What Is Functional Finance?

Functional finance is 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. It actively promotes government deficit spending as an effective way of reducing unemployment.

Functional finance 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.

Functional Finance Theory

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. Keynesian economics embraced the concept that optimal economic performance could be achieved by using economic intervention policies by the government to influence aggregate demand. It is considered to be a "demand-side" theory.