Wynne Godley (1926-2010)

"Yet when, having produced a destructive critique of the neoclassical production function, [Sylos Labini] asks, 'When will economists finally accept their own logic?' I do believe he is not just sniping from the sidelines at the Neoclassical Paradigm (NCP), he is shaking at one of its foundation stones. For this reason my short answer to his question is 'Never' or at least 'Not until we have a new paradigm...' ...I am convinced that this concept of general equilibrium in a monetary economy [with markets for real product, the stock of money, labour, and the stock of bonds] constitutes the primal scene - the primitive imaginary vision of the world - out of which the whole of mainstream macroeconomics now flows. At one extreme are 'monetarists' of various hue who believe that the classical version of this simple model does, or should, or can somehow be made to describe the real world. Almost all other modern macroeconomists, while forming a huge spectrum, have as their essential activity the study what happens if parts of the machine do not function properly, e.g. are subject to rigidities or time lags. For instance, much work has been concerned with effects on the solution of this model if the various prices do not clear markets or clear them imperfectly. If wages are not flexible the labour market may not clear; this is what most students now understand as Keynesian economics. If the price of goods is not flexible, the market for goods may not clear, perhaps generating 'classical' unemployment. Now Sylos Labini (like Kaldor and Pasinetti in different ways) makes a devastasting case against the empirical relevance or even meaningfulness of the aggregate neoclassical production function. What I want to emphasize here is the system role which the production function fulfils and therefore just why the Sylos Labini critique is so important. What the production function does for all equilibrium systems - whether markets clear or not - is to bring labour into instantaneous equivalence with real product in such a way that alternative quantities of each can potentially be traded against one another. The production function is necessary for this equivalence so that labour can instantaneously be translated into the profit-maximising quantity of product which firms are therefore motivated to supply. Without the production function no neoclassical model will start up; the blood supply to its head is cut off... ...I have reached a point when I am prepared to make a declaration. I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is. In particular, I do not believe that there exists a market in which goods in aggregate and labour in aggregate can be exchanged for one another provided only that the price of each is right in relation to some given stock of 'money.'" -- Wynne Godley (1993) "Time, Increasing Returns and Institutions in Macroeconomics: Essays in Honour of Paolo Sylos Labini", in Market and Institutions in Economic Development (ed. by S. Biasco, A. Roncaglia and M. Salvati), St. Martin's Press.

Godley goes on in this paper to outline a stock-flow consistent macroeconomic model with both real and monetary sectors.