Important Figures in the Development of MMT: Economist Wynne Godley, Pioneer of Stock-Flow Consistent Modelling and Populariser of Sectoral Balance Insights
Wynne Godley's work on SFC modelling and sectoral balances provided an essential toolset for Modern Monetary Theory MMT academics as a way to analyse and understand financial flows within the economy.
British economist Wynne Godley (1926–2010) is known for developing the stock-flow consistent (SFC) model and for his insights into the sectoral balances approach (i.e. the financial balances of the government, private and foreign sectors must always sum to zero). The SFC model provides a financial framework for tracking how money and assets move between different parts of the economy.
Stocks and Flows – What Are They?
'Stocks' refer to the amount of assets or liabilities held at a particular point in time. 'Flows' represent the changes in these quantities over a particular period of time. An example of stocks would be the amount of money in your bank account at the end of a particular year. The 'flows' would be the deposits and withdrawals you made during that year.
What Does Godley’s SFC model Tell Us?
Godley’s SFC model reveals the simple logic that if one person or organisation spends money then another person or organisation must receive that money. For example, in 2023 the UK Government spent £1,157.3 billion. Using the SFC model we can confidently predict that the total income of those who received the money will be £1,157.3 billion. We can of course, burrow down into the detail to find out which individuals or organisations received the cash. But, no matter how often we count up how much each of them received - it always comes up the same as the amount spent.
That may not sound terribly revolutionary—because it’s just simple logic—but consider this: most economic commentary on government spending focus only on the spending side of the equation, completely ignoring the income it generates. Most commentators also fail to account for where that income goes: it flows into the non-government sector. In practice that means (certainly in the UK and US), primarily the private sector.
The private sector—that’s where we are. The government’s debt is our surplus. When the government spends, that money ends up in our pockets: as workers in the firms commissioned to provide services, as workers building the country’s infrastructure, as staff in the health service, as pensioners collecting pensions. That money ends up in our savings accounts (if we have one). That money also gets invested to allow businesses to grow.
If there’s no government ‘debt,’ there’s no private sector surplus. Government debt is not our debt and not ‘a debt left for our children to pay’ as the popular neoliberals phrase goes. (Note, that the foreign sector is also part of the non-government sector. However, in the UK and US, financially speaking, it is a relatively small part of the overall pie.)
So, the phrase ‘the national debt’ makes little sense. When politicians, economists and commentators use the phrase ‘the national debt,’ they are referring to the (net) amount of government spending, i.e. what’s spent minus income from taxes and other sources, while ignoring where that spending went. Why say the nation is in debt when only referring to the government sector?
Note, that I’m using the word debt in the accounting sense: we must not forget that currency issuing governments can never run out of their own currency. What does the popular meaning of the word debt mean in such a scenario?
A Pocket Full of Tenners (£10 Notes)
Concentrating solely on the ‘national debt’ is comparable to me saying that my jacket is in debt if I take £10 out of my left pocket and put it into my right pocket. Somehow neglecting the fact that the pockets are on the same jacket. Similarly, the nation consists of both the government sector and the non-government sector: ignoring the sectors receiving that spending - makes little sense.
The SFC model tells us that the government spending and the non-government sector income are equal. So, if politicians, orthodox economists and journalists insist on using the word debt for one side of the equation they must also insist on using the word income for the other. Otherwise, as Stephanie Kelton points out in her book, ‘The Deficit Myth’, they are missing half of the story and potentially misleading their audience.
The Stock-Flow Consistency Model and Sectoral Balances
The stock-flow consistent (SFC) model is closely related to the concept of sector balances. Sectoral balances is an approach that tracks the flows of money and assets between different sectors of the economy—government, private (households, businesses) and the foreign sector. In a sectoral balances approach the economy is viewed as a closed system in which one sector’s surplus (savings) is necessarily offset by another sector’s deficit (debt).
The Government, Private and Foreign Sector Balances Must Sum to Zero
Wynne Godley popularised the insight that the financial balances of the government sector, private sector and foreign sector must sum to zero. This is based on the principle outlined above: if there’s a surplus in one sector there must be a deficit in another.
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Wynne Godley and Modern Monetary Theory (MMT)
Wynne Godley did not see himself as an MMT economist. However, his work on SFC modelling and sectoral balances has provided an essential toolset for MMT academics as a way to analyse and understand financial flows within the economy.
His work on the SFC model and his insights into sectoral balances were groundbreaking. By making clear the logical connection between government deficits and private sector surpluses, Godley provided a framework that aligns closely with MMT’s core principles, particularly MMT’s emphasis on the way sovereign currency-issuing governments can or should view their fiscal power.
“Modern Monetary Theory is, in part, based on the work of Wynne Godley. Godley, who died in 2010, was a senior economist in the UK Treasury, and later the Head of the Department of Applied Economics at the University of Cambridge. After his research budget was cut by the Thatcher Government, he later moved to the Levy Institute in NY, founded by Hyman Minsky, which is now a centre for MMT-related research. He wrote what has become a 'bible' of advanced MMT economics - if you have a thirst for t...echnical economics, let me know, and I'll tell you about it. He also wrote - in 1992!!!! - a magazine article, outlining what a single European currency as then proposed would mean, and why it would fail (or at least prolong depressions). It is easy to read, and like reading a prophecy.” Economist Steven Hail.
Fiscal policy and macroeconomic stability
Wynne Godley’s work shows how fiscal policy and macroeconomic stability are connected. He demonstrated that government deficits directly affect private sector savings and overall demand. His sectoral balances approach makes it clear that fiscal policy plays a crucial role in stabilising the economy, supporting private sector surpluses and preventing recessions.
His insights remain central to MMT’s advocacy for functional finance and the use of fiscal policy to achieve full employment and economic resilience.
About Wynne Godley: Economist, Musician, Model
Born in London, the son of Lord Kilbracken, an Anglo-Irish, second generation peer, Godley was an unconventional figure. In his early life he was both a student at Oxford, where he studied philosophy, politics, and economics and a student at the Paris Conservatoire de Musique - where I presume he studied the Obo. As later, he became the principal oboist at the BBC Welsh Orchestra.
His appreciation for music and the arts remained a central part of his life: he was a director of the Royal Opera House and continued to play the Obo throughout his life. In 1958 Godley was the model for a bronze sculpture by the artist Jacob Epstein called, St Michael's Victory over the Devil. The sculpture is located in Coventry Cathedral.
His early career included work at the UK Treasury, in the area of public finance and macroeconomic policy.
He later became an academic at Cambridge University, focusing on macroeconomics. It was while working as a professor at Cambridge University (where he was appointed as director of the Department of Applied Economics) that he developed his stock-flow consistent (SFC) models. His publications include his textbook ‘Macroeconomics’ (1983 with Francis Cripps) and his 2007 book Monetary Economics: An Integrated Approach to Credit, Money, Income, Production, and Wealth (with Marc Lavoie).
In his obituary in the Times of London (May 2010), he was described as “the warmest of men and the greatest of economists…during his Treasury years, he was hugely influential, and officials still acknowledge his lasting contribution.”
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Thanks,
Jim
can anybody say what policy is advocated by MMT adherence?