Tag Archives: wynne godley

Economists On US Manufacturing And Trade

Recently, Paul Krugman wrote two articles in The New York Times on recent surge in US manufacturing: Making Manufacturing Great Again (June 6, 2023) and Making Manufacturing Greater Again (April 20, 2023).

Post-Keynesians stress the importance of manufacturing and exports/international trade. Before the economic and financial crisis which started in 2007, Wynne Godley was worried about all this and proposed to improve exports and take measures such as imposing non-selective protectionism, as he thought—rightly—that a crisis would happen and fiscal policy should be used and would be used but that alone will not be sufficient. In other words, the market mechanism won’t do the trick.

The reason manufacturing is important is because of the potential for expansion of exports.

Economists however have been denying all this. Especially with the rise of Donald Trump when attempts to improve the US balance of payments/international investment position were looked upon as clownish. But now the establishment has accepted that it needs to be addressed. But they don’t want to accept that they were behind. At the same time, Joe Biden has gone beyond measures that Trump has taken.

However, there are many economists who still live with old dogmas. For example, see Adam Posen’s article America’s Zero-Sum Economics Doesn’t Add Up for Foreign Policy.

So we have two types of mainstream economists: a) those who grudgingly accept that they were wrong and b) who are still wedded to dogmas.

There’s of course a limit to this, so the solution to the problems lie in disbanding the system of free trade and move toward a system of balance-of-payments targets.

Ashwani Saith’s New Book — Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

Ashwani Saith’s new book is out. It’s the history of how Post-Keynesianism was dethroned at Cambridge through power and influence of neoliberalism.

Wynne Godley is on the cover!

From the book’s description of the cover:

COVER

St Michael’s victory over the devil.
Jacob Epstein, Coventry Cathedral

On 14–15 November 1940, “a bright moonlit cloudless night made navigation simple” for the Luftwaffe operation—fatefully code-named Moonlight Sonata—of the blanket bombing of Coventry in which “almost a third of the city was fattened” with its medieval cathedral reduced to rubble. (GCHQ 2021). Wynne Godley was married to Kitty Garman, daughter of Kathleen Garman and the famous sculptor Jacob Epstein, one of whose creations lives on the wall of the cathedral in Coventry evoking the unbroken spirit of the city, with Benjamin Britten composing his War Requiem for the consecration of the reconstructed cathedral in 1962. It depicts St Michael—representing the good—slaying the devil. Epstein used a model of his “impossibly handsome” son-in-law, Wynne, to sculpt the head of St Michael. Though Wynne and his research team, along with other celebrated heterodox lineages, lost out proverbially to “the devil” in the Cambridge war of economics, there has subsequently been a defiant phoenix-like revival of the reputation and work of the famous Godley-Cripps Cambridge Economic Policy Group of the 1970s, as well as of other renowned radical traditions nurtured since the 1920s in Cambridge, the crucible of heterodox economics. The allegorical symbolism of Sir Jacob Epstein’s sculpture resonates with the leitmotif of the book.

Here’s Marc Lavoie’s review:

Ashwani Saith’s book is monumental, enthralling, beautifully written with its occasional satirical tone, but as we are being warned, depressing. It explains how the Faculty of Economics of the University of Cambridge—the world centre of post-Keynesian economics—was gradually and entirely taken over by neoclassical economics and why the Department of Applied Economics, also at the heart of heterodox economics, eventually came to be dismantled. This was so far an untold story, except for a chapter on ‘Faculty wars’ in Saith’s previous book, the intellectual biography of Ajit Singh. The current book provides 14 chapters of a meticulous detective story, relying mostly on Cambridge archives, but also on testimonies, interviews, emails, and previous articles of participants to these events. The book makes clear that, besides possible strategical mistakes by the incumbent heterodox economists, there were inexorable and ineluctable outside forces that led to this dismal state of affairs, through the Americanization of the economics profession and through the changing political winds that blew out heterodox and left-wing economics nearly everywhere in the world. The last chapter shows that all is not lost, both in Cambridge and elsewhere in the world.

REFERENCES

GCHQ. (2021, April 19). The bombing of Coventry in WWII. Retrieved December 19, 2021, from https://www.gchq.gov.uk/information/the-bombing-of-coventry-in-wwii

The book is 1217 pages long.

Word count of “Kaldor” and “Godley”: 428 and 512 respectively.

