Transformational Growth and Full Employment
Edited by Edward J. Nell and Mathew Forstater
Chapter 5: Functional Finance, Past and Present
5. Functional finance, past and present 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...
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