Functional finance is an economic theory proposed by
Abba P. Lerner
Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born American-British economist.
Biography
Born in Novoselytsia, Bessarabia, Russian Empire, Lerner grew up in a Jewish family, which ...
, based on
effective demand
In economics, effective demand (ED) in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not ...
principles and
chartalism.
It states that government should finance itself to meet explicit goals, such as taming the business cycle, achieving
full employment
Full employment is a situation in which there is no cyclical or deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may remain. Fo ...
, ensuring
growth
Growth may refer to:
Biology
* Auxology, the study of all aspects of human physical growth
* Bacterial growth
* Cell growth
* Growth hormone, a peptide hormone that stimulates growth
* Human development (biology)
* Plant growth
* Secondary growth ...
, and low
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reducti ...
.
Principles
The principal ideas behind functional finance can be summarized as:
[Edward J. Nell, Mathew Forstater, ''Reinventing functional finance: transformational growth and full employment'', , Edward Elgar Publishing 2003]
*Governments have to intervene in the national and global economy; these economies are not
self-regulating.
*The principal economic objective of the state should be to ensure a prosperous economy.
*Money is a creature of the state; it has to be managed.
*
Fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...
should be directed in light of its impact on the economy, and the budget should be managed accordingly, that is, 'balancing revenue and spending' is not important; prosperity is important.
*The amount and pace of
government spending
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...
should be set in light of the desired level of activity, and taxes should be levied for their economic impact, rather than to raise revenue.
*Principles of 'sound finance' apply to individuals. They make sense for individuals, households, businesses, and non-sovereign governments (such as cities and individual US states) but do not apply to the governments of
sovereign states
A sovereign state or sovereign country, is a political entity represented by one central government that has supreme legitimate authority over territory. International law defines sovereign states as having a permanent population, defined terri ...
, capable of issuing money.
Rules for fiscal policy
Lerner postulated that government's fiscal policy should be governed by three rules:
# The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
# By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
# If either of the first two rules conflicts with principles of 'sound finance' or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.
See also
*
Government success
Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the bene ...
*
Government failure
Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the bene ...
*
Market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
*
Modern Monetary Theory
Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox
*
*
*
*
*
* macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply o ...
Notes
References
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External links
Functional Finance: What, Why, and How? - a case for functional finance in most of the developed world (1999)Lerner, Abba: Functional Finance and the Federal Debt (1943)
Public economics
Unemployment
Keynesian economics