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 17: Short-run Macroeconomic Stabilization by an Employer of Last Resort

Edward J. Nell

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


Edward J. Nell In contrast to supply-side dogma, modern economies appear to be subject to strong fluctuations in demand. This at any rate will be our premise. Moreover, there do not appear to be, in the modern world, any strong, market-based forces leading to stability. So there is a need for stabilization policies. Investment spending appears to be a major source of demand variation. Yet if the purpose of investment were simply to be a corrective Ð moving the actual capital/labor ratio to its optimal level Ð stabilization would hardly be needed. Such a long-run position would be stationary, or, if the labor force were growing, the economy would expand uniformly. This is the picture presented by neoclassical theory, articulated, for example, by Hayek (1941). But both Keynes and the older classicals, especially Ricardo and Marx, offer a different view: investment is the accumulation of capital, a process by which productive power is created, organized and managed. Driven by the desire for power and wealth, there is no definable ÔoptimumÕ investment. Investment expands productive power but does not move the economy towards any definite destination. Given such motivation and the important role of technological innovation, the urge to invest will sometimes be strong and widespread, but at other times weak and uncertain. This may help to explain the need for stabilizing policies that arise from the demand side. In postwar mass production economies (Nell, 1998a), constant returns appear to prevail in the short run; to put it differently, unit costs are broadly...

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