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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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Richard A. Musgrave and Robert L. Heilbroner


Richard A. Musgrave I have been asked to say a few words about my life in public finance, an addiction that by now has extended for over 70 years. Throughout I have drawn on three diverse traditions: German Finanzwissenschaft; British thought from Smith, to Mill to Pigou; and WicksellÕs and LindahlÕs Scandinavian model. When I came to the United States from Germany in 1933, I had already studied economics for three years in Munich and Heidelberg. The former was a city I chose in anticipation of opera and skiing and the latter was the site of a then recent renaissance in fiscal thought. The classical German Finanzwissenschaft of Stein and Wagner, with its emphasis on the state as decision maker, had reached its high point in the 1880s and 1890s but thereafter had gone dormant. At that time, that tradition was revived in HeidelbergÕs INSOSTA Institute. Gerhard ColmÕs work continued the Wagner tradition; Pfleiderer brought national income analysis into the picture; Sultan resumed Joseph SchumpeterÕs interest in fiscal sociology; and Ritschl related back to MŸllerÕs and SpannÕs very German concept of a romantic vision of community. So as a student in Germany I was well aware of the German public finance tradition. That tradition was not unfamiliar to earlier American authors, such as Adams and Seligman who had both studied in Germany, but it was quite alien to the English fiscal theorists from Smith on. Most important, English authors were unfamiliar with...

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