001-03, but progress got bogged down by other commitments, the difficulties of communicating from a distance, some disagreements on contents, a slowdown due to illness and some unexpected problems encountered when trying to model and simulate what seemed at first sight like simple and obvious concepts (for instance the model of Chapter 11 had to be completely revamped). In the end both of us had to recognize that we would never achieve a perfect product, and that it was better to publish a book with some imperfections than no book at all. The completion of the book was also both helped and slowed down by the fact that after 2003 we worked very hard at writing together three papers on stock-flow consistent open-economy models.
I would like to take the opportunity to acknowledge, both in my name and in that of Wynne, the support and keen interest of a variety of colleagues (such as Ken Coutts, Anwar Shaikh, Tom Palley, Duncan Foley, Mario Seccareccia) who induced us to move forward and achieve our task. By giving us the opportunity to present our work and/or by asking us regularly whether we had completed the manuscript, many colleagues helped us realize that it was important that we did so. Alex Izuieta provided encouragement and a lot of very helpful technical advice, without which in particular we could not have imported the charts; Claudio Dos Santos made a lot of suggestions and provided references to previous related literature of which we were unaware; Gennaro Zezza organized a conference on stock-flow-consistent modelling, and gave his time to translate our models into Eviews; Fernando Pellerano and Juan Carlos Moreno-Brid provided an everlasting dose of enthusiasm about the importance and relevance of our work for economists in semi-industrialized or less developed countries; Jacques Mazier, thanks to his student Michael Clevenot, provided both of us with generous opportunities to present our work on several occasions to a large number of siminar participants. And finallly, Geoffrery Harcourt offered his support and gave us a ^coup de pouce^, inducing us to submit a book proposal and complete the project, while two PhD students of mine, Jung-Hoon Kim and Jun Zhao, made sure that no reference and no notation were omitted and that the bibliography was in proper form.
To close this preface, it should be pointed out that all the models were run and figures charted with the MODELER software, which was provided us free of charge by Charles G. Renfro. MODELER is a wonderful tool to do econometrics, simulations and charts.
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