Wynne Godley’s monetary circuit

Abstract

This article outlines the main points of full agreement between Wynne Godley and I. These explain why we managed to complete the task of writing our book Monetary Economics. The main points are the following: we had an identical conception of pricing procedures and the lack of impact of demand on prices relative to normal unit costs; we both had identified the compensation thesis in our previous work, that is, the belief that balance-of-payment surpluses have no impact on the stock of high-powered money in an economy set in a fixed-exchange-rate regime, in contrast to the Mundell–Fleming model; we both held very similar views about the endogeneity of the money supply and the essential role of banks versus the rest of the financial institutions; and finally, we both held a view of the monetary production economy that was in line with that presented by French circuit theorists and Augusto Graziani. This last point is developed in more detail, as it is pointed out that a number of scholars now combine the stock-flow consistent approach of Godley with the theory of the monetary circuit.

Keywords:

• Compensation thesis
• endogenous money
• monetary theory of production
• theory of the monetary circuit
• Wynne Godley

Notes

1 How I got to meet Wynne for the first time in 1999 is recalled in the preface of Godley and Lavoie (2007, xli).

2 By the way, all the models can be found on the website of Gennaro Zezza devoted to stock-flow consistent modeling.

3 I am endowed for this insight to Ramanan, who by the way was also present at the conference in honor of Wynne Godley that was held at the Levy Economics Institute back in 2011. See his instructive website https://www.concertedaction.com/

4 Riboud was an engineer and businessman, deeply interested in monetary matters.

5 Graziani (1984) when discussing Keynes’s finance motive, referred to initial financement and final financement, which in French would be called placement. Davidson (1982, 48, 49) used the terms construction finance and investment funding. More recently Borio and Disyatat (2011) made the distinction between financing and saving.

6 Godley (1993) mentions Graziani (1989b) among his inspiring authors, along with Hicks, Kaldor and Tobin, while Godley (1999b, 404) uses the work of Graziani (1990) and refers to the book of Deleplace and Nell (1996), which combined post-Keynesian economics and the theory of the monetary circuit. In turn, Graziani (1989b, 1990, 2003) refers to Godley and Cripps (1983), and Graziani (2003) cites Godley (1993). I have linked up the theory of the monetary circuit and Godley’s stock-flow consistent approach in Lavoie (2004).

7 This article was among the eight papers which Wynne felt were his most important contributions. See Lavoie and Zezza (2012).

8 One clear point of disagreement between Graziani and Godley would be over the determination of consumer prices. Both authors agreed that a price could be divided into three components (wages, entrepreneurial profit and interest payments). However, for Godley, as already indicated, prices depend on a cost-plus procedure which is unaffected by demand, while Graziani, like Minsky, formalized consumer prices as a mechanism to equilibrate demand to (an implicitly fixed) supply. For more details, see Seccareccia (2014).

9 These authors have thus picked up the challenge set by Taylor (2008, 644) in his book review, who thought that: “If SFC modelling is to thrive in the future, its practitioners will have to grapple with how to extend the work of Monetary Economics to deal with contemporary finance, or whatever may emerge as the system contracts back toward the teetering banks.”