Mainstream Economics On A Better Globalisation

The United States policies and maintains the “liberal international order”, a totally unfair game built on laissez-faire/anti-Keynesian ideas. That was advantageous for the United States because its corporations are highly competitive because of historical reasons and who don’t need protection at home. Of course the US has still been using protectionist measures, so there’s hypocrisy there too. But the general system is the removal of protection from countries whose producers need it. Free trade in general. Low tariffs, no import quotas and industrial policy is shooed away.

There’s a good Noam Chomsky video on What Is The WTO? (with transcripts on that page).

Post-Keynesians have argued how the system of free trade has a deflationary bias and causes polarisation in the fortunes of nations.

The solution is, as proposed by Nicholas Kaldor in his book Causes Of Growth And Stagnation In The World Economy, page 87:

… coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets.

Anyway, China has gamed this too well to cause troubles to the United States. The US balance of payments and international investment position is on an unsustainable path now because of this. Slower growth for the US also implies slower growth for the world as a whole because the United States is a spender of the last resort (or more like the first resort). High imbalance also means that many countries can’t expand fiscal policy.

So there is a need to change the rules of globalisation, which is more than about free trade but free trade is an important part of it.

Dani Rodrik has two interesting recent articles on this. He is different from the establishment but unfortunately falls short. In his article US-China Rivalry: Geopolitics Is Ruining The Chance To Shape A Better Globalisation, he talks of how the US has taken measures which are more than just tariffs raised by Trump:

US President Joe Biden has added to these challenges by launching what Edward Luce of the Financial Times has called “a full-blown economic war on China”. Just before the party congress, the United States announced a vast array of new restrictions on the sale of advanced technologies to Chinese firms.

As Luce notes, Biden has gone much further than his predecessor Donald Trump, who targeted individual companies such as Huawei. The new measures are astounding in their ambition, aiming at nothing less than preventing China’s rise as a hi-tech power.

In Trump’s four years, economists led by Paul Krugman dismissed Trump’s actions on China but the current Biden administration for which Krugman—acts as a lackey—have gone way beyond.

It’s such a blot on the economics profession that almost nobody saw all this coming. The exception of course was Wynne Godley who was recommending import controls and policies to expand exports in the 2000s. The bigger solution of course is one in which trade is overall balanced. Wynne Godley mentions in his article The United States And Her Creditors — Can The Symbiosis Last? written in 2005:

A resolution of the strategic problems now facing the U.S. and world economies can probably be achieved only via an international agreement that would change the international pattern of aggregate demand, combined with a change in relative prices. Together, these measures would ensure that trade is generally balanced at full employment.

The other Dani Rodrik article How To Build A Better Order although interesting doesn’t go much far than proposing some changes. And Rodrik is a kind of dissenter from mainstream economics from within the establishment, so the profession doesn’t have a clue!

Mainstream Economics Vs. PKE On Manufacturing

Post-Keynesian growth theory (based on the work of Nicholas Kaldor) highlights the importance of manufacturing.

Mainstream theory denies it.

That’s because once you start talking along those lines, the idea of free trade appears even more dubious than at first sight. Mainstream economists don’t want that to happen as they represent the interests of Western corporations which have an interest in finding more markets for their products and services, at the expense of local producers abroad.

A recent denial of the importance of manufacturing came from Adam Posen who uses what’s called woke language. It also highlights how the woke ideology/identity politics is simply class politics disguised as concerns for identity.

Here’s what Adam Posen said in a talk at the CATO Institute:

I’m sure I’m gonna piss off both left and right, so I apologize. The fetish for manufacturing is part of the general fetish for keeping white males with low education outside the cities in the powerful positions they are in in the U.S., and that is really what’s going on here, because when you look at the costs of manufacturing and Susan Houseman and her co-authors have done a lot not of manufacturing but of trade and job displacement and community. Susan Houseman and her co-authors have done a lot of work on this and I’m sure she’ll have a different view than I do but when I look at the so-called cost of the China shock or the cost of the decline of manufacturing, I always think ‘compared to what’?

This is ridiculous as it sort of implies that people of other races somehow don’t want a position in manufacturing, are okay with offshoring work abroad or are okay with closing down of factories due to competition from abroad.

In reality this kind of analysis is just cover for class politics favouring the upper class and the super-rich.

