The exhaustion of public finance theories



The treatment of “public finances” constitutes one of the central aspects of the economic relations of present-day capitalism.

In the last four decades, capitalism returned to a kind of historical “bed” prior to the Second World War, something that marked the end of a period in which the Keynesian creed dominated the bourgeois economic ideology, and the “crisis of Keynesian ideology”, as expressed by Lauro Campos (2016),[I] defines one of the aspects of the current chaotic scenario of the capitalist system.

Karl Polanyi (2000)[ii] had already registered, in his splendid work, that the liberal individualist evolution would lead humanity to “a plunge into social destruction”, something materialized in the two global deaths that we experienced in the “era of catastrophe” of the XNUMXth century, which again seems to be heading towards very fast steps.

The treatment of “public finances” constitutes one of the central aspects of the economic relations of capitalism in the present time, defined by the dispute of the interests of the controllers of financial wealth and the control of these segments over the State, compared to the rest of society, and the imposition of of increasingly austere tax regimes has become one of the main assumptions of neoliberalism as a historical moment of capital accumulation in the current century.

In the text that follows, we critically discuss the two main contributions to understanding the finances of the capitalist State, and how the clash between these “ideologies” is part of an interactivity of capitalism’s continuity, but which is now at serious systemic risk, so or more on the threshold than during the years when Karl Polanyi was restless. The objective is to question whether an internal solution to capitalist logic is still possible, or if, in short, we have entered a new historical impasse, and how these aspects are placed in an agenda of Brazilian national sovereignty.

functional finance

JM Keynes (1985)[iii] established, as part of the “social philosophy” of his economic theory, that the State should exercise “a guiding influence on the propensity to consume, partly through its system of taxation, partly by fixing the rate of interest” and “a socialization somewhat broad investment will be the only way to ensure a situation close to full employment”.

This high degree of state interventionism was undoubtedly influenced by the conditions of deep crisis in which capitalism found itself in the 30s and 40s. As noted by the German Marxist Paul Mattick (2010)[iv], for Keynes “it was necessary to restore the disturbed 'accumulation habits'”, but he was “convinced that the capitalist economy could be regulated so that it functioned better without losing its capitalist character”.

The concept of the principle of effective demand structures the Keynesian theoretical basis. This principle stands literally in opposition to the basic principle of pre-Keynes – and, at any rate, post-Keynes – economic orthodoxy of the so-called Say's Law. JM Keynes argues that employment under capitalism is not determined by wage arrangements between workers and employers but by the existing “effective demand”, which depends on the “propensity to consume” and the “level of investment”, so the economic system can be in balance. equilibrium even under conditions less than full employment, no force internal to the equilibrium system can raise employment to full employment. This is only possible through coordinated action by the State.

Effective demand would be an expected condition, that is, it is business expectations about future demand that determine current employment and output. It is not the predetermined amount of employment that defines the product, this will depend on the level at which the aggregate demand will be established. The level of employment and income, according to this principle, depends on expected expenditures, which, in turn, depend on the determining factors of aggregate demand, which is defined in terms of two fundamental components: current consumption and investment.

These components are subject to a set of psychological and social influences and considerations. Current consumption does not grow in the same proportion as income, a marginal propensity to consume is defined as a psychological law. In this way, to justify any volume of employment, there must be a volume of investment sufficient to absorb the total excess of production over what the community wants to consume, when employment is at a certain level (KEYNES, 1985).

We can briefly consider that the level of employment and income will only increase if there is a shift in effective demand, which refers to a triple movement: (i) increase in the marginal efficiency of capital; (ii) drop in interest rates, and (iii) increase in the community's marginal propensity to consume.

It was based on these theoretical elements, very briefly summarized here, that post-Keynesian authors attributed a key role to the State in conducting economic policies with a view to managing and balancing the economic cycle, conditioning public finances to its “functional” role. in relation to the achievement of those objectives.

Abba Lerner (1957)[v] clearly expresses the meaning of what he came to call “functional finance”: “If there is not enough spending, so that the level of employment is too low, the difference can be covered by the State (...). If there is excessive spending, so that the symptoms of inflation appear, the State will be able to correct it”.

The conception of functional finance is linked to a very old theoretical tradition that presupposes State action as the main mechanism for “reforming capitalism” and, as such, functional finance corresponds to the use of fiscal policy, deficit budget and monetary policy (acting on the interest rate) with a view to achieving the goals of controlling the economic cycle, especially keeping the economic system operating at “full employment” and with low inflation.

