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.

Chapter 2: Functional Finance, New Classical Economics and Great-Great Grandsons

David Colander

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


David Colander At sea Septr. 1944. My dear Lerner, Your book arrived in London whilst I was away at Bretton Woods. But now again I am on the sea for yet another visit to the USA, and the sea voyage has given me an opportunity to read it. It is a grand book worthy of oneÕs hopes of you. A most powerful piece of well organized analysis with high aesthetic qualities, though written more perhaps than you see yourself for the cognoscenti in the temple and not for those at the gate. Anyhow I prefer it for intellectual enjoyment to any recent attempts in this vein. In the second of the two books which you have placed within one cover, I have marked with particular satisfaction and profit three pairs of chapters Ð chap 20 and 21, chap 24 and 25, and chap 28 and 29. Here is the kernel of yourself. It is very original and grand stuff. I shall have to try when I get back to hold a seminar for the heads of the Treasury on Functional Finance. It will be very hard going Ð I think I shall ask them to let me hold a seminar of their sons instead, agreeing beforehand that, if I can convince the boys, they will take it from me that it is so!1 The above letter from John Maynard Keynes to Abba Lerner celebrating his book The Economics of Control (1944) contains the essence of my view of functional finance:...

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