Functional finance and functional macroeconomics : a post-Keynesian perspective

A central theme emerging from Lerner's system of functional finance is that, contrary to the 'sound finance' dogma, the capacity of governments to spend is not constrained by their ability to collect tax revenue or by the willingness of the private sector to hold government securities. Ultimately, the capacity of governments to spend is constrained only by the willingness of the private sector to exchange fiat money issued by the government in return for goods and services, and by the productive capacity of the economy to absorb the increased effective demand flowing from the fiscal policy actions. However, the achievement of the objective of functional finance, full employment accompanied by price stability, requires a range of policies that extend well beyond discretionary fiscal policy. In the absence of such polices, full employment and price stability remain incompatible bedfellows even within the conducive setting presented by the principles of functional finance. Opposition to the principles of functional finance is shown to rest mainly on ideological foundations, rather than on an appeal to orthodox macroeconomic theory.