What is Functional Finance?

by David Gerlitz on August 30, 2011

Functional Finance is a theory of economics developed in the 1950’s by Abba Lerner. Functional Finance states that the principle economic goal of the state should be a prosperous overall economy and presents a basic framework for achieving this objective.

First, the budget position of a nation should be solely determined by a desired level of economic activity within the economy, and not on a desired level of surplus or deficit.

In addition, principals of ‘sound finance’– meaning balancing the budget over the business cycle– will apply to households, firms, and states, but not to sovereign states which issue their own currency.

What is Functional Finance?

Therefore, the amount of government spending and taxing will be determined by a desired level of economic activity. Should there be a lower than desired level of activity, the government should increase spending or decrease taxes. Should there be a higher than desired level, then the government should decrease spending or increase taxes.

Additional Functional Finance Resources

Functional finance From Wikipedia
Functional Finance and Full Employment: Lessons from Lerner for Today
Functional Finance and the Federal Debt

For an alternative theory, see The Myth of Functional Finance: Mises vs. Lerner.

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