Good read here from today’s NY Times. The article discusses Wynne Godley’s approach to economics and his use of modelling through understanding double entry bookkeeping and sectoral balances. Godley was one of the first economists to predict the flaws in the Euro and although he was known as a permabear, his analysis leading up to the Nasdaq bubble and the Great Financial Crisis were dead on. Godley adhered to an approach that I have referred to as stylized facts. In other words, he relied on things we could prove and model through actual accounting rather than theoretical equations and economic models based in large part on hypothetical views. Godley has been central in the understandings that formulate Monetary Realism.
Here’s a brief snippet:
“Marc Lavoie of the University of Ottawa collaborated with Mr. Godley to write “Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth” in 2006, which turned out to be the most complete account he would publish of his modeling approach.
In mainstream economic models, individuals are supposed to optimize the trade-off between consuming today versus saving for the future, among other things. To do so, they must live in a remarkably predictable world.
Mr. Godley did not see how such optimization is conceivable. There are simply too many unknowns, he theorized.
Instead, Mr. Godley built his economic model around the idea that sectors — households, production firms, banks, the government — largely follow rules of thumb.”
Read the full story here.