According to Abba Lerner (1957), there are three rules that govern the direction of the economy: (i) “the State will maintain at all times an adequate volume of expenditures in the system”. The capitalist economy would suffer a predisposition to “low consumption”, so that it would be “necessary for the State to spend more or reduce its fiscal income”, making use of the deficit budget or even “monetary issuance”, with a view to increasing aggregate demand. According to this perception, tax revenues cannot “be considered a means of sustaining the State, but an instrument for reducing income and, therefore, the level of expenditure [consumption] of society”; (ii) the “State will maintain the interest rate at the level that leads to the optimal point of investment”, making use of the issuance of public securities and operations for this purpose. open market; (iii) there is no economic validity in budget balance or limiting public debt. “The State shall issue all the necessary money to apply the [first two] rules”.

Wray (2003)[vi], one of the most interesting post-Keynesian authors, considers that “government spending is never limited by the amount of securities that markets are willing to buy (…) only by the desire of the private sector to provide goods, services and assets to the government in exchange for government currency", such that anything "anything that is for sale in terms of domestic money can be obtained by the creation of fiat money by the government". Thus, in this perception, the capitalist State assumes the capacity of a “deus ex-machine” at the service of the logic of accumulation, something that denotes the role of the Keynesian State, in terms of Lauro Campos (2016) “to preserve capitalist relations”, avoiding its collapse.

Keynesian theory attributes to the State a permanent anti-cyclical role, acting as a determining external force over the so-called “market failures” and raising national net income by generating additional economic activity. However, unlike the Keynesian analysis, public finances are in fact limited by the conditions of reproduction and accumulation of capital and, even if it also functionally serves a partial cyclical control, it does not have the capacity to dynamize accumulation, having much more of a function " constraint” on the mass of available loan capital in the economy.

The limits of the so-called “mixed economy” in the management of economic cycles of crisis and the advance of capital accumulation laid bare the crisis itself of the “Keynesian ideology”. From the 1970s onwards, the inability of Keynesianism to contain the contradictions inherent to capitalism became evident. The fall in the profitability rate of the main capitalist companies in the center, resulting in a decline in the level of investment, affecting tax revenue, and the increase in unemployment, converged to the exhaustion of the post-war pattern of capitalist growth.

The capitalist crisis that began in production spread quickly during the 1970s and 1980s to demand, as the productive reorganization of companies in central countries sought to recompose their profit margins, pressing towards a compression of the real wages and stimulating the precariousness of employment, subcontracting and displacement of manufacturing units to the periphery of the system.

The neoclassical approach

The neoclassical “balanced budget” approach assumes the “quantitative theory of money” and the “theory of loanable funds”, for which the principle of Ricardian equivalence between taxation and public debt is valid. This perception establishes that borrowing by the State displaces private sector loans in the economy, having only an effect on the interest rate, shifting it upwards and resulting, through the quantitative theory of money, in rising prices. The resulting analytical consequence is that of the so-called object State, that is, public finances are reduced to the budget balance imposed by fiscal discipline.

The neoclassical perception is linked to the dominant notion of the State as a neutral “entity”, which defines each attitude of the State as a separate action and also having repercussions on the economy in an isolated way. It should be noted that this conception has repercussions on the idea of ​​“independence” from the Central Bank, as occurs, for example, in the USA. It is interesting to note that at all times of structural crisis (1930, 1970, 2008) and war conflicts, the deficits budgets are determined by the presidential executive with the full consent of the Federal Reserve Board (see STUDENSKI&KROOSS, 1963[vii]; BERLE, 1982[viii]; DUMÉNIL & LÉVY, 2014[ix]).

The so-called “Ricardian equivalence theorem” is the recent neoclassical version, developed by Robert Barro (1974)[X], based on the Ricardian notion exposed in Chapter XVIII of the Principles of Political Economy and Taxation. The “Ricardian equivalence” approach improves, in terms of model, the assumption that financing public spending by issuing debt has the same effect on economic activity as financing it through taxes, announced by David Ricardo almost 200 years ago.

In this sense, it seems to us that the criticisms addressed to Ricardo apply to contemporary neoclassical models, even with the exception that these models are formally much more complex and specify hypotheses that were not present in Ricardo. For Barro, for example, consumers (taxpayers) would be “altruistic” rational agents, so that every present generation contributes with an amount equal to the costs corresponding to their participation in the flow of benefits generated by the public sector, with exact accounting in the transmission of “utilities” between generations.

