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Review of Political Economy
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Classical-Keynesian Political Economy, not
Neoclassical Economics, is the Economic Theory of
the Future
Heinrich Bortis
To cite this article: Heinrich Bortis (2022): Classical-Keynesian Political Economy, not
Neoclassical Economics, is the Economic Theory of the Future, Review of Political Economy, DOI:
10.1080/09538259.2022.2063512
To link to this article: https://doi.org/10.1080/09538259.2022.2063512
© 2022 The Author(s). Published by Informa
UK Limited, trading as Taylor & Francis
Group
Published online: 31 May 2022.
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Classical-Keynesian Political Economy, not Neoclassical
Economics, is the Economic Theory of the Future
Heinrich Bortis
University of Fribourg Switzerland
ABSTRACT
This article implies that the time is ripe for a new paradigm in
economic theory comprising classical (Ricardian) and Keynesian
elements of analysis. The central Section Five presents the basic
equations of classical-Keynesian political economy, the price and
the quantity equation, based on three constitutive principles: the
classical labour value and surplus principles and the Keynesian
principle of effective demand. Subsequently, two employment
mechanisms implied in the super-multiplier relation, the classical-
Keynesian quantity equation, are mentioned, the internal and the
external employment mechanism. Section Seven provides an
analysis of the actual situation on the basis of the external
employment mechanism, associated with cumulative processes of
increasing disequilibria and inequalities. Given this, it ought to be
replaced by the internal employment mechanism, allowing for
Keynesian employment and distribution policies (Section Eight).
However, the internal mechanism can only be implemented if a
new world economic order is brought about, based upon a
supranational currency, that is, Keynes’s bancor, to ensure
balance of current account equilibria worldwide. Section Ten sets
forth Keynes’s social liberalism, the social philosophy underlying
classical-Keynesian political economy, the fundamental social
ethical value of which is the Common Good. Social Liberalism
thus emerges as the alternative to Capitalism and Socialism.
ARTICLE HISTORY
Received 28 February 2021
Accepted 12 July 2021
KEYWORDS
Classical-Keynesian political
economy; neoclassical
economics; post-Keynesian
economics; methodological
foundations of economic
theories; integration of Piero
Sraffa into classical-
Keynesian political economy;
internal and external
employment mechanism;
new world economic order
JEL CODES
B12; B13; B22; B24; B51; E11;
E12; E13; E24; E25
I. Problem and Plan: Economics and Political Economy in the History of
Economic Theories
The struggle between economics and political economy has now existed for about 250
years (Bortis 2017,2021), originating in the cleavage between the ethical economics of
Adam Smith, founder of economics, and the political economy of François Quesnay
and David Ricardo. The gap greatly widened with the Marginalist Revolution of the
1870s, which produced neoclassical economics, Walrasian and Marshallian in the
main. Indeed, from the last quarter of the 19th century onwards, neoclassical economics
was mainly opposed to the powerful system of Marxian political economy, with classical
(Ricardian) political economy being pushed into the background. However, on the
© 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/
licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly
cited.
CONTACT Heinrich Bortis heinrich.bortis@unifr.ch Rue d’Or 5, 1700 Fribourg Switzerland
REVIEW OF POLITICAL ECONOMY
https://doi.org/10.1080/09538259.2022.2063512
purely theoretical level, neoclassical economics began to gain ascendency, mainly because
the classical and Marxian political economists were unable to show that the prices of pro-
duction were proportional to labour values (the transformation problem). This move-
ment culminated in Alfred Marshall’sPrinciples of Economics (1890), which became
the most influential book in the history of economic theories through providing the
basis for all neoclassical textbooks written since the end of the Second World War.
In the course of Shackle’sYears of High Theory 1926–1939 [–1960], a twin revolution
against neoclassical economics took place, associated with Keynes and Piero Sraffa
(Shackle 1967). Indeed,
[our] period opens with the Sraffian Manifesto of 1926 [The Laws of Returns under Competitive
Conditions], demanding the revision of [Marshallian] value theory [based on the principle of
supply and demand]. The other great traditional branch of economics is monetary theory, and
our period sees it transformed by [Keynes into a general theory of output and employment, inter-
est and money, which, for the first time, convincingly challenged Say’sLaw].(Shackle1967,p.12)
The Keynesian and Sraffian interwar revolution, though fundamentally important for
political economy, left neoclassical economics largely unscathed. After the Second
World War, Paul Samuelson elaborated the neoclassical synthesis of Marshall and
Keynes. Keynesian fiscal and monetary policies should bring about full employment.
Subsequently, more or less competitive markets, pictured by neoclassical (Marshallian)
theory, would solve the problems of value and distribution. Around the mid-1960s a fero-
cious attack on neoclassical theory was undertaken by the neo-Ricardians, based upon
Piero Sraffa’sProduction of Commodities by Means of Commodities (1960). This was
the capital–theoretic debate initiated and decisively shaped by Luigi Pasinetti. The
debate ended in 1966 with the total victory of the neo-Ricardians and political
economy, as was admitted by Paul Samuelson, the main representative of neoclassical
economics in the debate (Samuelson 1966, p. 250). However, the Keynesian, post-
Keynesian and neo-Ricardian political economists could not take advantage of this
victory because no coherent system of political economy, grounded on principles and
a social philosophy, existed. This shows that criticism, even if convincing, is not
sufficient. A coherent and potentially comprehensive political economy alternative
based on principles must be elaborated to counter neoclassical economics, the economic
theory of liberalism. Indeed, from the mid-1970s onwards a triumphant march of neo-
classical economics began. At first, Milton Friedman’smonetarism dominated the
scene. Subsequently, the irresistible rise of neoliberal economics culminated with
Robert Lucas’srational expectations system. And Keynes was imprisoned in the neoclas-
sical fortress through New Keynesianism. Here, Keynes appears as a Walrasian disequi-
librium theorist. How have such almost unbelievable developments been possible? A
crucial reason is the fact that it was Alfred Marshall who made of neoclassical theory a
fortress to which, ironically enough, Neville Keynes had provided important building
blocks. This emerges from chapter VIII of Phyllis Deane’s splendid biography of
Neville Keynes (Deane 2001): Faculty Conflicts and Tripos Reform (for a very short
summary of the argument, largely based on Deane, see Bortis (2019a, pp. 11–12):
[Neville] Keynes’sScope and Method of Political Economy (January 1891) represented the —
complementary —ground-clearing contribution to the Marshallian research programme
(Deane 2001, pp. 134 and 136).
2H. BORTIS
Chapter I of Keynes (1891) reviews the ongoing methodological debates. Section two is
about ‘the conception of political economy as a positive, abstract and deductive science’,
section three on ‘the conception of political economy as an ethical, realistic and inductive
science’. He then goes on to elaborate a synthesis by ‘distinguishing three types of economic
inquiry’:first, ‘a positive science’, that is, ‘a body of systematized knowledge concerning
what is’; second, ‘a normative or regulative science’, that is, ‘an art as systematized knowl-
edge relating to criteria of what ought to be and concerned therefore with the ideal as dis-
tinguished from the actual’; and third ‘an art as a system of rules for the attainment of a
given end’. This classification scheme permitted the economic theorist to insulate funda-
mental theorems from accusations of ideological bias, or ethical judgements, or relativity,
as well as from failures in economic policies derived from these theorems. In effect, the nor-
mative science and the art of political economy provided a protective belt for the hard core
of neoclassical theory that emerged from the marginal revolution. According to Keynes
(1891, p. 52): If political economy regarded from the theoretical standpoint is to make
good progress it is essential that all extrinsic or premature sources of controversy should
be eliminated; and we may be sure that the more its principles are discussed independently
of ethical and practical considerations, the sooner will the science emerge from the contro-
versial stage. (Deane 2001, pp. 139–140). [This is crucial and Neville Keynes] was entirely in
line with Alfred Marshall who claimed in his inaugural lecture: ‘that part of economic doc-
trine which alone can claim universality, the principles to wit, has no dogmas. It is not a
body of concrete truth but an engine for the discovery of concrete truth’(Keynes 1933a
[1972], p. 196). Hence, in the view of Marshall and Neville Keynes pure theory, based
upon fundamental principles, must be universal and independent from space and time,
that is, of historical realisations which give rise to applied theory, and policy doctrines.
With Marshall the fundamental principles are the marginal principle and the principle of
supply and demand, embodied in his new economics, which still dominates the theoretical
scene at the outset of the twenty-first century.
Thus, principles and pure theories are crucial and very difficult to refute because of the
protection provided by two huge defence walls. First, there is the protective belt supplied
by the normative science and the art of political economy mentioned above. Second, neo-
classical principles and pure theories are safeguarded by the values of liberalism, making
up its social philosophy. There is the primacy of the individual over society —Margaret
Thatcher even suggesting that there is no society, only individuals; other liberal values are
freedom, the right to private property and democracy as a political value. The idea of the
self-regulating market associated with a minimum state is crucial; sometimes, it is even
claimed that the magic properties of the self-regulating market economy have become a
kind of secular religion. These liberal values constitute a second huge defence wall pro-
tecting the neoclassical pure theory fortress.
