As has been said, the theory of functional finance is one thing, its 
practice by politicians is another. When discussing the Keynes chapter 
in Heilbroner with my first year students, I point out that politicians 
love the Keynes justification of spending in bad times but forget that a 
surplus should be increased in good times. Unfortunately, spending 
before an election is popular. We see it in Canada before every election 
regardless of whether there are good times. This got started in a big 
way in the mid-1970s. In contrast, I point out to my students that the 
Premier of British Columbia in the mid-1960s was running up surpluses 
and lending from them to Quebec.

LB

Colander, David C. wrote:
> A couple of points
>
> When Abba made the claim that the size of the debt didn't matter, it upset lots of people. Evsey Domar told me of running over to Dick Musgrave's office and telling him how crazy it was. Then they worked through the math of the model, and agreed that within the model Abba was right. But they also knew better than to emphasize it. You should remember that at the time there were high marginal income taxes--and much of the payments of interest would come back to the government. 
>
> A 10 trillion debt in 1943 would be much more than 10 trillion today, so it is still far higher than what we have.  
>
> There was a parallel debate about internal and external debt occurring at the time.--Buchanan among others contributed to it, but Lerner's view was that with internal debt that if you can tax, you can cover the debt interest payments whatever they are, and it was simply a payment from one hand to another. His macro model was very much a representative agent model, and he asked how the representative agent fared. He did not take political difficulties of heterogeneity into account--others did, and saw Lerner's work as getting the logic right, but the politics wrong. Keynes was one of those. That's why Keynes wrote Lerner that he would not present Lerner's ideas to the Treasury, but rather to their sons, with Treasury "agreeing beforehand that, if I can convince the boys, they will take it from me that it is so!"   The issues are discussed in my book with Harry Landreth  "The Coming of Keynesianism to America".  (Elgar, 1996)
>
> 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: Monday, August 15, 2011 1:36 PM
> To: [log in to unmask]
> Subject: Re: [SHOE] functional finance
>
> A supplementary: Abba Lerner (1943) illustrated his functional finance proposal with “a completely fantastic exaggeration” of national debt reaching $10 trillion: “the absolute size of the national debt does not matter at all … there is a natural tendency for the national debt to stop growing long before it becomes anywhere near the astronomical figure that we have been playing with … as the national debt increases it acts as a self-equilibrating force ...”
>
> Did the rules party engage on this one?
>
> 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
>   


-- 
Lawrence A. Boland, FRSC
Department of Economics, Simon Fraser University
Burnaby BC Canada V5A-1S6
ph: 778-782-4487, web: http://www.sfu.ca/~boland