Written by John Lounsbury
Abba Lerner (1903-1982) was not considered a dominant figure in American economics for much of his career although he collaborated and exchanged ideas with many more famous economists of his time. He studied under Friedrich Hayek at the London School of Economics, spent a short period of time at Cambridge when John Maynard Keynes was there and both collaborated and debated with Milton Friedman. Early in his career he was intrigued by market socialism but in the 1950s left much of the socialism behind. He ended up as a friend of both Milton Friedman and Barry Goldwater.
In the 1940s and 1950s Lerner developed an early version of NAIRU which came later to be associated with Edmund Phelps and Friedman and also the theory of Functional Finance, which has close ties to the MMT (Modern Monetary Theory) of today. In this post we have his essay from Selected Economic Writings of Abba P. Lerner (New York University series in selected economic writings) edited by David C. Colander. The book is out of print but used copies are available from time to time at Amazon.com. The copy for which images have been made for this post came from the University of Missouri Kansas City library (http://k.web.umkc.edu/keltons/Papers/501/functional%20finance.pdf).
Before we start the actual text, here is an altogether too short summary of the main topics of Lerner’s Functional Finance:
- The first financial responsibility of government is to keep the total rate of spending in the country on goods and services equal to that needed to buy all the goods that it is possible to produce.
- The government should only borrow money if it is desirable for the public to have less money and more government bonds. (Econintersect: Think of this as removing money from consumption and investment and increasing money in private savings.)
- The printing of money should take place only when it is needed to increase spending and lending or when needed to retire government debt.
- Unemployment and inflation are controlled by government spending (reduce unemployment) and increased taxation (reduce inflation).
The above brief list leaves out much of the detail in Functional Finance which can be understood by reading the following.
A 2006 rebuttal was written in 2006 by D.W. Mackenzie, Ludwig von Mises Institute: The Myth of Functional Finance: Mises vs. Lerner