Prolegomena to Realistic Monetary Macroeconomics: A Theory of Intelligible Sequences

Wynne Godley, Marc Lavoie
2006 Social Science Research Network  
This paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, mark-up pricing, etc.) with a model of the financial system (comprising banks, loans, credit money, equities, etc.), together with a model of inflation. Central contentions of the paper are that, with trivial exceptions, there are no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation
more » ... ome, with inflation sometimes playing a key role in determining the outcome. The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself. This paper sets out a rigorous basis for the integration of Keynes-Kaleckian 1 macroeconomics (with constant or increasing returns to labor, multipliers, mark-up pricing, etc.) with a model of the financial system (comprising banks, loans, credit money, equities, etc.) together with a model of the inflationary process. 2 Mainstream macroeconomics (MM) is always based ultimately on some concept of equilibrium 3 with prices giving signals which either clear markets or (occasionally) fail to do so. A central contention of the paper will be that, with trivial exceptions, there are no equilibria (or disequilibria) outside financial markets 4 while the role of prices is to distribute the national income between wages, profits and creditors, with inflation sometimes playing a key role determining the outcome. Economies are organisms comprising interdependent activities which evolve sequentially through historical time in response to the circumstances in which they find themselves, and in accordance with the diverse motivations, constraints and resources of firms, governments, households, and banks. The model deployed here 5 describes a growing economy which does not spontaneously find a steady state let alone an equilibrium, even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. Almost all the individual ideas deployed in what follows have antecedents in the canonical post-Keynesian literature and most of this paper might seem to be little more than a partial summary of what has gone before. That would be to miss the methodological departure which is being outlined here. Frank Hahn once told Nicky Kaldor, with good will, that his work was "poetry," which we take to mean that it was not grounded in a rigorous and formal model of a complete system, capable of expression in a well-articulated mathematical model. We think that Hahn was right and that the same thing can be said of all the great pioneers of post-Keynesian thought. They were poets of the first order, with
doi:10.2139/ssrn.885340 fatcat:x7byjog7pjfspfki3eaml72ln4