However, historical events and theoretical critiques have heavily damaged the neoclas-
sical-Marshallian fortress. On the historical side are the Great Depression of the 1930s,
the financial crises of 2007–08, heavy involuntary unemployment worldwide and increas-
ing inequalities in income and wealth distribution on a world level; on the theoretical are
the devastating capital-theoretic critique and, very importantly, the heavy internal cri-
tique of neoclassical-Walrasian economics recently put forward by the eminent MIT
economist Ricardo Caballero (2010). On the constructive side, there are a great
number of very useful pieces of economic theory to be found in Keynesian, post-Keynes-
ian and neo-Ricardian-cum-Sraffian economic theory; moreover, a fundamental all-
encompassing framework based on principles is gradually emerging in the shape of clas-
sical-Keynesian political economy (Bortis 2012, on Luigi Pasinetti). This is crucial:
REVIEW OF POLITICAL ECONOMY 3
empirical-historical evidence and theoretical critique are not sufficient to displace neo-
classical economics. A comprehensive and coherent system of economic theory, based
on a vision of man and society, that is, a social philosophy, must be erected on solid prin-
ciples. Looking at classical and Keynesian political economy, three principles are emerg-
ing: two of classical origin —the labour-value principle and the surplus principle —and
a third, the principle of effective demand, which is Keynesian. Given all this, neoclassical
economics now seems à bout de souffleand, as a consequence, the future belongs, as is
very likely, to classical-Keynesian political economy, not to neoclassical, Marshallian–
Walrasian economics. This article aims to substantiate this proposition through setting
forth a brief sketch of classical-Keynesian political economy, including some implications
of this theoretical system. Possible extensions are also alluded to.
We start, in Section Two, with some conceptual remarks on economics and political
economy, largely taken from Bortis (2019b,2021). Section Three is about fundamental
methodological issues in economic theory. Subsequently, in Section Four, a most intri-
cate problem is dealt with: the significance of Piero Sraffa within classical-Keynesian
political economy. Section Five offers some remarks on the foundations of classical-
Keynesian political economy on the basis of Bortis (1997,2003,2013a). In Section Six,
we mention possible implications and extensions of classical-Keynesian political
economy, which is, in fact, an open system of economic theory. Section Seven is
devoted to an analysis of the actual prevailing socio-economic situation on the basis of
the external employment mechanism. In Section Eight, the desirable situation is sketched
by making use of the internal output and employment mechanism. Subsequently, in
Section Nine, we hint at a new world economic order required to implement the internal
output and employment mechanism on the institutional and policy levels. Finally, in
Section Ten, some socio-economic, political and social philosophical implications of clas-
sical-Keynesian political economy are alluded to. In the concluding remarks in Section
Eleven, we argue that, following up Karl Polanyi’sFirst Great Transformation (1750–
1830),asecond great transformation is presently required to transform neoliberal capital-
ism into a Keynesian social liberal economy, whereby social liberalism, Keynes’s social
philosophy augmented by Aristotelian elements, underlies classical-Keynesian political
economy (Bortis 1997, chapters 2, 7).
II. Neoclassical Economics and Classical-Keynesian Political Economy
Economic theory consists of two broad strands: economics and political economy (Bortis
2021). The basic model of neoclassical economics is Walras’s general equilibrium model,
popularised by Marshall’s partial equilibrium model based upon the principle of supply
and demand, refined by Arrow and Debreu and extended through the introduction of
stochastic and dynamic elements. In neoclassical economics, the rational —profit and
utility maximising —behaviour of economic agents in the marketplace is supposed to
be coordinated by markets such that all resources, labour most importantly, are, in prin-
ciple, fully employed. However, in the real world, a natural rate of unemployment is sup-
posed to exist, made up of structural and voluntary unemployment; involuntary
unemployment is absent. Economic activity is presumed to be governed by supply
factors, that is, available resources. Saving governs investment, and money is neutral. Dis-
tribution is supposed to be regulated by market forces. Institutions, trade unions and
4H. BORTIS
entrepreneurial associations, as a rule, modify distributional outcomes. Thus, in princi-
ple, there is no room for state intervention. The market is almighty. Potentially, the
general market equilibrium also implies a social —Pareto —optimum. In the real
world, the market system is surrounded by the institutional framework made up of polit-
ical, social, legal and cultural institutions, which, ideally, have to be market-compatible.
This implies that the basic aim of economic policy is to bring about all-prevailing com-
petitive conditions. Finally, a fundamental characteristic of neoclassical economics is
given by Sraffa’s one-way avenue that leads from factors of production to final products.
This contrasts with classical-Keynesian political economy (Bortis 1997,2003) where
the social and circular process of production is put to the fore, not the market. The
social product —gross domestic product —results from a common effort within all
industries. Firms can produce only because they receive goods from other firms; for
example, the shoe factory receives leather and specific machines. On the other hand,
firms producing primary goods (such as iron, steel, electricity and machine tools)
deliver their commodities to firms producing intermediate goods and final goods.
Hence, the social process of production is a complex system of deliveries and receipts,
which is represented by the so-called Leontief quantity system. Given the social nature of pro-
duction, all the great problems of economic theory —value and price, distribution, employ-
ment, money and finance —are social and macroeconomic issues (cf Bortis 2021,p.92).
Political economy also rests on a specific vision of society. The heart of the economy is
the social process of production and monetary and financial institutions (the central bank
and the banking system). Given this, the economy is a monetary production economy,
which forms the material basis of a society and produces the social surplus, that is, the
social product (or GDP) minus the socially necessary consumption of producers,
workers and employees in the productive (surplus-producing) sectors of an economy.
The social surplus is used to maintain and expand the production system through
gross investments and, most importantly, to build up and maintain the material basis
of political, social, legal and cultural institutions, including the educational system.
These institutions form the institutional superstructure and, together with economic
institutions (enterprises in the social process of production, making use of a specific tech-
nology, and the banking system), they form a complementary set of institutions, associ-
ated with the technology in use. Given the complementarity of institutions, the material
basis of a society and its institutional superstructure form a system or a structured entity,
which may be called the socio-economic system, or society for short. In political
economy, society is primary and the starting point of analysis. Given this, political
economy is, essentially, about the functioning of the socio-economic system, not about
the rational behaviour of individuals, which is supposed to be co-ordinated in a socially
meaningful sense by competitive markets (cf Bortis 2021, pp. 92–93).
While neoclassical economics rests on a single principle, the marginal principle to wit
(Schumpeter), as is embodied in the principle of supply and demand, classical- Keynesian
political economy is based on three principles (Bortis 2021, p. 103). Two principles are of
classical origin: the labour-value principle summarises the essential features of the
immensely complex social process of production to provide the essence of the prices
of production, which are the fundamental prices in a monetary production economy
(Bortis 2003, pp. 433–445); the surplus principle of distribution implies that the distribu-
tion of income is, positively, a social issue, with power relations, eventually resulting in
REVIEW OF POLITICAL ECONOMY 5
mutual agreements, coming into play, and, normatively, a matter of distributive justice
situated at the heart of social ethics (Bortis 1997, pp. 158–175). Keynes provided a
third principle, namely, the principle of effective demand, related to determining the
scale of economic activity (Bortis 2003, pp. 460–467). These three principles imply
that money, intimately associated with the financial sector, plays a fundamental role.
Indeed, the processes of production and circulation could not go on without money,
since production takes time, outlays and receipts are not synchronised, and goods are
never exchanged against other goods (as is the case in a neoclassical-Walrasian frame-
work) but always against money, which also acts as a store of value and is, as such, inti-
mately connected to the financial sector, which interacts with the real sector (Bortis
2015). Finally, the Common Good is the fundamental social ethical value of classical-
Keynesian political economy; since, in an Aristotelian vein, ethically correct action
requires knowledge, classical-Keynesian political economy is needed to realise the
Common Good as perfectly as is possible for fallible human beings.
III. Methodological Remarks: Two Kinds of Abstraction in Economics and
in Political Economy
Political economy and economics both represent grand systems of economic theory,
based upon specific principles and systems of pure theory. The method used to obtain
conclusions regarding the great problems of economic theory —the determination of
the level of employment, the formation of prices and the regulation of income distribu-
tion —is, however, entirely different in political economy and economics. This is evident
from comparing two great works of political economy, Karl Marx’sKapital and Keynes’s
General Theory, with two important theoretical pieces in the field of economics, Alfred
Marshall’sPrinciples of Economics and Léon Walras’sGeneral Equilibrium Model.
The political economists consider the object under investigation, the economy, society
and the state as an interrelated entity. This implies a specific vision of society: the
economy with the social process of production at the centre constitutes the material
basis that produces the social surplus used to build social, political and cultural institu-
tions. Particular phenomena, for instance employment levels, income distribution and
prices, are seen in terms of the economy as a whole; they are macroeconomic issues.
