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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.
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Chapter 1: Transformational Growth and Functional Finance

Edward J. Nell


Edward J. Nell ÔThere is no such thing as Society,Õ said Margaret Thatcher, Ôthere are only individuals.Õ Margaret Thatcher seems to have captured the perspective of modern macroeconomics. Whether ÔNew KeynesianÕ or ÔNew Classical,Õ everything can be reduced to the actions of individuals. Macro is simply micro, aggregated. Or further, macro is micro writ large Ð the working of the economy can be examined by looking at the (rational) actions of a representative agent. (Or the agentÕs limited but almost rational behavior in imperfect circumstances.) Macro is based, then, on microfoundations. These may take the form of a neoWalrasian general equilibrium, or a ÔpartialÕ version may be considered adequate. The markets may be perfect or imperfect, but the focus is on how rational, or nearly rational, agents in them interact. Such ÔfoundationsÕ are timeless. Agents are (nearly) rational and generally well-informed; their preferences are clear and consistent, and they are endowed with given supplies of factors, including labor, which they allocate optimally to producing goods, which they exchange Ð also optimally Ð in more or less competitive barter trades. Whether in ancient Egypt or modern America, this is the way the world works. But this is not how the early developers of the macro approach saw it. For them, macro was about the way the system adjusted, where ÔsystemÕ referred to the interaction of business firms, banks, labor and government. They studied a system of interacting institutions that developed and changed over time. The short-term problem was to analyze the forces determining...

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