Functional​ finance — how to cope with inflation

14 Apr, 2019 at 18:18 | Posted in Economics | 6 Comments

Less well worked out is a technique of dealing with the other responsibility of the creator of money – the responsibility for maintaining its value. The key points here are not in the direct supply of money, or even in the regulation of the level of spending. The key points are in the determination​ of wage rates​ and in​ the determination of rates of markup of selling prices over costs … Higher wages relatively to prices are necessary for long-run prosperity but​ raising wages will do no good because they​ will only lead​ to higher prices and inflation.

Abba-P.-Lerner-2-810x540The dilemma can be resolved only by the government going to work on both money wage determination and on markup rates. Both are problems of monopoly and as such are inevitably destructive of a free economy. Markup rates must be reduced​ by antimonopoly measures … The most important help to the government in this will be the policy of maintaining​ full employment which will make it profitable for business to work with smaller markups.

Abba Lerner


  1. “Higher wages relatively to prices are necessary for long-run prosperity but​ raising wages will do no good because they​ will only lead​ to higher prices and inflation.”
    The largest bulk of money is in the financial sector where higher trader incomes may lead to higher asset prices, but inflation has been redefined as wealth creation.
    In other words, the private sector deals with inflation by raising investor incomes so investors can continue to afford rising asset prices.
    Inflation swaps also take inflation out of consideration for both short and long term contracts.
    Inflation should not be viewed as a constraint on public spending. The private sector shows us how to neutralize inflation’s unwanted effects.

  2. I have never understood “markup” as a simplification. It corresponds to nothing we know about the firm and its cost structure or business strategies.

  3. Basically what we need is incomes policy backed by tripartite industry-wide wage fixing mechansim, which also act as an instrument of industry policy. If wages are fixed according to the industry-wide average productivity then more efficient firms with higher than industry average productivity enjoys a rent, and hence are encouraged to expand while less efficient ones with lower than industry average productivity will be forced to quit or upgrade. This results in rises in economy-wide productivity, and hence keeps inflation under check as wage growth will be in line with productivity growth. However, this does not diminish the importance of anti-monopoly measures.

    • First of all, “industry” is not a well-identified, well-bounded thing-in-the-world and “average” is an arbitrary statistic for a sample, not an operating parameter for an entity. Second, labor productivity is not some formless virtue that we should automatically want more of it; an economics of rewarding virtue and punishing vice is a fairy tale, not social science, let alone a sensible public policy.

      • Why would we not value increases in what is called ‘labor productivity’? And why not try to fashion a sensible public policy so that it would reward virtue and punish vice? Seems sensible to me.

        • Dear Bruce and Jerry
          What I said about wages-cum industry policy is not a theoretical construct. It has been used in Singpore to restructure its economy from low value added labour-intensive activities to high value added skilled intensive activities in the mid 1980s. It was also applied in Australia during 1983-1991.

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