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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 3: Toward a New Instrumental Macroeconomics: Abba Lerner and Adolph Lowe on Economic Method, Theory, History and Policy

Mathew Forstater


Mathew Forstater This chapter argues that the ideas of Abba Lerner and Adolph Lowe contain overlapping and complementary insights and themes that may contribute to the development of a new approach to macroeconomics, and that have rather specific practical policy implications. This approach might be called Instrumental Macroeconomics, after LoweÕs instrumentalism, but it could be termed Functional Macroeconomics after LernerÕs functional finance without changing the intended meaning.1 Terminology aside, what is required today is a macroeconomics that considers macro policy goals at the ground level of theoretical practice Ð a political macroeconomics; a macroeconomics that recognizes that the system is dynamic and transformational, with major features changing over time Ð a historical macroeconomics; a macroeconomics that pays careful attention to institutional frameworks and arrangements Ð an institutional macroeconomics. What is required is a macroeconomics that, rid of neoclassical microfoundations, nevertheless considers sectoral as well as aggregate relations, technological change as well as monetary production Ð a structural macroeconomics that avoids the unacceptable mechanisms of aggregate models that bypass the complexities of human agency through their insertion of unacceptable motivational and behavioral assumptions. The works of Lerner and Lowe serve as an interesting point of departure in thinking about such a new approach to macro theory and policy. While there are important areas of overlap in their work and thought, Lerner and Lowe diverge in their emphases, but, it shall be argued, in ways that are strikingly complementary. LernerÕs functional finance deals with aggregate proportionality and balance, while much of LoweÕs...

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