Lerner on Functional Finance

After yesterday’s Keynes quote, I thought I’d follow it up with one from the late economist Abba Lerner. The quote is about ‘functional finance’ that he developed. I’ve blogged about functional finance before here. Here’s the quote:

“The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine what is sound and what is unsound …Government should adjust its rates of expenditure and taxation such that total spending is neither more or less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is deficit, greater borrowing, “printing money,” etc., then these things in themselves are neither good or bad, they are simply the means to the desired ends of full employment and price stability.”  (Lerner, 1943. From “Functional Finance and the Federal Debt”, taken from here)

This is kind of what I was referring to in this blog post. It’s the idea that governments today are pursuing all the wrong goals while ignoring the ones that really matter.

Lerner was a contemporary of Keynes and they corresponded in the 40s. There is some evidence that after initially disagreeing with Lerner, Keynes came to accept the logic of functional finance. For an interesting discussion of this, see here. I think we can learn a lot from Lerner’s ideas, and functional finance was built upon by economists from the branch of economics known as Modern Monetary Theory, of which I am a fan. Check out some of the links on the right hand side bar for more about MMT.


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