Definition of functional finance

What is functional finance?

Functional finance is a heterodox or unorthodox macroeconomic theory developed by the Russian-born, British-raised economist Abba Lerner during World War II, which seeks to eliminate economic insecurity (that is, the business cycle) through intervention of government in the economy.

Key takeaways

  • Functional finance is a macroeconomic theory developed by economist Abba Lerner during World War II that promotes government intervention in the economy.
  • Functional finance promotes deficit spending to reduce unemployment, controlling consumer spending through fiscal policy, and controlling interest rates, inflation, and cash flow through the economy.
  • Lerner was a Russian-born and British-raised scholar, teacher, follower, and interpreter of famed economist John Maynard Keynes.
  • Keynes was an advocate of government intervention to create an optimal economic environment.

Understanding functional finance

Functional finance emphasizes the result of interventionist policies in the economy. Actively promotes deficit spending as an effective way to reduce unemployment. The theory holds that the government’s priority should be to balance supply and demand at full employment, rather than trying to balance the budget.

Theory of functional finance

Functional finance is based on three main beliefs:

  1. The role of the government is to prevent inflation and unemployment by controlling consumer spending by raising and lowering taxes.
  2. The purpose of government loans and loans is to control interest rates, investment levels, and inflation.
  3. The government should print, accumulate, or destroy money as it sees fit to achieve these goals.

Functional finance actively promotes deficit public spending as an effective way to reduce unemployment.

Special Considerations

Functional finance also says that the sole purpose of taxes is to control consumer spending because the government can pay its expenses and debts by printing money. Furthermore, Lerner’s theory does not believe that governments need to balance their budgets.

Abba lerner

Lerner earned a BA in economics from the London School of Economics in 1932 and was an instructor there for four years. Subsequently, he attended Cambridge University, where he studied “The General Theory of Employment, Interest, and Money” by John Maynard Keynes (1936).

The impact of Keynes

Lerner was a follower of the extremely influential economist and helped develop and popularize some of his ideas. Keynesian economics adopted the concept that optimal economic performance could be achieved through the use of policies of economic intervention by the government to influence aggregate demand. It is considered a theory on the demand side.

Lerner’s work

Lerner tried to explain the correlation between high employment rates and inflation. He also invented a strategy for measuring the power of monopolies that became known as the Lerner index. He was receptive to socialist arguments for much of his life and championed planned economies, as demonstrated in his 1944 book, “The Control Economy: Principles of Welfare Economics.”

In his lifetime, he taught at various American universities, including Columbia and the University of California, Berkeley, and finished his teaching career at Florida State University. He died in Tallahassee, Florida in 1982 at the age of 78.

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Mark Holland

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