by Philip Pilkington

I recently came across a rather interesting argument that the famous Post-Keynesian economist Abba Lerner made in relation to his well-known doctrine of Functional Finance. Basically Lerner said that labour-saving technological innovation in a below full employment economy was not particularly socially useful.

Follow up:

In a 2003 paper entitled Functional Finance and Unemployment: Lessons From Lerner For Today in the book Reinventing Functional Finance Matt Forstater laid out this argument. First he quotes Lerner himself to the following effect,

When there is unemployment… it is not important or even useful to use less resources in any task… There is no point, for instance, in managing to carry out some task with less labor if there are unemployed workers available, because the workers set free would not be utilized for other tasks any more than the workers who are already unemployed. They would merely be added to the unemployed. Where there is unemployment, an increase in efficiency in any particular productive process does not result in any increase in efficiency in the economy as a whole. (p.163)

Forstater goes on to lay out one argument against this consideration and lays out Lerner’s objection,

Lerner does consider the possibility that, rather than producing the same amount of output with fewer workers, society could produce more output while maintaining the same amount of workers. Yet as he rightly points out, though increased saving results from increased income accompanying higher output levels — absent an exactly offsetting higher level of investment or government expenditure — the new higher level of output will not be sustainable, as all production will not be sold, and firms will cut back that production and lay off workers. (ibid)

Basically then, the higher level of output produced by the workers will not be purchased because the workers will have the same amount of income outstanding as they did before. And since we can assume that prices will not adjust, the adjustment must be made on the quantity side — i.e. by an increase in unemployment.