Functional Finance

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= Functional finance is an economic theory proposed by Abba P. Lerner, based on effective demand principle and chartalism. It states that government should finance itself to meet explicit goals, such as taming the business cycle, achieving full employment, ensuring growth and low inflation. [1]


"Functional Finance is an economic theory based on the following principles:

  • The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector – NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace’s rejection of that government.

  • Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary. But ultimately, it must be the private sector that is the driver of economic growth. While government can aid in this process it cannot be expected to be the primary driver of innovation, productivity and growth.

  • Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces. Government by the people and for the people is not the antagonist in this story, but rather an entity that should be best utilized to maximize private sector prosperity.

  • Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity, productivity, innovation and growth."


Difference with Modern Monetary Theory

Tadit Anderson:

"The difference is more a matter of history and focus, because generally speaking they are integrated. MMT is derived from J. M. Keynes's later work related to money as an institution and as related to his advocacy of macro-economics. Functional Finance is based upon work of Abba Lerner (the New School for Social research through the 1960s and 1970s plus) others. It is based upon the experience with deficit based government spending during the "Great Depression/FDR's New Deal and into the transition after US Pres Nixon "closed" the Gold "window" on the redemption of US Dollars into gold in 1971. It is functional in the sense of how monetary and fiscal policy works relative to its outcomes. MMT includes substantial historical research into the history of the origin and issuance of money. Functional finance is more about the effects of the macroeconomics of Keynes and related people."

The Private/Public Distinction in FF

Tadit Anderson:

"It would be useful to make a distinction between public and private differently. I tend to break down the word "economics" ( oikos-nomia ) using oikos/eco- as community or place where we live, or even "commons," appended with nomia as management. The "economics" we have now as the convention (neo-classical) is generally dismissive of this sort of perspective, and as you full well know it tends to be oligarchic/plutocratic at its root. This comparison requires, I believe, the additional distinction between consumption and participation for common subsistence and personal consumption, and contrasted with the abuse of the commons to extract wealth either directly or indirectly well beyond the personal and communal pursuit of well being and health. Fiscal policies that favor private income for general personal needs of shelter, food, transportation, health, and such is a positive process. Favoring wealth accumulation well beyond those personal and private need to advance private wealth accumulation should be liminted when it is at the expense of public support of personal needs ends up being a variety of exploitations. To leave the distinction as only between public and private seems to import a slice of the neo-classical model, which support a variety of class prejudice against the interests of citizens in the economy as a public commons. By intent the public sphere under the FF model would be the means of stewarding public interests, including the basic needs, and also physical and social infrastructure. By way of supporting infra-structure and ongoing innovations, governance could also serve to be a locus for innovation/R and D as it has been supported in many sovereign contexts."

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