There is a fine Wynne Godley article from the year 1984 titled Confusion In Economic Theory And Policy — Is There A Way Out? in the book After Stagflation: Alternative To Economic Decline, edited by John Cornwall, 1984, in which he discusses his worldview and how Keynesianism should work. In this he talks of how Keynesianism requires international coordination of not just fiscal policy but also management of international trade.

He starts off by how Keynesianism demand management works:

The policy makers of that era and those who advised them particularly in Britain and the United States came, generally speaking, to share a view, the authorship of which was correctly attributed to Keynes, that governments could, and therefore should, accept responsibility for ensuring real growth and full employment. And those same people also believed that the success, at that time, of the industrialized economies was the consequence of the implementation of Keynesian policies.

While the idea that governments can and should accept responsibility for maintaining full employment can be attributed to Keynes, the theoretical basis of the explicit or implicit models used in practice to underpin Keynesian policy advice was pretty crude. The essential points were as follows.

1. To obtain real growth and full employment it was necessary and sufficient to expand aggregate demand for goods and services. Governments could achieve this by expanding their own expenditure on goods and services or releasing disposable income by cutting taxation.
2. There might be a temporary constraint on the growth of real output imposed by shortage of physical or human capital. A constraint might also be imposed if exports did not rise sufficiently to pay for imports.
3. Subject to these constraints, fiscal policy could safely adopt full employment as a target while disregarding any imbalance in the Budget — that is, any excess of public spending measured in nominal terms over revenue receipts.
4. Monetary policy under this system of ideas did not matter much, the quantity of money itself being a residual number thrown up by everything else that happened which could safely be ignored. It was even the case through much of the post-war period that statistics relating to what are now called ‘monetary aggregates’ (the stock of money and various other financial assets) were not regularly available, if at all.¹

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NOTES

1. In other words people thought and built econometric models which were based on an ‘IS’ mechanism without any (operative) ‘LM’ process; if these models contained a representation of the financial system, that did not make any important differences to the solutions they generated.

And later:

…  I am prepared to assert that the macroeconomic theory on which policy was based in the successful post-war period was essentially correct after all.¹¹

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I do not for a moment accept that the post-war Keynesian consensus has been in any way confuted by events.

NOTES

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11. In the appendix I have attempted to set out rigorously, if briefly, why this is so, and how the confusion in Keynesian macroeconomics can be resolved and why the most important change which I have had to make in my views about macroeconomic policy has nothing to do with the theory of inflation as such, nor about monetary aggregates, ‘crowding out’ etc. It has to do with the importance of the proper inflation accounting of all national-income accounting concepts i.e. stocks as well as flows. It is (maybe?) slowly coming to be realized that, to be meaningful as a measure of fiscal stance, a budget deficit must be corrected for cyclical movements. It has still to be understood that public deficits, if they are to be measures of the determinants of real demand and output, must also be corrected for the erosion of the money value of the stock of government debt (including ‘inside’ money) from inflation.

Then Wynne Godley talks of how Keynesianism would need international coordination:

Even if I am correct in supposing that the post-war Keynesian system of ideas was a basically correct foundation for economic policy this does not, unfortunately, mean there is a simple solution to the problem of world recession by simply reverting to old ways. Even if my views about the key role of fiscal policy were generally accepted and monetary targeting were abandoned, the world economic situation has now gone so badly wrong that it would be very difficult to put things right again. To achieve sustained growth would require that countries cooperate with one another in an altogether new way, coordinating their plans as they have never done before.

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The conclusion must be that even if we could now coordinate fiscal policies to accommodate the fact that different countries are in different degrees of recession, I am quite sure that very large current-account imbalances would emerge. So we need not only to coordinate our fiscal policies, we also need to coordinate our trade policies and payments as well. Yet, under the present system of floating exchange rates, we have been deprived of the traditional means of making balance-of-payments adjustments. Paradoxically, by having floating exchange rates we have deprived ourselves of exchange rates as an instrument of economic policy.

In sum, I believe that there is no intrinsic reason why growth and full employment in the industrialized world should not be achieved by coordinated fiscal policies in combination with an appropriate configuration of exchange rates. The difficulties are first that action and cooperation along these lines are not at all what governments at present have on their agenda; second there does not at present exist a system of information and analysis which could form the basis for such a coordinated plan of action; third, even if exchange rates could be adjusted to satisfy the long-run conditions for equilibrium, the trade responses to currency adjustment are known to be very slow so there would be a long transitional period during which potential-deficit countries would have to suffer large increases in import prices (and therefore inflationary pressure) and cuts in real income.

I am, therefore, very doubtful if, even supposing that international cooperation was attempted, it could now really be successful without some form of international trade management. By trade management I do not mean protection in the sense ordinarily understood, i.e. a situation where individual countries unilaterally protect individual weak industries without international agreement and in a way unrelated to general macroeconomic management.

What I have in mind is that deficit countries adopt the kind of protection specifically catered for in the little read and, I believe, never used Article 12 of GATT which is specifically designed to make full employment possible in countries which would otherwise be subject to a general balance-of-payments constraint. The key point of such trade management would be, first, that it would be operated as a macroeconomic instrument, in harmony with fiscal policy, so as to ensure that the balance of payments would not be any more favourable than would otherwise be the case; in other words such protection would be used entirely to make possible higher domestic production reducing the import propensity without reducing total imports themselves below what they otherwise would be. Under such conditions the rest of the world does not suffer (its exports being, by assumption, fully maintained) and the recovery of output can be much more rapid and less inflationary.