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