The task of the political economist is to uncover the causal forces that govern the phe-
nomena in question. This necessarily leads on to looking for the essential elements gov-
erning value, distribution and employment. Marx (and Ricardo) concluded that labour
values represent the essence of prices. Marx argued further that distribution is regulated
by the surplus principle. Moreover, Keynes stated that the level of employment is gov-
erned by effective demand; given this, unemployment is mainly involuntary. These prin-
ciples lead on to very simple macroeconomic causal relations, that is, a macroeconomic
price relation embodying the labour value and the surplus principles and a quantity equa-
tion, exhibiting the principle of effective demand. These pieces of pure theory imply con-
sidering essential elements. For instance, in the price equation, specific conditions of
production and the vagaries of the market are not considered and, hence, abstracted
from. This type of abstraction, abstracting from accidental or not essential elements, is
denoted Aristotelian abstraction —the type of abstraction put to use in traditional
philosophy.
6H. BORTIS
Kantian abstraction, the type of abstraction of modern philosophy, is of an entirely
different nature. Selected areas of the object (the economy, interrelated with society
and the state) are chosen for investigation. The neoclassical economists consider the eco-
nomic sphere, represented by the market, in a vacuum, so to speak: the market is at the
centre surrounded by an institutional framework, which, ideally, should be market com-
patible, that is, not influencing the market mechanism.
The crucial point is that Kant denies that essentials can be identified. Given this, think-
ing about the properties of the objects seen as complex entities, for example considering
the economy, society and the state as a complex integrated whole, governed by laws of its
own, the paradox of thrift being an instance, is no longer possible. The traditional
essences of Aristotle and Aquinas become dogmas that may be wrong: Galileo Galilei dis-
proved the dogmatically held geocentric view through the heliocentric view. This mis-
trust concerning dogmas leads to modern non-dogmatic, scientific philosophy, of
which Kant is one of the main representatives. Kant proposed that the subject himself
thinks in an undogmatic way about the selected spheres of the real world; this is of par-
amount importance: the subject, the individual, now determines what the object is;to
know how the object really is, indicated through essentials, is out of reach for the indi-
vidual. Neoclassical economic theory provides an excellent example of thinking along
Kantian (-cum-Cartesian) lines. In the main, there is Walras’sGeneral Equilibrium
Model, which is a product of reason shaped by the liberal view: individuals are
primary and society is derived from the actions of individuals. Hence, since objective
truth, objective principles and pure theories, are out of reach for the individual scientist,
the subject, through his thinking, determines what the object is. As a consequence, neo-
classical principles and pure theories (Walras and Marshall) result from thinking in
terms of what is directly observable, that is, the behaviour of the economic agents, not
in terms of the economy as a whole, as is the case with Marx and Keynes. Given this,
the analysis becomes positivistic and purely scientific. There are prices and quantities,
and there is no essence of prices, no metaphysics. Economic agents behave rationally,
they maximise utility and profits. And the market co-ordinates the optimising behaviour
in such a way that a social optimum obtains: the general equilibrium is also a Pareto-
optimum. Hence, in economics the rational behaviour of individuals, that is, microeco-
nomics, is fundamental and neo-classical micro-founded macroeconomics is given by
Walras’s general equilibrium model, considered the Magna Carta of economic theory
by Joseph Schumpeter. In fact, Walras’s general equilibrium model represents the pure
theory of neoclassical economics, which provides the foundation of theoretical and
applied work along neoclassical lines.
In general, truth becomes relative with the anti-metaphysical Kantian approach: the-
ories are established and may eventually be falsified. In any case, science without meta-
physics, that is, looking for essentials, leads to confusion, even to chaotic situations,
illustrated by the intellectual scenery in the domain of economics prevailing presently;
this is due to considering the various spheres of investigation —economic, social, polit-
ical —as separated from each other; this is normal if, in a Kantian vein, the individual-
istic point of view is taken: the individuals simply become active in the various spheres;
and since the various spheres are interrelated in the real world, so-called interdisciplinary
work adds to the confusion. In any case, the holistic viewpoint, taken by Marx and
Keynes, which ultimately results in very simple causal relations, for instance the
REVIEW OF POLITICAL ECONOMY 7
classical-Keynesian super-multiplier, is pushed into the background. Nevertheless, neo-
classical economics, based on Walras’s general equilibrium model, still dominates
because it has become an ideology serving the interest of powerful capitalist forces,
huge corporations in the industrial, service and financial sectors, and, more importantly,
a convincing alternative is lacking.
However, Keynes, putting to use his macroeconomic principle of effective demand, has
ruthlessly unveiled the character of neoclassical theory: it is simply wishful thinking
(Keynes 1936 [1973], pp. 33–34):
The celebrated optimism of traditional economic theory, which has led to economists being
looked upon as Candides, who, having left this world for the cultivation of their gardens,
teach that all is for the best in the best of all possible worlds provided we will let well
alone, is also to be traced, I think, to their having neglected to take account of the drag
on prosperity which can be exercised by an insufficiency of effective demand. For there
would obviously be a natural tendency towards the optimum employment of resources in
a society which was functioning after the manner of the [neo-]classical postulates. It may
well be that the [neo-]classical theory represents the way in which we should like our
economy to behave. But to assume that it actually does so is to assume our difficulties away.
Marx and Sraffa are less polite with neoclassical theory, and its precursors. Marx speaks
of vulgar economics because the exchange-oriented followers of Adam Smith only con-
sider surface phenomena, prices of final goods, wages, profits and rents, without
asking about the essence of these phenomena, that is, labour values, socially necessary
wages and the social surplus. Piero Sraffa considers neoclassical economics an aberration,
mainly because of the one-way avenue leading from factors of production to final goods,
leaving the social process of production out of the picture.
However, we know that the modern neoclassicals counter criticism by arguing that
competition is not perfect. There is monopolistic competition, there are oligopolies
and monopolies; moreover, some trade unions still exist. Given this, globalisation is con-
sidered necessary to bring about more competition, also among huge multi- and trans-
national enterprises. Hence with increased competition, the (Walrasian) price or market
mechanism would be capable of solving the great problems of economics: employment,
value and distribution. However, if the price mechanism can solve the great problems of
economics, then social and political issues can be easily solved, too. The links between the
economic sphere, considered by the Kantian economists, and the social, political and cul-
tural spheres can be easily established. To simplify things, it is postulated that individuals
behave rationally in these spheres, too. This is demonstrated by the application of opti-
mising techniques, put to use in the economic domain, to the social, political and cultural
domain. The economics of crime is just one example. Given this, economics has become
the master-science of modernity!
At this stage, a crucial question arises: Can the price mechanism bring about a ten-
dency towards full employment of resources, specifically labour, in principle, that is,
in ideal conditions with perfect competition prevailing? The outcome of the capital-the-
oretic debate (Harcourt 1972) has shown that this is not the case (Samuelson 1966,
p. 250). The neoclassical principle of supply and demand, implying the marginal princi-
ple, is not robust enough to determine prices and quantities at a fundamental level. Given
this, the way is open to move from economics to political economy, that is, to the labour
value and surplus principles and to the principle of effective demand.
8H. BORTIS
To conclude, it is necessary to take a look at the work done by great economists and polit-
ical economists. Marshall was a brilliant mathematician, who, as a master of persuasion,
popularised economics, that is, the immensely complex Walrasian general equilibrium
model.Giventhis,themaintextofhisPrinciples contains no mathematics; rather, these
are presented as appendices. Walras was an engineer and, as such, a good mathematician,
who, however, became a poet when discussing the question about the tendency towards a
general equilibrium, which, in his view, was given by the flat lake of Geneva; storms produce
waves,hencedisequilibria.Oncethestormceases,thewavesflatten out until equilibrium is
reached! Hence, the scientifically rigorous basic model of neoclassical economics has to be
complemented by analogies taken from nature to answer crucially important questions! In
fact, Walras thought, in a Kantian-cum-Cartesian vein, of the competitive market as a kind
of natural institution taking the tendency towards an equilibrium for granted.
The great political economists, Ricardo, Marx and Keynes, wrote their important
works after a long period of preparation, around the age of fifty. Most importantly
they were in-depth students of the history of economic theories, which, in Keynes
words, leads on to the ‘emancipation of the mind’through considering differences and
contradictions between theories. Moreover, our political economists all did outstanding
practical work putting to use the dictum ‘nothing is more practical than good and solid
pure theory’: Ricardo was a highly successful stockbroker and a very influential member
of the British parliament; Marx dealt intensively with social and political problems, as a
co-organiser of the First International for example; and Keynes was a high-ranking civil
servant, a writer on economic, political and cultural affairs, and a very influential govern-
ment adviser. And, most importantly, Marx and Keynes were traditional (Aristotelian)
philosophers who knew about the fundamental concepts of essence and existence,
which with Keynes became pure and applied theory. And Ricardo was an amateur phi-
losopher, as all human beings potentially are, with a highly developed common sense,
enabling him to distinguish between what is really important for the entire economy,
that is, labour, and what is not important or accidental, that is, the conditions of
production.
