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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 15: The Operational Role of Functional Finance for Labor Market Behavior and Outcomes

Ingrid H. Rima


Ingrid H. Rima Before World War II, economists who concerned themselves with Ôlabor issuesÕ often identified themselves with that distinctively American approach known as Ôinstitutionalism.Õ With the economic malaise of the 1930s, their interests overlapped with those of macroeconomists like J.M. Keynes, Abba Lerner, Alvin Hansen, and Adolph Lowe, all of whom took the position that the functioning of the macroeconomy can and should be managed to protect society from the vagaries of the free market. After 1945, the postwar economy brought with it relative prosperity and other institutional and societal changes that fundamentally altered labor market behavior and outcomes, and, consequently, the ways in which economists defined the problems they would single out for study. Two societal changes stand out with respect to labor markets: the first is the perception of education as an investment in a future income stream; the second is the perception of labor force participation as an activity that is competitive with other uses of time, not only for males, but also for females. For economists trained in marginal analysis, these institutional developments were interpreted as offering an opportunity to pursue a new research agenda. Unfortunately, they also led most labor economists toward their present predominantly microeconomic orientation in which scant attention is paid to the interdependence of the behavioral decisions of firms and households or to their links to the macro economy. The latter is conventionally presumed to have strong tendencies toward labor markets that equilibrate at employment levels that provide jobs for all...

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