Two books (the General Theory and the Road to Serfdom) and two clubs (the Mont Pelerin Society and the Keynesian network) broke economists up into hostile camps. The consequences of dysfunctional discretion (stagflation) completed the process. Why was Hayek selling the Keynesian aggregate circular flow model to the US?  Presumably, he was displaying an open-mindedness to novel stabilisation proposals (including the analysis of inflationary expectations) before the rift became ossified.  (Hayek's correpondence with McCord Wright and Meade is instructive). 

Phillips immediately began to develop rules-based policy recommendations based on the Machine: rules that were designed to eliminate the type of discretion which Mont Pelerin Society members like Arthur Burns were pushed into exploiting to ignite the worst inflation since the 1920s. 

To call this the "Mont Pelerin Society Stagflation" is as helpful as calling it the "Keynesian Phillips Curve Stagflation."  Such rhetoric distracts attention from the cause of financial crises: intermediary discretion.  

RL    

----- Original Message -----
From: "Bruce Caldwell" <[log in to unmask]>
To: [log in to unmask]
Sent: Tuesday, August 16, 2011 4:44:16 AM
Subject: Re: [SHOE] functional finance

I didn't bite because I think that Hayek just thought that the machine 
was cool for representing the circular flow. That doesn't have any 
necessary connection with either the Phillips Curve or any policy 
implications that people may later have drawn from the curve.
Bruce

  On 8/16/2011 12:13 AM, Robert Leeson wrote:
> Since noone took my Tooke bait: Hayek and Lerner were US sales agents for the Phillips Machine.
>
> RL
>
> ----- Original Message -----
> From: "Robert Leeson"<[log in to unmask]>
> To: [log in to unmask]
> Sent: Monday, August 15, 2011 9:51:05 AM
> Subject: Re: [SHOE] functional finance
>
> Distinction taken.  Did the "rules party" directly engage Lerner on this issue?
>
> A follow-up question: Keynesian economics is an _indirect_ attempt to tackle the central malfunction of capitalism - the discretion allocated to intermediaries to sever the arterial flow of savings into capital expenditure.  The Phillips engineering framework implicitly provides a _direct_ re-engineering solution which makes functional finance (and the Paradox of Thrift, deficit-financed expenditure ...) redundant. Preliminary speculation: this may be why Hayek appeared to be so enthusiastic about Phillips' work.
>
> RL
>
> ----- Original Message -----
> From: "David C. Colander"<[log in to unmask]>
> To: [log in to unmask]
> Sent: Monday, August 15, 2011 5:26:09 AM
> Subject: Re: [SHOE] functional finance
>
> I will.
>
> The idea of Functional Finance was that government should take the actual consequences of the fiscal decisions into account rather than to simply have a blanket rule to never run a deficit. That makes good sense then and now. If deficits cause problems that the model does not take into account, functional finance rules would have to adjusted to take those effects into account. As I discuss in “Functional Finance, New Classical Economics, and Great Great Grandsons” (in Edward Nell and Mat Forstater (editors) Reinventing Functional Finance Edward Elgar, 2003) when inflation became a problem in a way separate from the way Lerner's simple model had assumed, then the rules of functional finance had to be changed to take account of that. The same holds true if debt has consequences separate from those assumed in the model. So the problem is not with the idea of functional finance--choose policy on the basis of its consequences--the problem is with the unthinking way it has been applied.  It is not functional finance that has led to dysfunctional deficits, it is the unthinking (or political) application of it.
>
>
> Dave
>
> David Colander
> CAJ Distinguished Professor of Economics
> Department of Economics
> Middlebury College
> Middlebury, Vermont, 05753
> (802-443-5302)
>
> -----Original Message-----
> From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Robert Leeson
> Sent: Sunday, August 14, 2011 9:37 PM
> To: [log in to unmask]
> Subject: [SHOE] functional finance
>
> Has anyone (or will anyone) defend Abba Lerner against the charge that "functional finance" has led to dysfunctional deficits?
>
> Robert Leeson


-- 
Bruce Caldwell
Research Professor of Economics
Director, Center for the History of Political Economy

"To discover a reference has often taken hours of labour, to fail to discover one has often taken days." Edwin Cannan, on editing  Smith's Wealth of Nations

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