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Wynne Godley pp 135-150 | Cite as

Sector Balances and ‘New Cambridge’

  • Alan Shipman
Chapter

Abstract

Although instantly dismissed by the theorists at Cambridge’s Economic Faculty, who regard him as a mere technician and ‘conjuncturist’, Godley starts a serious search for analytical foundations for his macroeconomic intuitions. He finds them in the ‘sector balance’ idea, a simple accounting identity for the whole economy, which shows that the government deficit (or surplus) plus the private-sector deficit (or surplus) must be exactly matched by the current-account deficit (or surplus). Kaldor had shelved his use of the concept, despite sensing its importance, due to lack of immediate linkage to causal theories. Godley sees a way to provide these, by identifying stable longer-run stock-flow ratios and the associated household and firm behaviour. Applying the identity, the CEPG finds a link between the current-account deficit and the fiscal deficit, due to an apparent stability in private-sector asset holding. This ‘New Cambridge’ approach causes a very public argument with other Cambridge Keynesians, who view it as incorrectly rejecting the use of fiscal policy.

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Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Alan Shipman
    • 1
  1. 1.Department of EconomicsThe Open UniversityMilton KeynesUK

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