Functional Finance

AAA

DEFINITION of 'Functional Finance'

A heterodox macroeconomic theory developed by Abba Lerner during World War II that seeks to eliminate economic insecurity (i.e., the business cycle) through government intervention in the economy. Functional finance emphasizes the end result of interventionist policies on the economy and is based on three major beliefs:


1. It is the role of government to stave off inflation and unemployment by controlling consumer spending through the raising and lowering of taxes.


2. The purpose of government borrowing and lending is to control interest rates, investment levels and inflation.


3. The government should print, hoard or destroy money as it sees fit to achieve these goals.

BREAKING DOWN 'Functional Finance'

Functional finance also says that the sole purpose of taxation is to control consumer spending because the government can pay its expenses and debts by printing money. Furthermore, Lerner's theory does not believe it is necessary for governments to balance their budgets.


Lerner was a follower of the extremely influential economist John Maynard Keynes and helped to develop and popularize some of his ideas.

RELATED TERMS
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  2. Chartalism

    A non-mainstream theory of money that emphasizes the impact of ...
  3. Mainstream Economics

    A term used to describe schools of economic thought considered ...
  4. Heterodox Economics

    The analysis and study of economic principles considered outside ...
  5. Gold Standard

    A monetary system in which a country's government allows its ...
  6. Hard Money

    1. Funding by a government or organization that is repetitive, ...
Related Articles
  1. Economics

    The Austrian School Of Economics

    Investopedia explains: If you think economists are only concerned with numbers, check out the Austrian School, who are more like economic philosophers.
  2. Economics

    Monetarism: Printing Money To Curb Inflation

    Learn how Milton Friedman's monetarist views shaped economic policy after World War II.
  3. Forex Education

    Taking Advantage Of Central Bank Interventions

    These interventions provide great opportunities for investors and traders to seize entries into longer-term trends.
  4. Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  5. Active Trading

    Giants Of Finance: John Maynard Keynes

    This rock star of economics advocated government intervention at a time of free-market thinking.
  6. Economics

    Economic Meltdowns: Let Them Burn Or Stamp Them Out?

    Whether the Fed should intervene in market bubbles is up for debate. Learn about both sides here.
  7. Investing Basics

    Explaining Trade Liberalization

    Trade liberalization is the process of removing or reducing obstacles that impede the exchange of goods and services between nations.
  8. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  9. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  10. Economics

    Explaining the Participation Rate

    The participation rate is the percentage of civilians who are either employed or unemployed and looking for a job.
RELATED FAQS
  1. What is the Keynesian multiplier?

    The Keynesian multiplier was introduced by Richard Kahn in the 1930s. It showed that any government spending brought about ... Read Full Answer >>
  2. Where are the Social Security administration headquarters?

    The U.S. Social Security Administration, or SSA, is headquartered in Woodlawn, Maryland, a suburb just outside of Baltimore. ... Read Full Answer >>
  3. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  4. Is the Social Security administration a government corporation?

    The U.S. Social Security Administration (SSA) is a government agency, not a government corporation. President Franklin Roosevelt ... Read Full Answer >>
  5. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  6. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  2. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  4. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  5. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  6. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!