ABSTRACT OF PAPER
Title: The role of the State after the crisis: money, rules and functional finance
Author: Esposito Lorenzo, Mastromatteo Giuseppe
After the crisis, scientific debate has begun to reassess the economic role of the State considered in the widest possible meaning. This has almost inevitably brought back the Abba Lerner’s functional finance (FF), a welcomed development for many reasons. Above all, FF compels the scientific debate to return to its theoretical and historical foundations: the nature of money, the origin of business cycle and crises. This is interesting, as the classical school, although rooted on completely different basis as far as the value theory is concerned, still maintained a commodity theory of money that also yielded confidence in the quantity theory of money and the policies that stems from it. So ingrained was the notion of money as a commodity that even Marx based his critique of the political economy not only on the labour theory of value but largely also on the commodity theory of money. Thus, this theoretical clarification will allow a thorough recognition of the different explanation of the crisis. Secondly, it touches a number of historical and theoretical controversies, among them: the nature of Barro-Ricardo equivalence, the sustainability of the public debt and what really triggers inflation. This is also linked to important theoretical controversies. The most relevant for our purposes are: what are the main sources of inflation (i.e. is monetarism still of any interest?) and what is the role of the banks in fostering the crisis? As we can see, discussing the FF approach implies an extensive debate on historical, political and also institutional aspects, that before the crisis were completely irrelevant in the mainstream theoretical framework. This is a methodological turnaround that will strengthen the heuristic capability of economic theory. FF has traditionally been criticized for its presumed indeterminacy and vagueness. This critique was connected to the theoretical victory of rules on discretion in the field of economic policy that was an allegedly final reminder for FF’s demise. The crisis has forced central banks and government to reject any rule. A creative and discretionary use of economic policy weapons saved the day. Therefore it is necessary to go back to the theoretical debate on the best ways to implement economic policies to assess if the laissez-faire conclusions reached at that time are still valid if they ever were. FF throws a strong light on this scientific debate showing the real link between money, economic cycle and the State. Therefore it is a sound foundation to discuss income, fiscal and monetary policy rules in the right context of flexibility in the management of national budgets, assessing what kind of policies should be awarded priority and the real effectiveness to tackle the crisis of each type of expenditure, overcoming the simplistic distinction between current operating expenditures and investment. It also allows to understand the ways to increase efficiency by public investment reducing in the meantime the total operation costs of the firms. In the specific context of the Eurozone, FF is useful to assess the institutional framework of the area and how to improve it in a situation of protracted low growth, deflation and weakness of public finances.
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