According to this theory, there is competition between the State and the capitalists for the so-called “loan funds”, resulting from the intertemporal decision of families between consumption and savings. Credit is limited to the notion of “real loans”, in which banks “passively” manage the global volume of available savings. Imagine that changes in deficits from the government do not affect household savings. This analysis is distorted because it does not consider the components of the credit system and the dynamics of capital accumulation (TRINDADE, 2017)[xi].

The general corollary of this interpretation is the condition that all savings (S) generated in the system find, in some way, productive application (I) and that it is subjective decisions to save that determine investment. This perception generates the predominant version of public finances based on budget balance or healthy finances, establishing the impossibility of maintaining deficits government, unless long-term cost inflation is assumed.

Neoliberal and neoclassical triumphalism

During the twentieth century we had the confrontation between these two forms of ideological defense of capitalism. Until the third decade of that century of extremes, the neoclassical creed and its minimalist perception of the State and society prevailed. Since the middle of the XNUMXth century, the Keynesian ideology has been imposed, in many ways more sympathetic to the living conditions of a considerable portion of the working population, but limited and very far from any form of proximity to a more expressive transformation of capitalist relations of production.

The triumphant return of neoclassical ideology takes place through the conformation of a set of prescriptions for liberalizing policies and with a strong ideological content contrary to any form of social solidarity and state interventionism in the economy, the basis of the theoretical content of the neoliberal program, having as exponents of this movement, names like Friedrich Hayek, Milton Friedman and Ludwig Von Mises, among others. It is worth noting that, despite the fact that it cannot be said that the work of those authors constitutes a cohesive and integrated body of a “neoliberal economic school”, we can delimit at least as a historical landmark of deliberation a more or less systematic agenda of direction of political and propagandistic action the meeting idealized by Hayek in Mónt Pelerin (Switzerland) in 1947, as already discussed by Juarez Guimarães in an article on the website the earth is round.[xii] In general, neoclassical economic ideology, renamed neoliberalism, has become the creed of capitalism over the last forty years, with the previous Keynesian creed being abandoned to a smaller set of left-wing believers.

We find ourselves in this third decade of the XNUMXst century around a double ideological bourgeois economic crisis: on the one hand, the impossibility of Keynesian triumphalism, no longer satisfying the interests of monopoly capitalism and its financial essence; on the other hand, the renewed crisis of neoliberal ideology and its alleged neoclassical technicality, exposed by the continued decline in the profitability of central capitalist companies and by the resumption of the dispute between old and new centers of accumulation, visible in the exposed nerve of the war in Ukraine.

It is necessary to reinvent socialism for the XNUMXst century in opposition to the different versions of capitalism, as a basic condition for conceiving a future history of humanity.

*Jose Raimundo Trinidad He is a professor at the Institute of Applied Social Sciences at UFPA. Author, among other books, of Critique of the political economy of public debt and the capitalist credit system: a Marxist approach (CRV).


[I] CAMPOS, Laura. The Crisis of Keynesian Ideology. Sao Paulo: Boitempo, 2016.

[ii] POLANYI, K. The Great Transformation: The Origins of Our Time. Rio de Janeiro: Campus,


[iii] KEYNES, John Maynard. The general theory of employment, interest and money. So Paulo: Nova Cultural, 1985.

[iv] MATTICK, Paul. The limits of the mixed economy. Lisbon: Antigone, 2010.

[v] LERNER, AP Economía del Pleno Empleo. Madrid: Aguilar, 1957.

[vi] WRAY, L. Randall. Work and money today: the key to full employment and price stability. Rio de Janeiro: Counterpoint, 2003

[vii] STUDENSKI, P. & KROOSS, HE Financial history of the United States. New York: McGraw-Hill, 1963.

[viii] BERLE, Adolf A. The American Economic Republic. Rio de Janeiro: Forensics, 1982.

[ix] DUMÉNIL, G. & LÉVY, D. The Crisis of Neoliberalism. Sao Paulo: Boitempo, 2014.

[X] Barro, Robert J. 1974. Are government bonds net wealth? Journal of Political Economy 82 (6) 1095-1117.

[xi] TRINDADE, JR. Critique of the political economy of public debt and the capitalist credit system: a Marxist approach🇧🇷 Curitiba: CRV, 2017.

[xii] Juarez Guimaraes. A new “cold war”. The Earth is Round. Access at:

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