Hence, the great political economists attempted to understand what is going on within
the objectively given real economy through very hard theoretical and practical work; the
theoretical work consisting of an in-depth study of the history of economic theories
leading to Keynes’s emancipation of the mind. This enabled Ricardo, Marx and
Keynes to rationalise their vision of the working mechanism of a modern monetary pro-
duction economy through distilling principles: the labour value and the surplus princi-
ples and the principle of effective demand. On the basis of these principles, a coherent
body of classical-Keynesian political economy may be set up.
In short, economists are rigorous scientists, making sometimes heroic assumptions
and arriving at clear-cut conclusions. But, when asked what they really want to say,
their answers are not always satisfactory. However, political economists are artists for
whom intuition, Keynes’sfirst form of knowledge, is important. But, as Keynes said
repeatedly, intuitive knowledge about the functioning of a monetary production
economy is hard won. The object, the monetary production economy, has to be exam-
ined thoroughly and, perhaps even more importantly, the history of economic theories
has to be studied in depth, such that the ‘emancipation of the mind’results. This,
Ricardo, Marx and Keynes did very seriously. And the conclusions reached are rational,
REVIEW OF POLITICAL ECONOMY 9
but not conclusive. Keynes thought that the conclusions resulting from a very complex
argument about the real world, the great Depression of the 1930s, set out in his
General Theory cannot be proved. All the political economist can do is to convince his
readers. (Incidentally, this is the reason why Keynes wrote his Essays in Persuasion.)
And, finally, and perhaps most importantly, one should not forget that both Marx and
Keynes were originally philosophers; in fact, they were traditional philosophers, admir-
ing Aristotle who coined the terms essence and existence, which, in Keynes’s hands,
became pure and applied theory. This theoretical technique —pure-cum-applied
theory —was put to use by Keynes in his Treatise on Money (1930 [1971], vol. I, The
Pure Theory of Money and vol. II, The Applied Theory of Money) and in his General
Theory (1936 [1973]), where he distinguishes between ‘the logical theory of the multi-
plier, which holds good continuously, without time-lag, at all moments of time [the mul-
tiplier principle is prior to its historical realizations in space and time], and the
consequences of an expansion in the capital-goods industries which take gradual effect
[in space], subject to time-lag and only after an interval [hence in historical time]’
(p. 122; see also pp. 122–125); on this, see also Bortis (2021, pp. 105–107). Given this,
principles and their associated pure theories, the super-multiplier grounded on the prin-
ciple of effective demand for instance, are crucial since they provide the tools for empir-
ical and historical investigation:
The notion of principles [and their associated pure theories] is closely associated with Aris-
totle’s essentialist theory of knowledge: the human mind does not remain at the surface of
phenomena but tries to understand the essential or constitutive forces behind, perhaps
better, inside, the phenomena. Here, the distinction between essentials and accidentals is
crucial as is the comprehensive point of view implying that all the relevant information
with the history of economic thought perhaps being most important —has to be taken
into account if a complex problem is investigated (for example, the formation of prices
or the determination of involuntary unemployment). Only what is considered to be essential
or constitutive to a phenomenon is included in the model, which is a picture, in fact a recon-
struction or recreation of what probably constitutes a phenomenon (for example, prices,
quantities and employment levels in political economy). This recreation is performed by
reason interacting with intuition and is analogous to the recreation of constitutive aspects
of nature by the late Cézanne by the means of colour or to the representation of essential
information for the user of the underground through a map. Consequently, metatheories
or sets of principles [and their associated pure theories] have not to be realistic in the sci-
entific sense, since they are not [simplified] reflections or copies (Abbilder) of certain
spheres of the real world that can eventually be associated with testable propositions.
(Bortis 2003, p. 413)
Keynes’s philosophy is set forth in his Treatise on Probability (1921 [1973]), his first
major work, originally submitted as a King’s College fellowship thesis in 1908. This
crucial work makes Aristotle fruitful for modernity. Given this, the Philosopher Keynes
is perhaps even greater than Keynes the Political Economist. This proposition is
enhanced by important books on Keynes’s method that take account of unpublished
work by him to be found in the Keynes archives at King’s College, Cambridge: Anna Car-
abelli (1988), Athol Fitzgibbons (1988) and R.M. O’Donnell (1989, specifically pp. 36–
40). Very importantly,
probability refers to a relation between two parts of an argument [and] is always concerned
with rational belief [resulting from Keynes’s] theory of rational inference [which] takes the
10 H. BORTIS
whole of human thought as its domain, ranging across areas as diverse as actuarial studies,
legal disputation, moral reasoning, metaphysical speculation, psychical research and math-
ematical argument, not to mention daily life and all branches of the natural and social sci-
ences [our emphasis]. Its aim is to express a unity within superficial diversity. (O’Donnell
1989, pp. 36–38)
Given this, ‘probabilities are always objective and never subjective. This is because they
are essentially connected to logic and not to psychology. Logical relations are viewed
as objective because they are grounded in an external immutable realm which timelessly
transcends mere individual opinion’(pp. 37–38).
IV. The Significance of Piero Sraffa in Classical-Keynesian Political
Economy
In Section Two it was suggested that the labour-value principle is, together with the prin-
ciple of effective demand and the surplus principle, a constituting principle of classical-
Keynesian political economy, which is essentially of a macroeconomic nature (Bortis
1997,2003). This seems to clash with the fact that Sraffa’s prices of production differ
from labour values if the conditions of production, given by capital–labour ratios,
differ between industries while the rate of profits has, in principle, to be uniform in all
industries.
In a Ricardian vein, one can reasonably argue that differing conditions of produc-
tion are of secondary importance since they only modify values. In this view, labour
values constitute the essence of the prices of production, implying that the conditions
of production are accidentals in metaphysical terms. This proposition is true for clas-
sical-Keynesian macroeconomics, as set out in Bortis (1997,2003,2012). Indeed, clas-
sical-Keynesian macroeconomics must be based upon the labour-value principle,
associated with the surplus principle of distribution and with Keynes’sprincipleof
effectivedemand.Thisgoestogether with the fact that the labour theory of value is
wrong if the conditions of production vary between industries while the rate of
profits is uniform (Bortis 2003,pp.411–415). To ground classical-Keynesian macro-
economics in the labour-value principle is a simplifying assumption that renders mac-
roeconomic analysis very simple, clear-cut and ready for socio-economic policy
making (Bortis 1997,2003,2012). Introducing the prices of production on a
macro-level would render macroeconomic analysis immensely complicated and
useless for policy purposes.
Hence, the labour-value principle enables the linking of Sraffa with classical-Keynes-
ian macroeconomic theory in a sensible way. And, indeed, Sraffa’s prices of production
emerge from a labour value basis. This is evident from writing his equations for the prices
of production (Sraffa1960, p. 11) in a slightly different form. The first equation can be
written as:
Law[[(Aapa+...+Kapa)(1 +r)]/Law] +1] =Ap
a(1)
Here, the expression:
[(Aapa+...+Kapa)(1 +r)]/Law] =P (2)
is but an indicator of the conditions of production, that is, the capital–labour ratio, which
REVIEW OF POLITICAL ECONOMY 11
is different from the concept of the conditions of production Sraffa uses in Chapter III of
his 1960 book. This expression suggests, first, that the conditions of production are not
important on the macroeconomic level because they only modify labour values and,
second, that the prices of production emerge from a labour value basis, which, inciden-
tally, implies that the title of Sraffa(1960) should read: Production of Commodities by
Means of Commodities and Labour. Indeed, if P were equal for all basic goods, then, obvi-
ously, the prices of production (p) would be proportional to labour values (L/A) in all
equations of production:
pa=(1 +P)(La/A)w (3)
In equation (2), P is a scalar, that is, the ratio of two monetary magnitudes. Now to
abstract from the conditions of production, the P-values of all the other equations —
the 2, the 3 and so on —have to be multiplied by appropriate scalars so as to make
them equal to the P-value of the first equation. This is to abstract from the conditions
of production that are accidentals and, as such, not relevant for macroeconomic pur-
poses. Indeed, if the conditions of production are abstracted from, the prices of produc-
tion (p) will be proportional to labour values (L/A) in all equations of production with
the same structure as equation (3), and the labour values appear as the essence of the
prices of production. In this context, one has to recall that pure theory is of a metaphys-
ical character dealing with essentials only, and material reality and historical time are
both abstracted from. Given this, ‘[p]rinciples and pure theories are intellectual con-
structs or products of the mind; they recreate or reconstruct by means of reason what
is considered to be constitutive or essential of a phenomenon; for example, prices, quan-
tities and output and employment levels’(Bortis 2021, p. 105). On metaphysical reason-
ing, see also the introduction to Bortis (2003, pp. 411–415, specifically pp. 412–413) and
what has been said on the distinction between principles and pure theory, on the one
hand, and applied theory on the other in Section Three above. To avoid misunderstand-
ings, the proposition that labour values constitute the essence of the prices of production
must be further explained. In fact, this proposition makes full sense only in a monetary
theory of production and, hence, in a macroeconomic context. Here, prices are absolute
prices. Indeed, Keynes, just after publishing his Treatise on Money, realised that he
was not able to deal with the Great Depression and involuntary mass unemployment
with his Treatise model, which implied full employment situations from which deviations
could occur because of the credit cycle. Given this, Keynes immediately set out to write a
new book that would become the General Theory. In the course of struggling to elaborate
the General Theory, he wrote a very small paper for the Festschrift für Arthur Spiethoff
(Keynes 1933b, pp. 123–125). To begin with, Keynes writes: ‘In my opinion the main
reason why the Problem of Crises is unsolved [or at least unsatisfactory], is to be
found in the lack of what might be termed a Monetary Theory of Production’(p. 123).
