Important Characteristics of Functional Finance

Important characteristics of Functional Finance Concept of Functional Finance We have often heard about the concept of functional finance, especially in the Keynesian views on public finance. The main point in Keynesian view of public finance is tha

Important characteristics of Functional Finance

Concept of Functional Finance

We have often heard about the concept of functional finance, especially in the Keynesian views on public finance. The main point in Keynesian view of public finance is that Keynes has given it the form of functional finance. The essence of functional finance is that public finance should be used as an instrument for the achievement of certain economic and social objectives.

 

It is clear that the function of public finance is not merely to raise financial resources for the State but to help in the performance of certain important tasks facing the economy, e.g., raising the level of income and employment in the economy. This is entirely a new concept altogether different from the classical view of public finance. It may be mentioned here that the term 'functional fin­ance' was first used by an American, Professor Lerner. But it is more explicit in the Keynesian theory of Income and Employment and Keynes put it more emphatically. It was Keynes who strongly advocated that public expenditure on public works should be increased to remove depression and unemployment and to increase national income and employment in the country.

 

It is clear from the above analysis that the essence of functional finance is that the government should solve both the problems of depression and inflation by making appropriate changes in its taxation and expenditure policies. By removing both depression and inflation, it should establish equilibrium in the economy at the level of full employment. Public finance has this important function to perform in developed or advanced countries.

 

But in under-developed countries like India, the problem is not so much of cyclical stability as of promoting economic development and accelerating economic growth. The under-developed countries are trapped up in the nasty circle of scarcity and their main difficulty is to break this circle and move in the direction of economic growth so that poverty is eradicated and the standard of living of the people is boosted. Thus, the goals of public finance in developing countries are dissimilar from those in the urbanized nations. While in the developed nations, the purpose is to make sure economic strength at the point of full employment, in the developing nations; its purpose is to speed up economic growth so that the extensive unemployment and deficiency existing in the nation are eradicated. Hence, in the under-developed countries, public finance is to play a developmental role.

Besides the main function of accelerating economic growth, public finance has, in the developing countries, also to check price hike and reduce inequalities of income and wealth. Reduction of inequalities in income and wealth can bring about social justice in the country. Hence, in the developing countries, the objective of public finance is to ensure growth with social justice.

We may repeat that the essence of functional finance is that public finance is not merely an instrument of raising financial resources for the State, but it has also to perform several other important functions for the economy. The functions of public finance are, however, different in the developed and under-developed or developing economies. Whereas in the developed countries, its objective is to eliminate cyclical fluctuations and maintain economic stability, in the under-developed countries, its function is to give a fillip to capital formation and economic development.

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Chris Stonecipher
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Posted on Jan 29, 2012