Modern Monetary Theory and its connection to Abba Lerner

Contributed by Glen Davis

Way back July 2014, I wrote for The Pen, about Abba Lerner, the economist. Here I’ll touch on one of his primary ideas.

As capitalism lurches from crisis to crisis, combined with the heavy toll wrought by Covid-19, there are people talking about a concept called Modern Money Theory.

Abba Lerner

MMT. It’s not socialist by any means. But it gives an alternative, providing a break from the slavish devotion to the ‘market.’  MMT tackles some of the current shibboleths re budget deficits, government spending etc.

MMT adherents say budget deficits are not always bad, for example, if the money is used building hospitals, and/or schools. They talk of government investing in the economy before they can tax or borrow, this being the antithesis of most contemporary economic mantra.

The goal of real full employment is the priority, meaning, there should not be fixations about debt, or deficit, getting in the way of this goal.

The 1943 work by Abba Lerner on Functional Finance is an influence on the adherents of MMT.

What is Functional Finance?

Video from The Audiopedia

In Lerner’s words: The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce.

If total spending can go above this there will be inflation, and if it can go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes.

Abba Lerner’s Functional Finance is thus about governments aiming for goals such as full employment, rather than fixated on fetishes like balanced budgets.

By borrowing required levels of money, alongside of meeting public demand, job creation schemes, such as creating work on infrastructure, can be undertaken without creating inflationary spiral.

If there is a problem when aggregate demands exceed aggregate supply during full employment, an increase in taxes or reduction of government purchases is applied. The raising of taxes thus is about reducing consumer demand, not raising government revenue. If explained properly it can prove politically popular to the public.

If there are public concerns about an increase in Australia’s national debt, it’s worth noting that in December 2019 Australia’s household debt accounted to 125 percent of nominal Gross Domestic Product (GDP).

If there’s a debt problem in Australia, it’s household debt.

During the times of the Arch-Tory Robert Menzies, running a deficit budget was never considered a problem. During a talk on the 1962 budget, Menzies spoke of the deficit of 120 million pounds, but said it was an expansionary budget that would create jobs. Menzies may have been an adherent of MMT.

MMT may be a break with contemporary capitalism, but it doesn’t challenge it.

Still, in an interregnum like we’re currently experiencing, it’s worth talking about a way forward. Lerner’s Functional Finance is important in any debate/discussion of this nature.

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