Compare Post-Keynesians:

Here’s a quote from Wynne Godley from 1995 from the article, A Critical Imbalance In U.S. Trade, The U.S. Balance Of Payments, International Indebtedness, And Economic Policy:

It is sometimes said that manufacturing has lost its importance and that countries in balance of payments difficulties should look to trade in services to put things right. However, while it is still true that manufacturing output has declined substantially as a share of GDP, the figures quoted above show that the share of manufacturing imports has risen substantially. The importance of manufacturing does not reside in the quantity of domestic output and employment it generates, still less in any intrinsic superiority that production of goods has over provision of services; it resides, rather, in the potential that manufactures have for expansion in international trade.

RIP, Lance Taylor

Lance Taylor has passed away.

Among other things, he promoted stock-flow consistent modeling. He had a book Reconstructing Macroeconomics.

I hold dear the review of Lance Taylor of Wynne Godley’s work, titled: A Foxy Hedgehog: Wynne Godley And Macroeconomic Modelling.

The article starts:

The fox knows many things, but the hedgehog knows one big thing (Archilochus, seventh century BCE).

Lance Taylor clearly understood the importance of accounting. In the paper A Simple Model Of Three Economies With Two Currencies, Wynne Godley and Marc Lavoie quote him:

As pointed out by Taylor (2004, p. 206), ‘the best way to attack a problem in economics is to make sure the accounting is right’.

Bibliography

Taylor, L. 2004. Exchange rate interderminacy in portfolio balance, Mundell–Fleming and
uncovered interest rate parity models, Cambridge Journal of Economics, vol. 28, no. 2, 205–27

Here’s the link to that Lance Taylor paper.

Wynne Godley’s Views About How The Economy Works

You may have noticed the expression (G + X)∕(θ + μ), where G is government expenditure, X is exports, θ is the tax rate, and μ is the propensity to import in stock-flow consistent (SFC) models.

In the book A Biographical Dictionary of Dissenting Economists, Wynne Godley (pages 232-240) says:

… As a result of this apprenticeship at the ‘sharp end’ of economic policymaking, I had formed by the late 1960s a system of views about how the economy works which corresponded roughly to what people now call ‘crude’ Keynesianism. That is, I thought real output and employment were determined by the exogenous variables of the model – government expenditure and exports – interacting sequentially through the combined effects of the multiplier and accelerator, while inflation was a largely contingent process (which, as stated by the OED, ‘may or may not happen’) only weakly related to the pressure of demand (1974a). But I recognized early on that performance in foreign trade was an abiding constraint on growth. In no sense did this set of views make me into a ‘dissenting’ economist. The same opinions were held by virtually all my colleagues in the Civil Service and, so far as I could discern, in comparable institutions in foreign countries. I had, for instance, no sense of any difference in Weltanschauung when discussing any aspect of economics with Arthur Okun.

(The entry seems to have been first published in the year 2000).

I thought if you’re writing on economics, you should say that frequently and especially when you’re introducing the subject to someone.

That the worldview was widely held seems surprising to me though.

Wynne Godley Vs. The Mundell-Fleming Model

In mainstream economics, the Mundell-Fleming model is central. It’s however wrong to the core!

As early as 1978, Wynne Godley in a paper “New Cambridge” Macroeconomics And Global Monetarism: Some Issues In The Conduct Of U.K. Economic Policy (with Martin Fetherston) had a model with the compensation thesis which is contrary to the neoclassical model. As per Marc Lavoie’s paper Wynne Godley’s Monetary Circuit, where he also refers to the paper, according to the compensation thesis:

central banks set a target interest rate and supply bank reserves and cash on demand. Thus, if there is an increase in the amount of foreign reserves held by the central bank on the asset side of its balance sheet, so as to keep the overnight interbank rate on target this will be compensated on the asset side of the balance sheet of the central bank by either a decrease in the size of the advances provided to domestic banks or a decrease in the amount of government securities held by the central bank. As a third possible compensatory mechanism, the central bank may instead issue central bank bills on its liability side.

Marc Lavoie and Wynne Godley, Levy Institute, 2002. Picture via Marc Lavoie’s site.

