Chapter 19: The basic principles of functional finance
Many of our publicly minded men who have come to see that deficit spending actually works still oppose the permanent maintenance of prosperity because in their failure to see how it works they are easily frightened by fairy tales of terrible consequences. (Lerner, 1943: 38) Important aspects of MMT are derived from the work of economist Abba Lerner, who emphasised that the conduct and evaluation of economic policy should be intrinsically linked to the aim of advancing social purpose. As in Figure 18.2, economic policy cannot be assessed without regard to the functions it serves. Trying to assess whether the economic policy settings are ‘good’ or ‘bad’ in terms of whether the fiscal deficit is below or above 3 per cent of GDP is meaningless. In 1943, Abba Lerner provided a roadmap for governments aiming to eliminate ‘economic insecurity’ (Lerner, 1943: 38). The Second World War was raging and Lerner was worried about the ‘threat to democratic civilisation’ (p. 38) posed by Fascism. He wanted to understand how nations might resist falling prey to extremist ideologies, especially when it is clear that these extreme positions emerge when there is hardship and mass unemployment.
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