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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 13: Interest Rates, Profits and Economic Growth

John Smithin


John Smithin INTRODUCTION The purpose of this chapter is to present a simple macroeconomic model that emphasizes the interaction of the (real) interest rate, the Ôrate of profitÕ,1 autonomous demand, and the rate of growth of real GDP. The significance of similar interrelationships for economic performance under capitalism has been stressed, in particular, by Edward J. Nell (1998) in the context of the theory of transformational growth. The analysis here shares this general perspective, while offering different hypotheses about some of the causal relationships. The model developed here is a revised and up-dated version of earlier constructs put forward in Smithin (1994, 1997). The revision deals specifically with the role of expected aggregate demand, and the functional distribution of income, in the growth process. As in traditional Keynesian models, demand growth is an important determinant of economic growth. Also, interest rates (the return to financial capital) and profits (the return to industrial capital) impact on growth rates in various ways. The results are intended to provide insight into certain aspects of the political economy of a capitalist-type economic system. PRODUCTION, THE SUPPLY OF OUTPUT, AND THE FUNCTIONAL DISTRIBUTION OF INCOME Let the relationship between aggregate output, Y(t), and aggregate labor input, N(t), be as follows: Y(t) = A(t)N(t) (13.1) where A(t) is average labor productivity. However the basic premise is to be a model of capitalist Ômonetary production,Õ and hence it is important to recognize the inevitable lapse of time between the planning...

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