Functional Finance and Full Employment: Lessons from Lerner for Today

By Forstater, Mathew | Journal of Economic Issues, June 1999 | Go to article overview

Functional Finance and Full Employment: Lessons from Lerner for Today


Forstater, Mathew, Journal of Economic Issues


In this paper, I review seven important lessons to be learned from the work done by Abba Lerner some five decades ago.

Lesson 1: Full employment, price stability, and a decent standard of living for all are fundamental macroeconomic goals, and it is the responsibility of the state to promote their attainment.

Lerner rejected the positive/normative dichotomy in economics. His distinction between "objective" and "normative" was based not on whether one considers macroeconomic goals as part and parcel of their analysis, but whether one does so openly and honestly:

Objectivity turns out to be not the avoidance of concern with what is desired in a pure concentration on what is, but merely the avoidance of smuggling in an advocacy of desired objectives without making it clear that this is being done or making it clear whose are the desires being considered [1969, 131].

While respecting market forces, Lerner [1941] likened laissez faire to a refusal to take hold of the "economic steering wheel." Government must use its powers to "fill its two great responsibilities, the prevention of depression, and the maintenance of the value of money" [1947, 314].

Lerner's arguments for full employment are worth reviewing. First, "the economic gains from full employment are enormous" [1951, 31-32]. The costs of unemployment are staggering. These include the permanent loss of output of goods and services, but also the social costs resulting from increased crime, illness, and other social problems.

Full employment increases efficiency. By removing the threat imposed on workers by the existence of a reserve army of unemployed, workers will feel more confident to move out of one job and into another. This often means a movement from a lower productivity job to a higher productivity job [1951, 32].

Individual economic security is an even more important benefit than the increase in goods and services [1951, 33]. Though this means foremost individual economic security for workers, government commitment to full employment has an important stabilizing impact on business confidence, derived from the awareness that the state is committed to maintaining aggregate demand [1951, 33].

A full-employment policy can weaken racial and other discrimination in hiring [1951, 36]. There are incentives in an economic system characterized by general unemployment for workers to seek ways of "tying up the jobs they have so they cannot be easily fired" [1951, 34]. "The economic interest of a group of workers in protecting their scarce jobs against competition from outside," so often conducted through racial and other discrimination, would be significantly decreased with the elimination of job scarcity [1951, 36-37]. In addition, employers, who have the opportunity to indulge their own racial and other prejudices in hiring when there is widespread unemployment, would no longer be able to do so in a full-employment economy [1951, 36]. Full employment also helps to remove wage differentials, well-known to be highly related to race and gender [1951, 37].

Full employment is the key to social stability [1951, 37ff.]. Without employment and income security, citizens are vulnerable to dangerous ideologies, scapegoating, and anti-democratic political movements.

Full employment and the maintenance of the value of the currency are the key initial prerequisites for a decent standard of living for all. To leave such matters to the market would be like driving a car without using the steering wheel. Fortunately, people do not drive their cars without using the steering wheel:

But are they as reasonable about other things as they are about the desirability of steering their automobiles? . . . Do they not allow their economic automobiles to bounce from depression to inflation in wide and uncontrolled arcs? Through their failure to steer away from unemployment and idle factories are they not just as guilty of public injury and insecurity as the mad motorists . …

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