Table of Contents

Reinventing Functional Finance

Reinventing Functional Finance

Transformational Growth and Full Employment

Edited by Edward J. Nell and Mathew Forstater

This ambitious book seeks both to revive and revise the idea of ‘functional finance’. Followers of this doctrine believe that government budgets should concentrate solely on their macroeconomic impact on the economy, rather than reflecting a concern for sound finance and budgetary discipline. Reinventing Functional Finance examines the origins of this idea and then considers it in a modern context. The authors explore the concept of NAIRU and argue that modern economies can operate at the level of full employment without provoking unmanageable inflation. They also contend that budget deficits do not have the deleterious effects commonly ascribed to them; the belief that they do rests on a misunderstanding of modern money. In this context, they highlight the relevance of Abba Lerner’s famous dictum, ‘money is a creature of the State’. The authors also debate the merits of various proposals for ‘Employer of Last Resort’ programs, which combine automatic stabilizers with the buffer stock principle.


Mathew Forstater

Subjects: economics and finance, financial economics and regulation, radical and feminist economics


In 1941, Professor Abba Lerner of the University of Kansas City (later the University of MissouriÐKansas City) laid out the principles that he believed should guide the governmentÕs budgetary policies. These principles, spelled out in his article, ÔThe Economic Steering Wheel,Õ which appeared in the University of Kansas City Review, were offered as an alternative to the orthodox principles of so-called Ôsound finance.Õ Lerner later moved to the New School for Social Research where he elaborated his ideas in ÔFunctional Finance and the Federal Debt,Õ published in 1943 in the New SchoolÕs Graduate Faculty journal, Social Research. The New SchoolÕs Program on Transformational Growth and Full Employment, under the direction of Edward J. Nell, Malcolm B. Smith Professor of Economics, has revived the tradition that Lerner began. Part of this revival, a conference on ÔFunctional Finance and Full Employment,Õ was held in the spring of 1998 at the New School, attracting economists from around the globe. The conference re-examined monetary and fiscal relationships Ð both in theory and policy Ð in the light of LernerÕs prescient principles. Among the participants were Harvard University Professors Richard Musgrave, the father of modern public finance, and James Duesenberry, best known for formulating the relative income hypothesis, an alternative to the permanent income and life-cycle theories of consumption. The late Robert Eisner of Northwestern University, former President of the American Economic Association, and the late Lynn Turgeon of Hofstra University both presented papers at the conference. This would be the last...