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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 11: Functional Finance and Full Employment: Lessons from Lerner for Today

Mathew Forstater


Mathew Forstater The United States economy was already headed for recession when the September 11, 2001 terrorist attacks occurred, worsening conditions in an already troubled global economy. The Asian financial crisis, with fallout in Latin America and the transition economies; the Russian default; continuing troubles in Japan; weaknesses in the structure of the new European EMU; volatility on Wall Street; deflationary pressures in the global economy Ð recent economic developments invite reconsideration of some of our most deeply held beliefs concerning economic theory and public policy. Even within the hallowed halls of mainstream economics, voices of dissent can be heard. Paul Krugman, Joseph Stiglitz and Jeffrey Sachs are among those whose recent proclamations mark our entry into a period in which orthodox views are openly questioned, creating an atmosphere characterized by a crisis of confidence. Such periods of impending crisis, and open expressions of self-doubt, question our most deeply held beliefs about the way the world works and create a climate in which the ideas of the great unorthodox thinkers of the past may be revisited. The work of those who in the past dedicated their lives to formulating solutions to the challenges of modern capitalist economies may contain lessons applicable to contemporary conditions. In this spirit, this chapter revisits the early works of Abba Lerner, outlining 15 such lessons regarding macroeconomic theory and policy that are as fresh in the context of the current scene as they were some five decades ago when first formulated. Lesson #1: Full employment, price...

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