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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 5: Functional Finance, Past and Present

Perry Mehrling


Perry Mehrling FUNCTIONAL FOR WHAT? Abba Lerner coined the phrase Ôfunctional financeÕ as a label for his proposal to stabilize business fluctuation at full employment by allowing the government deficit, and hence the government debt, to fluctuate as needed in order to stabilize aggregate demand. At the time he wrote, the problem of stabilization was uppermost in everyoneÕs mind, and Lerner was one among many who were thinking about how to make use of the apparatus of government finance to address, and maybe even solve, the problem. In retrospect and in prospect, the apparatus of government finance is a powerful tool that has been and could be used to address any number of pressing social problems. The problem of stabilization is just one of many, and not always the most important. The answer to the question whether government finance is functional or not turns on the answer to the prior question of what problem we are trying to solve. What is functional at one time and place may well not be functional in another time and place. What seems functional to one group of people may not seem functional to another group. Functional finance is both an historical and a political question before it is a technical one. IN RETROSPECT: ALVIN HANSEN Alvin HansenÕs thinking about what is the most functional use of government finance went through three successive stages: social insurance for spreading the costs of a dynamic economy; investment banker for jump-starting an economy suffering from...

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