Keynes immediately goes on to say that he does not have in mind the neoclassical
notion of a monetary economy, in which money merely facilitates exchange and is
neutral (p. 123). Consequently, he considers the term monetary economy a misnomer
and suggests that, classical and neoclassical economics are about a Real-Exchange
Economy (p. 123). In this context, ‘Marshall expressly states (Principles, pp. 61, 62)
that he is dealing with relative exchange values’(Keynes 1933b, p. 12), a statement
12 H. BORTIS
which is fully true for the basic model of neoclassical economics, that is, Walras’s general
equilibrium model. Hence, Keynes’s macroeconomic monetary theory of production
must contain absolute prices, a fact that went without saying for Keynes because, in a
monetary production economy, goods are always exchanged against money; hence, as
a rule, relative prices in a macroeconomic context do not matter except for specific—
comparative —purposes, to calculate the terms of trade, for example. This is certainly
the reason why Keynes, in his General Theory, does not bother in the slightest about rel-
ative prices, that is, traditional neoclassical microeconomics. Pricing, that is, the calcula-
tion of normal costs and mark-up pricing was, for him, a matter of (practical) business
economics, not a matter of economic theory; Sraffa would have agreed on this proposi-
tion. However, we argue in this article that Piero Sraffa provided the conceptual under-
pinning for mark-up prices. Now, it is crucial to note that Sraffa adds an equation for the
national income to his equations for the prices of production, which allows him to keep
the prices of production in absolute form, as is required for macroeconomic purposes:
‘This gives k+1 equations as compared with k+2 variables (k [absolute] prices, the
wage w and the rate of profits r)’(Sraffa1960, p. 11). However, Luigi Pasinetti expresses
Sraffa’s prices of production as relative prices because he excludes Sraffa’s additional
equation for the national product (Sraffa1960, p. 11; Pasinetti 1977, p. 73). On the
other hand, absolute prices and quantities emerge from the social process of production
if distribution (the money wage rate and the rate of profits) and the level of employment
are determined (Bortis 2003, pp. 448–467, specifically pp. 451, 457, relations [19.18] and
[19.25], based on Pasinetti 1986, pp. 422–423). Expressing Sraffa’s prices of production as
relative prices is necessary for two main reasons. First, this allows one to solve Ricardo’s
conundrum of absolute value, independent of distribution, through Sraffa’s standard
commodity. Second, and crucially, Sraffa’s relative prices model allows one to disprove
the basic neoclassical-Walrasian claim, namely, that the price system, consisting of rela-
tive prices, may, in principle, bring about a full employment situation and simultaneously
solve the problem of functional income distribution on the basis of marginal products.
This claim has been disproved in the course of the capital-theoretic controversy, initiated
and led on the Sraffian side by Luigi Pasinetti (Harcourt 1972). Hence Keynes’s principle
of effective demand, which determines the quantities of all goods produced on the basis
of the labour-value principle, is crucial to establishing a macroeconomic theory with laws
of its own, entirely independent of and even in contradiction to the outcome of the
behaviour of individuals, the paradox of thrift being a prominent example. Indeed,
effective demand is a monetary magnitude and labour values have to be expressed in
money form as absolute prices, which, in turn, are defined once the money wage rate
is fixed and distribution is regulated through the mark-up containing the normal rate
of profits on the level of firms and the social surplus on the macroeconomic level (see
the macroeconomic price relation [4] below). Hence, the money wage rate is not the
price of labour, as is the case in neoclassical economics; rather, together with the rate
of profits, contained in the mark-up, it is a distributional variable. This is an important
characteristic of classical-Keynesian political economy. The principle of effective demand
and the labour value and surplus principles thus imply each other on the macroeconomic
level. Given the above, in Section Five below and in Bortis (2003,2012) it is argued that
Sraffa can be brought together with Keynes’s theory, which is essentially macroeconomic,
on the basis of the labour-value principle only; this argument is also implied in Bortis
REVIEW OF POLITICAL ECONOMY 13
(1997). Hence the labour-value principle is, in a way, the unifying principle of the mac-
roeconomic part of classical-Keynesian political economy. Here, Sraffa’s prices of pro-
duction are thus discarded, in fact reduced to their essentials, that is, labour values.
This must be so because sensible classical-Keynesian macroeconomics requires vertical
integration: an economy must be considered an entity, a huge firm, as Nicholas
Kaldor argued in his lectures in the early 1970s. This implies that macroeconomics
has laws of its own that cannot be deduced from the behaviour of producers and consum-
ers, the paradox of thrift being just one important instance. In this sense,Keynes was the
first real macroeconomist and, given this, the founder of macroeconomics in the full
sense of the word. However, Sraffa’s prices of production become of primary importance
if attention is directed towards industries, final product sectors and individual firms. This
leads to Sraffa’s constructive contribution. Why is a coherent system of prices of produc-
tion required given the fact that, in a Ricardian–Marxian vein, labour values are funda-
mental and the conditions of production are of secondary importance? To explain this,
we have to start from the macroeconomic price equation based upon the assumption of
vertical integration (equation [4] below). The assumption of vertical integration is
required at the macroeconomic level to derive the macroeconomic price equation in
order to uncover the basic principles governing value and distribution on the macroeco-
nomic level, that is, the labour-value principle and the surplus principle. However, the
assumption of vertical integration evidently does not make sense on the microeconomic
level. Firms do not know labour values; they simply take the existing prices on which to
base their calculation of normal costs and prices. These prices are not labour values
because no vertical integration exists on the micro level. Here, and on the industry
level, there are horizontal interfirm and interindustry deliveries and receipts of goods
and services, as are exhibited by the Leontief input–output table. Given this, labour
values would have to be calculated by making use of the Leontief inverse, with prices
having the same structure as the prices exhibited by relations 19.4, 19.5 and 19.6 in
Bortis (2003, p. 438); this is impossible as the experience of the socialist economies
has shown. Thus, normal cost and price calculations must be based on prices, not on
labour values. Now, entrepreneurs and managers, if asked what kind of prices enter
normal cost and price calculations, would simply reply that these prices are market
prices, with exceptional price movements being abstracted from. However, Sraffa has
demonstrated that this is wrong: the prices in question are not the result of the
working of the principle of supply and demand, but are formed in the social process
of production; hence, the prices in question are prices of production with the conditions
of production playing a crucial role. As the classical economists knew, market prices as a
rule deviate from the prices of production or from the natural prices; moreover, in com-
mercial schools students are instructed to eliminate exceptional market elements from
prices of basic and intermediate goods in order to obtain the prices of production to
be used to calculate normal costs and prices.Hence, the assumption of equal conditions
of production, required to establish the labour-value principle, cannot be maintained on
the microeconomic (firm) level. However, once established in principle, the prices of pro-
duction may be used on the microeconomic level to study, for example, the pricing
behaviour of firms or, on the sectorial level, giving rise to industrial economics. Given
all this, Sraffa’s prices of production represent an immense theoretical achievement,
which is alluded to in Bortis (2013b, pp. 62–66). Hence, Sraffa(1960) sets out the pure
14 H. BORTIS
theory of the prices of production, and empirical and historical studies in mark-up pricing
would be pieces of applied theory, which are likely to be very complex. Consider, for
example, the production of a suit somewhere in Italy: the wool, originating in Australia,
has been brought to Italy by a Greek ship, which has been produced in Germany, using
steel produced in Japan with Swedish iron ore, and so on. Given the immense complex-
ities of social production, pure theory is absolutely necessary to interpret correctly the
empirical–historical result in terms of the labour value and the surplus principle,
taking account of specific technical and socio-economic conditions of production.
This implies that the theoretical system of classical-Keynesian political economy is
essentially of a macroeconomic nature; classical-Keynesian microeconomics and indus-
trial economics largely consist of empirical and historical work on the basis of Sraffa’s
prices of production. Hence, Sraffa provides the link between macroeconomic theory
and facts, on the one hand, and empirical–historical microeconomics and industrial eco-
nomics, on the other, establishing thus the link between the macro-, meso- and micro
levels of classical-Keynesian political economy.
Given this, Sraffa’s prices of production are Janus-faced. The labour-value face (rela-
tions 1 to 3 above) looks in the direction of macroeconomics, the prices-of-production
face in the direction of meso-economics and microeconomics, that is, in the direction
of industries, final product sectors and firms. However, the prices of production build
upon labour values (relations 1–3). The labour-value principle thus emerges as a unifying
principle of classical-Keynesian political economy, together with the surplus principle of
distribution and the principle of effective demand. At this stage we may note that, in the
socialist economies, the planning authorities have indeed attempted to directly calculate
labour values. This requires, however, knowledge of the immensely complex Leontief
inverse (Bortis 2003, relations 19.4–19.6, p. 438). Given this, the labour values cannot
be calculated with sufficient precision even if powerful computers are available. The
problem would be the definition of sectors and industries and the collection of the
data required to calculate the production and labour coefficients, which are not available
with sufficient precision. Consequently, the socialist method of calculating prices based
on labour values resulted in an irrational price system. Some socialist enterprises made
undeserved losses, others undeserved gains, leading to indebtedness between enterprises.