Some Wynne Godley Quotes On Planned Trade

There’s an interesting review of Jagdish Bhagwati’s book Protectionism published in the year 1988 by Wynne Godley in the journal Economica, year 1993. Without going into the review, I wanted to highlight how Wynne Godley’s views were quite similar to Nicholas Kaldor’s and Godley proposals such as planned trade and international cooperation of a new kind:

… Kaldor’s chapter, ‘The Foundations of Free Trade Theory and Their Implications for the Current World Recession’ (in E. Malinvaud and J. P. Fitoussi (eds.), Unemployment in Western Countries, 1980), which, in the context of a fundamental critique of the abstract theory of international trade, suggests that, because of the scope for dynamic economies of scale, free trade in manufactured goods leads to the concentration of manufacturing production in certain areas, what Kaldor called ‘a polarisation process’. ‘In principle such trade is of great practical benefit since specialisation between industries of different areas should enable the benefits of the economies of scale to be realised more fully. However … this … depends on the trade being balanced in both directions … But as past experience … has shown this does not come about naturally.’

These ideas were further developed in Kaldor’s 1981 article in Economie Appliquee, ‘The Role of Increasing Returns, Technical Progress and Cumulative Causation in the Theory of International Trade and Economic Growth’, where he related his concern about dynamic imbalances in trade to the ideas of Roy Harrod (himself a strong advocate of protection as a way of improving Britain’s economic performance throughout the postwar period), who had put forward the theory of the foreign trade multiplier in his International Economics (1933). As the trade imbalances constituted a growing threat to the continued expansion of the world economy, Kaldor concluded that we should not ‘stick to free trade (whatever the cost) but introduce a system of planned trade between the industrially developed countries on a multilateral basis’.

Also in an interview to the magazine Marxism Today in 1981, Wynne Godley says how he is openly opposed to free trade and the destructive aspect of it:

Let’s turn to some international questions. How do the problems of the UK economy — and your solutions to them — tie in with problems in the world economy?

Well, the general answer is that I don’t think that free trade is the best way of organising international trade. The classical theory of international trade, which appears in text books and which is extremely influential in peoples’ minds, is based on a postulate of full employment. If you assume full employment you can easily prove that free trade is mutually advantageous. But if you think, as I do, that full employment cannot be assumed, then it’s easy to make out a realistic case that free trade is extremely destructive to economies that are relatively unsuccessful. Instead of making them more prosperous and better-off, it destroys them. I think this is a general proposition; it applies to the United Kingdom at the moment because it’s a relatively unsuccessful country, and I think it is beginning to apply to the United States, which is also becoming a relatively unsuccessful country.

When you say that you think that the free trade system is a bad system, how do you think it should be changed? It’s easy enough to say Britain should have import controls, but how do you see this in international terms?

Well, the logical answer to the question which, as an academic, is what I am primarily called on to give, is quite clear to me. If all relatively unsuccessful countries protect in the way we suggest — using import controls to raise domestic output and not to strengthen their balance of payments — the system of protection can be generalised advantageously. But that assumes a high degree of international co-operation, and international co-operation of a new kind.

Marc Lavoie — Godley Versus Tobin On Monetary Matters

The fourth Godley-Tobin lecture was by Marc Lavoie on February 2021. The video of the talk is on YouTube.

There is now a paper by the same title published with ROKE (Review Of Keynesian Economics).

It’s interesting how James Tobin had a lot of things right but yet his model has a lot of neoclassical economics.

In the paper Marc Lavoie argues how Tobin seems to get a lot of things right but those were just weapons for criticisms of extreme views such as of Friedman. Tobin didn’t actually believe in them. Wynne Godley’s models are quite successful in escaping old ideas, if you remember the ending line of the preface of the GT.

John Maynard Keynes On Import Controls

I was rereading the article Keynes And The Management Of Real National Income And Expenditure by Wynne Godley from 1983 (page 157 in that book, footnote 20) and he reminds us of this letter from JMK published in The Collected Writings Of John Maynard Keynes, Volume XXVI, pages 287-289, that he thought that import controls work much better than movements in the exchange rates.

To J. M. FLEMING, 13 March 1944

Dear Fleming,

Your paper on quotas versus depreciation, sent me with your letter of February 14th, raises a very interesting question. But, for my own part, I am not one of the’ most economists’, to whom in paragraph 2 you attribute the view that disequilibrium ought, so far as possible, to be corrected by movements in the rate of exchange rather than by controls over commodity trade.

There is, first of all, to the contrary the simple-minded argument that, after all, restriction of imports does do the trick, whereas movements in the rate of exchange do not necessarily do so.