The efforts of academics, conservative think tanks, and political leaders on emphasizing markets and reducing government paid off after the election of President Ronald Reagan, which resulted in a new mix of government and markets, although not to the extent that many proponents of small government favored. There have been additional legal procedures and political oversight, which has made it more difficult to regulate some markets; government services have been outsourced, and government spending on regulation and social welfare has been reduced. Bill Clinton, influenced by the anti-government mood in the county, supported deregulation of telecommunications, welfare, and banking, but Congress reversed the banking deregulation after a Wall Street collapse in 2008 and was forced to spend billions of dollars to save the economy. Despite the anti-government mood, nearly all the laws and programs established in the New Deal and Great Society eras have remained on the books and have not been repealed. Besides the bailout, there were some other significant expansions of government including most notably the Affordable Care Act, popularly known as Obama Care.

This chapter examines John Rawls’s uncritical acceptance of “sound” finance, how it reflects his use of his constructive method, his influences in neo-classical economics, and the regrettable consequences. It also suggests how we can unlearn deference to neo-classical thinking, using Rawls’s method, in view of Abba Lerner’s functional finance and an egalitarian form of central banking.

Money is created by the banking system issuing liabilities against itself. Under a fiat money system, nothing of intrinsic value backs the money supply. Viability of the system depends on shared faith. Central banks issue liabilities in the form of currency and deposits held by commercial banks in exchange for acquiring assets in the form of domestic government securities, foreign securities, or loans to commercial banks. These central bank liabilities constitute the monetary base. Commercial banks issue liabilities in the form of demand deposits held by the public in exchange for making loans. Commercial banks are constrained in money creation by the need to hold reserves with the central bank at a required ratio relative to demand deposits. The central bank must manage growth in the monetary base to maintain economic balance: too slow keeps the economy from performing at its potential while too fast causes inflation to rear up. To keep the economy on an even course, the monetarist school, led by Milton Friedman, advocates steady growth in the money supply. A pattern of inflation falling with slowing money growth shows up for Emerging East Asia between the 1990s and the 2000s.