This left the workers and the management of the socialist enterprises without real moti-
vation to achieve the best possible price–quality relationship for final goods, with inno-
vations in consumer goods being largely absent; moreover, as a rule, socialist enterprises
attempted to keep the Plansoll as low as possible. These were certainly important factors
bringing about the breakdown of the socialist economic system. In fact, central planning
of quantities and prices is a war and crisis system, entirely inappropriate in normal and
peace times. However, Sraffa’s prices of production allow, in principle, for entrepreneur-
ial freedom and motivated workers, implying the constant search for the best possible
price–quality relationship. However, the social process of production must be regulated
through employment and distribution policies, if this process is to continue in a way
beneficial to society as a whole. Hence, for reasons of socio-economic expediency, the
prices of production prevailing in an economy should be based on the labour principle
of value without strictly corresponding to labour values (relations 1–3 above and the
prices of production exhibited in Sraffa1960, p. 11). The socialist aim of bringing
about an ideal economic system through realising, in strict terms, the labour-value
REVIEW OF POLITICAL ECONOMY 15
principle is bound to result in a loss of freedom and an authoritarian society. In fact, the
fundamental policy aim must be to favour the coming into being of a good society, that is,
to achieve the Common Good as far as this is possible for imperfect human beings with
limited and probable knowledge. This is, in fact, Keynes’s social liberal message. The
attempt to bring about a perfect society in which prices are proportional to labour
values would result in an authoritarian society, possibly even a tyranny.
Given this, the fundamental prices are not, and cannot be, determined in the market, be it in a
Walrasian or in a Marshallian framework. But these basic prices need not be determined by a
central plan either. Sraffa’s work implies that price formation is decentralised, that is, prices can
be fixed by individual firms through the calculation of normal prices, and, within the limits of
the given output, governed by effective demand; this is also true of quantities. Sraffahasthus
provided us with the foundations of the price theory pertaining to a theoretical alternative to
neoclassical economics and centrally planned socialism, that is, classical-Keynesian political
economy [the political economy of Keynes’s social liberalism]. (Bortis 2013b,p.69)
This is certainly Sraffa’s most important contribution to Keynes’s social liberal alternative
to liberalism, historically realised through capitalism, and to socialism with central plan-
ning. This constructive achievement of Sraffa(1960) is complemented by two critical
achievements. First, this book has led to a revival of classical political economy while, at
the same time, implying a fundamental critique of neoclassical economics. For classical-
Keynesian political economy, which is essentially macroeconomics, the labour-value prin-
ciple rests on simplifying assumptions: the same conditions of production for all goods and
a vertically integrated economy. If the simplifying assumptions are given up, the labour-
value principle still holds, in modified form though (relations 1–3 above and the prices
of production system exhibited in Sraffa1960, p. 11). However, for the neoclassicals, the
assumptions of the same conditions of production and vertical integration are crucial;if
given up, the marginal productivity theory breaks down; for example, with Samuelson’s
(1962) surrogate production function, the neoclassical marginal productivity theory
holds if the labour-value principle is postulated and breaks down as soon as the conditions
of production differ between sectors of production (Bortis 1997, pp. 289–290). Given this,
the capital-theoretic debate of the mid-1960s, based on Sraffa(1960) and initiated by Luigi
Pasinetti, came out entirely in favour of classical political economy, with Samuelson admit-
ting complete defeat (Samuelson 1966,p.250).Second,
the labour value and the surplus principles can be brought together with the long-period
principle of effective demand through the classical-Keynesian super-multiplier relation
(Bortis 2003, pp. 460–467), thus completing the classical-Keynesian synthesis. Hence
Sraffa has not only rescued the classical labour value-cum-surplus approach, but also
Keynes’s principle of effective demand, literally snatching Keynes from the jaws of the neo-
classical-Walrasian mainstream. (Bortis 2013b, p. 68)
However, the fact that Keynes had become a Walrasian disequilibrium theorist for some
time illustrates that criticism is not enough; a coherent classical-Keynesian system is
required to definitely discard neoclassical economic theory. These considerations of
Sraffa imply that Section Five below on classical-Keynesian macroeconomics has a
heavily Ricardian flavour, with the labour-value principle put to the fore and capital con-
sisting of fixed capital only —with vertical integration circulating capital appears in the
shape of indirect labour. However, on account of relations 1–3 above and of the
16 H. BORTIS
equations for the prices of production (Sraffa1960, p. 11), Sraffa is present on the mac-
roeconomic level through the labour-value principle underlying his prices of production
and, implicitly, on the level of industries and firms, precisely on account of his prices of
production. Yet one should note that the macroeconomic price equation of a mark-up
type (relation I below) rests entirely on the labour-value principle, and the macroeco-
nomic ‘mark-up’(k) now becomes the surplus coefficient (k∗), with the surplus being
made up of surplus wages above necessary wages; profits; rents, made up of land and
labour rents; land rents on intramarginal, more fertile land appear as a surplus; and
labour rents, accruing to parts of the labour force on account of special skills, privileges
and power positions. It is at this point that Sraffa comes into the picture, on the micro-
economic level though, that is, on the level of firms. Here, all prices are prices of produc-
tion and the various mark-ups contain profits only. However, on account of relations 1–3
above, the prices of production rest on a labour-value basis and profits are linked to the
surplus principle. Given this, Sraffa has established the conceptual unity not only of clas-
sical-Keynesian political economy but also Marx’s system of political economy, set forth
in the three volumes of Das Kapital. Here, volumes I and II rest on the labour-value and
surplus principles in the form of pure theory; and volume III is based upon prices of pro-
duction, which in bourgeois (neoclassical) economics appear in alienated (ideological)
form, that is, as market prices, and, in the sphere of distribution, as wages, profits and
rents (Marx, Das Kapital, vol. III, ‘Die trinitarische Formel’, pp. 822 ff.). However,
Marx and Engels seem to join the Ricardian position: the conditions of production do
not produce values, but only modify values, and a modification that can be calculated
does not imply a refutation of the law that living labour only produces value and that
profits appear as a surplus, also produced by living labour (Engels, quoting
P. Fireman, in his introduction to vol. III of Das Kapital, p. 21). Yet, it is not sufficient
to claim that the conditions of production modify labour values. A coherent system of
prices of production must be set up, and this is entirely to Sraffa’s immense merit. Sub-
sequently, Luigi Pasinetti has shown how labour values can be transformed into prices of
production (Pasinetti 1977, appendix to the Sraffa system, pp. 122–150). Given all this,
Luigi Pasinetti and Piero Sraffa have both decisively contributed to advancing the
Keynesian revolution and rendering it possible to contribute to an open system of clas-
sical-Keynesian political economy (Bortis 1997,2003,2012,2013a), capable of being
extended in various directions: money and finance, foreign trade and business cycles,
for example.
V. The Basic Equations of Classical-Keynesian Political Economy
It is of the utmost importance to bring together the three fundamental principles under-
lying classical-Keynesian political economy —the classical labour value and surplus prin-
ciples and the Keynesian principle of effective demand —in a coherent theoretical
scheme that may be set in opposition to the neoclassical-Walrasian framework.
Indeed, as emerges from Keynes’s economic and philosophical work, to analyse socio-
economic phenomena, employment and distribution on the basis of pure theories,
grounded in turn on principles, is the most appropriate way to prepare rational policy
actions in a complex and rapidly evolving real world, about which we have imperfect
and probable knowledge only and where uncertainty about the future always prevails.
REVIEW OF POLITICAL ECONOMY 17
The analytical basis of classical-Keynesian political economy is set forth in Bortis (2003)
and is put into a wider context of the social and political sciences and of history in Bortis
(1997). Given this, in this section we present the basic elements of classical-Keynesian
political economy, that is, the price and the quantity equations as they emerge from
the social and circular process of production.
5.1. Value and Distribution: The Macro-Economic Price Equation
The immense complexity of the social process of production emerges from the two
aspects under which it may be considered: the nature and the labour aspects. Horizontal
or inter-industry models of the Leontief–Sraffa type represent the nature aspect of pro-
duction: primary products taken from nature and intermediate products moving
between industries to enable, in association with direct labour and fixed capital (past
labour), the production of final goods (Pasinetti 1977). In vertically-integrated produc-
tion models, labour is put to the fore. At the different stages of production labour uses
up primary and intermediate products to produce final goods. In this, labour is assisted
by fixed capital, embodying past labour (Pasinetti 1981,1986). In inter-industry models
with unequal conditions of production, unequal relations between fixed and variable
capital–price equations become immensely complicated. This can be seen immediately
from Sraffa equations for the prices of production (Pasinetti 1977, chapter V). Indeed,
prices depend on all production coefficients of basic goods and on income distribution
represented by the uniform rate of profits.
