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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 4: Neisser’s Unorthodox Quantity Theory of Money

Hans-Michael Trautwein


4. NeisserÕs unorthodox quantity theory of money Hans-Michael Trautwein 1. INTRODUCTION When Hans Neisser came to America in 1933 to become a professor of monetary theory at the Wharton School in Philadelphia, his works in that field had already earned him an international reputation of high stature.1 His treatise on the value of money (Der Tauschwert des Geldes, 1928) was approvingly cited by Keynes, Hayek and other writers in those peak years of monetary theory. This is remarkable for several reasons. It was not only because they were written in German that NeisserÕs works were not an easy read.2 They also contained painstaking dissections of the effects of capital accumulation and technical progress on the circuit flow of money; and they were based on Irving FisherÕs formulations of the quantity theory of money. At first glance we might take these to be very orthodox approaches, and Neisser, in fact, never made any great claims to originality. Yet his methods and results were unorthodox, both for his time and from the vantage point of ours. The first unorthodox feature of NeisserÕs approach lies in the fact that he took recourse to the quantity theory. The hyperinflation in 1923 may have made many Germans believe that changes in price level were directly and equiproportionally caused by changes in the volume of money. Among monetary theorists in the German language area, however, the quantity theory was quite unpopular. Under the influences of KnappÕs chartalism, other types of nominalism...

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