Alternative uses of functional finance: Lerner, MMT, and the Sraffian supermultiplier

Abstract

The purpose of this paper is to show that the Sraffian supermultiplier is compatible with functional finance and can be used to discuss macroeconomic policy in a simplified way, providing an alternative to Lerner and Modern Monetary Theory (MMT). We argue that the general functional finance framework (FFF) can be separated from Lerner’s specific views on how the economy works and its policy recommendations. Then, we propose that FFF can be combined with different views on how the economy works as well as policy objectives and instruments. For this, we construct three comparable ‘toy models’ to evaluate the alternative uses of functional finance from Lerner, MMT, and the Sraffian supermultiplier. We use these toy models to provide an alternative comparison between Lerner and the MMT to that proposed by Wray (2018), and we argue that Lerner never abandoned his FFF or his theoretical principles towards Monetarism. We use this same scheme to evaluate the FFF from the standpoint of the Sraffian supermultiplier. The presentation of these three comparable ‘toy models’ helps to stress the shared principles and specific disagreements among Lerner, MMT, and the Sraffian supermultiplier and to discuss their implications for active economic policies and their constraints in open economies.