Given this, the problem now is to bring out the essential elements of value formation
and of the regulation of distribution such that a very simple model of value and distri-
bution emerges that can be used for macroeconomic purposes (Bortis 2003, pp. 436–
445). The starting point is a Leontief price system (Bortis 2003, relation 19.1, p. 436). Iso-
lating the price vector and applying the Pasinetti transformation (Bortis 2003, relation
19.5, p. 438) yields a series of very simple sectorial price equations (19.6, p. 438).
Indeed, each price is given by the product of the money wage rate, the quantity of
direct and indirect labour per unit of output and of the mark-up, which has to ensure
a target rate of profits on fixed capital; on the macroeconomic level, the mark-up (k)
in relation (1) becomes the surplus coefficient and the money wage rate in this equation
(w
n
) the socially necessary wage rate. Given this, the sectorial price equations lead on to a
macroeconomic price equation, based on the labour value and on the surplus principles:
p=wnnk=wn(1/A)k∗(4)
Overall, labour productivity (A) is the inverse of the macroeconomic labour coefficient
(n) with (A = Q/N) and (n = N/Q), where (N) is the productive labour force active in
the social process of production. In a Ricardian–Marxian–Keynesian vein, measuring
(N) implies that the ‘reduction problem’is solved through the existing wages structure;
as a consequence, w
n
represents the socially necessary wage rate of a unit of simple
labour. The social product (Q) is measured in terms of a bundle of socially necessary con-
sumption goods, of which (p) is the price in terms of money. Most importantly, the
socially necessary money wage rate (w
n
), the surplus coefficient (k∗), and the distribution
of the surplus result in the distribution of total incomes. Given this, prices are, in a Ricar-
dian vein, formed in principle on marginal land where the rent for nature basics
18 H. BORTIS
(agricultural products and raw materials) is zero; given this, land rents occur because less
labour is required to produce a certain quantity of nature basics on intramarginal land.
Labour rents arise because the wages of certain employees in the production and service
sectors exceed socially necessary wages because of exceptional abilities (outstanding foot-
ball players or very gifted surgeons) or power positions (managers getting very high sal-
aries). Subsequently, the distribution of socially necessary wages and, above all, the
distribution of social surplus among the various social classes becomes a fascinating
problem of political economy, sociology and politics. Specifically, in this context, the
notions of poverty and misery may be defined on the basis of the surplus principle.
For those on low incomes, poverty results if the surplus wage tends towards zero and
misery occurs if money wages are depressed below socially necessary wages, the main
reason for the pressure on wages being permanently existing involuntary unemployment.
Now, the (Keynesian) scale aspect of the monetary theory of production requires
taking account of absolute prices and quantities. Absolute prices are determined once
income distribution is regulated (Bortis 2003, pp. 436–456). To determine absolute quan-
tities requires a theory of employment (Bortis 2003, pp. 456–467). Given this, the deter-
mination of the long-period level of employment (N) below full employment, governed
by persistent factors, i.e., technology and institutions, will be considered next. This
amounts to looking for the factors governing the breadth of the economic circuit or
the scale of economic activity in the long term; formally, this amounts to determining
the employment scalar by which the full employment level and the associated output
quantities have to be multiplied (Bortis 1997, pp. 150–151).
5.2. The Scale of Economic Activity and the Employment Issue: The Quantity
Equation
The classical-Keynesian long-period theory of output and employment is given by the
super-multiplier relation as derived in Bortis (2003, pp. 460–467):
AN =Q=G+X
zs[1 −(1/k∗)] +
p
(b1+b2)−(g +d)v (5)
This relation governs the position of the normal, trend or ‘equilibrium’output (Q), which
may be located well below the full employment trend (Q
f
) (Bortis 1997, chapter 4, spec-
ifically pp. 142–154; 2003, specifically pp. 460–467; 2021, pp. 106–107, 109–113). Given
this, the super-multiplier relation tells us how the long-period employment level is deter-
mined in principle by the institutional-technical system, independent of any historical
realisation; as such, the super-multiplier pictures a fully-adjusted situation. The super-
multiplier links the autonomous variables (government expenditures (G) and exports
(X)) with output (Q) and, hence, to economically productive employment (N) because
of (Q = AN), where (A) is labour productivity. In fact, economic activity is set in
motion by the autonomous variables (G + X), which bring about a cumulative process
of output and income creation in the consumption and investment goods sectors,
which is constrained by imports. The trend rate of growth of output (Q) is governed
by the growth rates of the autonomous variables (G) and (X). The super-multiplier rela-
tion is of a long-period nature because, in a classical (Ricardian) vein, all the prices and
quantities involved are governed by technology and institutions that are constant or
REVIEW OF POLITICAL ECONOMY 19
slowly evolving and represent, as such, a system equilibrium. To bring into the open the
essential features of the super-multiplier relation, we postulate that socially necessary
wages are entirely consumed. The surplus over socially necessary wages consists of ordi-
nary surplus wages, gross profits and land and labour rents, the latter arising on account
of special abilities or privileges. Given this, ordinary or normal wages, governed by col-
lective or individual bargaining or simply imposed upon workers and employees, consist
of socially necessary wages and ordinary surplus wages; if labour rents are added to ordi-
nary or normal wages, the total wage sum results. The leakage as a fraction of the social
surplus is z
s
=1–c
s
=s
s
+t
s
(c
s
,s
s,
t
s
= fractions of social surplus consumed, saved and paid
for in taxes, respectively). The surplus share in income is 1–(1/k∗), where k∗is the surplus
coefficient, which is a macroeconomic magnitude, differing from the microeconomic k,
which is on unit costs at normal capacity utilisation to bring about a normal rate of
profits; b
1
is the propensity to import necessary goods required in the process of produc-
tion; b
2
stands for the import propensity of non-necessary goods that are related to state
and private consumption; πequals the terms of trade; (g + d)v is the gross investment–
income ratio; g is the trend rate of growth of the autonomous variables (G + X); d is the
drop-out ratio of fixed capital, depending on physical and technical obsolescence and
hence upon the innovative dynamism of entrepreneurs; and v represents the capital
coefficient. Given the autonomous variables, output (Q) is, in principle, positively
linked with a large investment–output ratio (g + d)v and negatively linked with a
strong import dependence, as is reflected in large import coefficients, and in unfavour-
able terms of trade (πis large). Most importantly, an unequal income distribution,
reflected in a relatively large value of the surplus share [1–(1/k∗)] is, in principle, associ-
ated with a lower level of output and employment; if the surplus is itself unequally dis-
tributed, the leakage coefficient z
s
will be large —because of a high saving coefficient s
s
—
which further depresses output (Q) and employment (N). The negative link between
unequal distribution and output and employment is the crucial feature of the super-mul-
tiplier relation.
VI. Possible Extensions and Implications of the Basic Classical-Keynesian
Model
6.1. Extensions
Classical-Keynesian long-period theory, that is, the theory of the long-period output and
employment trend, and its implications for the theories of value, distribution and pro-
portions-cum-structures (on this, see Bortis 1997,2003), represents the starting point
for building up an open-ended classical-Keynesian system of political economy, which,
in a first step, would consist of an orderly arrangement of all elements of post-Keynes-
ian-cum-neo-Ricardian theories. Here, the works of Keynes and Sraffa would have to
be put in their appropriate place. However, in a second step, the classical-Keynesian
system must be open to allow all types of heterodox economics, and of (humanist)
Marxist political economy. In this way, most differing aspects of an evolving real
world may be tackled. And, to avoid misunderstandings, it should be mentioned that
Walras and Marshall will, forever, remain monuments in the history of economic
theory because, without knowing about their theoretical systems, we cannot understand
20 H. BORTIS
the meaning and significance of the twin Keynes–Sraffa revolution (Shackle 1967) and of
classical-Keynesian political economy. Hence, the purpose of the classical-Keynesian
political economy is essentially positive and constructive; the aim is to gather all the
forces required to meet the formidable challenges facing us on a world scale: social prob-
lems (poverty and misery), economic issues (employment and distribution), environ-
mental problems and the issue of sustainable development on a world level, the
migration problem, and last, but not least, the rebuilding of states. At this stage we
mention two possibilities for integrating Keynesian and post-Keynesian elements of anal-
ysis into the system of classical-Keynesian political economy. The first kind of theory that
can easily be incorporated into the classical-Keynesian framework of political economy is
money and finance (Bortis 2013a, pp. 346–352; 2015). Both pieces of analysis deal with
the role of money and finance in a monetary production economy; specifically, the
problem of financialisation is treated on the basis of Keynes’s chapter 15 in volume I
of his Treatise on Money: ‘The Industrial Circulation and the Financial Circulation’.A
second topic is the problem of growth and distribution. It would seem that the post-
Keynesian rate of growth–rate of profit relationship should not be used as a theory of
growth and distribution but as a (pure) theory of business cycles (Bortis 1997,
pp. 132–135, 204–220). A short presentation of business cycles interacting with the insti-
tutional trend is set out in Bortis (2021, pp. 106–107, 111–113).
