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.

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