Reinventing Functional Finance: Transformational Growth and Full Employment

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Reinventing functional finance: Transformational growth and full employment. Edited by Edward J. NELL and Mathew FORSTATER. Cheltenham/Northampton, MA, Edward Elgar, 2003. xiv + 347 pp. ISBN 1-84376-1114.

This volume is the outcome of a conference on "Functional Finance and Full Employment", held at the New School for Social Research, New York, in the spring of 1998, in an effort to revive Abba P. Lerner's lifelong effort to develop an alternative to the orthodox "sound finance" view of monetary and fiscal policies. Nell and Forstater have put together a set of thought-provoking papers that examine Lerner's functional finance theory, linking it to transformational growth, full employment, price stability, labour market dynamics, as well as fiscal and monetary policies. Reinventing functional finance at this conference in 1998 was an attempt to counter the increasing enthusiasm in the United States for balancing the Government's budget or even for running surpluses to pay off the national debt.

The conference was an unusual gathering of younger heterodox economists together with some of the major figures in 20th century economics in the United States, such as Richard Musgrave (Harvard University), the father of modern public finance, James Duesenberry (Harvard University), originator of the relative income hypothesis, Robert Eisner (Northwestern University), known for his pioneering work on budgetary policy and social security, and Robert Heilbroner (New School for Social Research).1 This occasion also marked the last public appearance of Robert Eisner and Lynn Turgeon, both of whom passed away shortly after the conference.

The book is organized in six parts. In the introductory part, Heilbroner, Musgrave, and Nell set the stage for the broader discussion to follow. Nell rejects the Walrasian argument that the macro economy adjusts through a price mechanism. Indeed, he argues that the economy has no self-regulating features, "except in the government budget!". Nell points out that sound finance and balanced budgets were appropriate for the craft economy, and that functional finance is appropriate for the economy of mass production and big government. Musgrave adds that "placing the active use of fiscal policy in cold storage involves a lost instrument and 'paying off the debt' is not the ultimate goal".

Part two sets the historical background of the functional finance approach. David Colander shows that it was Lerner's functional finance approach to fiscal policy that accompanied the Keynesian revolution in economics textbooks. This approach was attacked in the 1970s, and virtually disappeared after the advent of New Classical and New Keynesian economics. Colander claims that functional finance is consistent with multiple-equilibria models and rational expectations. It is in this sense that Colander sees the potential resurrection and development of functional finance. Forstater points to similarities and complementarities between Lerner's functional finance and Adolph Lowe's instrumentalism. He argues that a synthesis of their work "provides a framework for incorporating both monetary production and structural and technological change, and for analyzing both Keynesian and technological unemployment".

Hans-Michael Trautwein presents Hans Neisser's unorthodox quantity theory of money, making the case for activist government policies and showing the relationship between technological change and unemployment. Perry Mehrling looks at functional finance in the light of Alvin Hansen's views on the government role to provide social insurance, jump-start the stagnating economy, and act as a "balance wheel" to stabilize the economy over the business cycle. This leads Mehrling to address the role of functional finance in the present crisis of the welfare state.

Part three addresses the inflationary limitation of functional finance and countercyclical fiscal policy. Eisner demonstrates the empirical invalidity of the conventional belief in the relationship between unemployment and inflation. …