6.2. An Implication of the Super-Multiplier Equation
To prepare for the analysis in Sections Seven, Eight and Nine below, a specific character-
istic of a simplified super-multiplier equation related to the determination of output and
employment has to be set out. This property is relevant for the analysis of actually exist-
ing situations (what is) and desirable normative states (what ought to be) as well as for
policy conclusions. In fact, the super-multiplier relation embodies two output and
employment mechanisms, that is, the internal and the external employment mechanism
(Bortis 1997, pp. 190–198; 2019b, p. 197). The internal mechanism is based upon the fun-
damental macroeconomic equality (S = I):
Qi=G
(1 −c) −a(6)
The economy is set in motion through government expenditures (G). The level of output
and employment (Q
i
) is governed by (G) and the consumption–output ratio (c), which,
in turn, depends on the distribution of incomes. In a Keynes/Beveridge vein, a more
equal income distribution enhances the spending power of the population, raises (c),
leading thus to a higher output and employment level. The gross investment volume
is, like consumption, a derived variable. Since (1–c) equals (s + t), the sum of the
saving and tax ratios, and, in macroeconomic equilibrium the gross savings ratio (s)
equals the gross investment ratio (a), relation (6) becomes:
Qi=(1/t)G (7)
Hence, in macroeconomic equilibrium, the inverse of the tax–income ratio (t) represents
the multiplier associated with government expenditures (G). This is equivalent to saying
that government expenditures create the amount of taxes necessary to balance the state
REVIEW OF POLITICAL ECONOMY 21
budget (G = t Q) as long as (Q) is below (Q
f
). The external mechanism is based upon the
current account equilibrium (X = M = b Q):
Qe=(1/b)X (8)
The inverse of the import–output ratio (b) represents the familiar export multiplier
stating how output (Q
e
) and thus employment are governed by the external employment
mechanism. This mechanism puts to the fore the essentially neo-mercantilist nature of
international trade, characteristic of monopoly capitalism.
VII. Analysis of the Actual Situation on the Basis of the External
Employment Mechanism
1
The internal employment mechanism (relation 6) is politically exceedingly difficult to
manage in an open economy. There is, first, an inherent difficulty. The internal employ-
ment mechanism in fact requires establishing socially appropriate proportions between
the state and the private sector, reflected by the ratio (G/Q), and a socially acceptable dis-
tribution of incomes, such that economic activity is near to, or ideally at, the full employ-
ment level. And, second, internal policies ought to be such that the external balance (X =
M) is broadly preserved, which is exceedingly difficult, if not impossible, to realise given
the fact that the external output and employment mechanism actually dominates.
However, on a fundamental level the internal employment mechanism cannot be put
to use systematically because it cannot be reconciled with the presently dominating exter-
nal employment mechanism, as we shall now argue.
The starting point is a modified and simplified version of the super-multiplier (relation 5
above), which, in fact, synthesises the internal and external employment mechanisms:
Q=G+(X−M)
(1 −c)−a(9)
This relation sets forth clearly the mercantilist nature of the external output and employment
mechanism. Indeed, if the external mechanism dominates [Q
e
>Q
i
,assetoutinequations
(6) and (8)], then a current account surplus will show up in relation (9) and, contrariwise,
adeficit will come into being if (Q
e
<Q
i
)(seeBortis1997, pp. 191–196). The surplus coun-
tries could, in theory, bring the balance of current account into equilibrium through stimu-
lating effective demand, through additional government expenditures (G) and/or enhancing
the spending power of the population by a more equitable income distribution to increase
(c); however, we shall argue that this kind of Keynesian policy cannot be pursued in a com-
petitive global environment. The deficit countries would, however, have to pursue austerity
policies, lowering (G) or raising (t), which, as is evident from relation (7) above, would
produce, and is indeed producing, catastrophic results regarding output and employment.
In any case, however, a current account surplus stimulates economic activity —output
and employment rise —and contrariwise with a deficit. In view of the difficulties associated
with the internal employment mechanism it is natural that, with the creation of large free-
trade areas and globalisation, almost all countries are forced to rely upon the external
1
With minor changes, Sections Seven, Eight and Nine correspond to sections 9.5, 9.6 and 9.7 of Bortis (2019b,
pp. 197–206).
22 H. BORTIS
employment mechanism to secure levels of employment as high as possible. Given this,
remaining competitive on world markets becomes all-important. Densely populated coun-
tries lacking primary resources (agricultural products, raw materials and energy resources)
are, as a rule, naturally outward-oriented. Obvious examples are Germany, Japan, Singapore,
Switzerland and Taiwan. Producers of primary goods are invariably forced to rely on the
external mechanism (relation [4] above). With the external employment mechanism, eco-
nomic activity is governed by exports and the import coefficient. Exports constitute an auton-
omous variable setting the economy in motion. The import coefficient reflects outside
technical and cultural dependence and the terms of trade would constitute a kind of inter-
national reduction coefficient (Bortis 1997,pp.185–189). Favourable terms of trade would
imply that the labour of some country is highly valued abroad since, in exchange for
given exports, large quantities can be imported. The employment effect of foreign trade
will be particularly strong if the bulk of exports consists of high-quality industrial products
and services and if imports are, in the main, made up of primary goods; in this case, the terms
of trade will, as a rule, be favourable. Sophisticated high-quality industrial goods and services
are, as Nicholas Kaldor has emphasised time and again, labour-intensive if account is taken of
direct, indirect and past labour (fixed capital) and of research and development activities.
However, primaries (agricultural products, raw materials and energy resources) are essen-
tially land-intensive and industrial standard products create few and low-quality workplaces
since their production is usually very mechanised, with machines being imported as a rule.
Here, the employment effect of foreign trade will be weak and heavy outside dependence on
technologically advanced industrial products will occur.
Most importantly, however, there is a contradiction between the external and the
internal employment mechanism at the world level. In fact, world economic activity
(Q
W
)must be governed by the internal employment mechanism since the world as a
whole is a closed system:
Qw=GW
(1–cW)–aW
(10)
The share of world economic activity attributed to each country is, however, governed by
the super-multiplier mechanism (relation [5] above). Hereby, the shares in world indus-
trial production and service activities are, of course, of particular importance; even shares
in technologically advanced industrial goods and services are crucial. In order to success-
fully set to work the external employment mechanism, countries and regions have to
offer favourable conditions in order to attract firms, which create additional work
places and, subsequently, export the bulk of their production. The workforce has to be
of good quality, but wages not too high. The infrastructure should be in a good state
and available at low cost to the users. Public services, education in the main, and
traffic infrastructure should be of high quality, but taxes not too high. Taxes may, in
turn, be lowered if state activities are privatised. Given the endeavour to create, in
each country, a favourable environment for exporting firms, it is likely that government
expenditures stagnate or even decline at the world level, (G
W
) in relation (10) declines.
Even more importantly, income distribution has become markedly more unequal in the
last thirty years or so —and the distribution of wealth even more so; in fact, high invol-
untary unemployment worldwide and relatively high rates of mobility exert a downward
pressure on wages everywhere, above all in the low wage sectors where primaries and
REVIEW OF POLITICAL ECONOMY 23
industrial standard products, like textiles, are produced. According to relation (10), a
more unequal income distribution, associated with a lower world consumption–
income ratio (c
W
), and stagnating or eventually declining government expenditures
(G
w
) both imply that, in principle, long-period world economic activity —output and
employment —remains more or less constant or even declines. As a consequence, the
struggle for world market shares, mainly of industrial goods and services, will intensify.
Through the external employment mechanism, the few successful exporters of high-
quality industrial goods and services may nevertheless enjoy a satisfactory, even a
booming, economic situation. The great number of losers, however, will be precipitated
into the abyss of mass unemployment, increasing indebtedness, and social and political
instability. Owing to the law of increasing returns and huge differences in technological
standards and dynamism, as well as to the principle of effective demand, there is a cumu-
lative causation of growing disequilibria (Kaldor 1985; Myrdal 1957), resulting in ever
larger inequalities in income and wealth and employment opportunities worldwide.
Hence, the external employment mechanism associated with large free-trade areas and
globalisation is entirely inadequate, since so-called market economies do not produce
any tendency towards full employment whatever. Quite the contrary, globalisation and
large free-trade areas lead to growing disequilibria: income distribution gets more
unequal worldwide, thus reducing spending power everywhere; this goes along with
increasing indebtedness of countries experiencing current account and balance of pay-
ments deficits and, most importantly, with rising involuntary unemployment as is
evident from relations (9) and (10) above. Hence, with the actually dominating external
mechanism, distribution and employment are both regulated by social power, comple-
mented by political and, eventually, military power. Indeed, the surplus principle of dis-
tribution implies, positively, that in the distributional struggle, weak and largely
disorganised workers and employees are faced on a world level with powerful corpora-
tions and the big players of finance, and small enterprises have to lower wages too, in
order to survive. In a situation of massive involuntary unemployment worldwide, this
asymmetric power relation is, probably, the main reason for the continuously widening
inequality in wealth and income distribution on the world level. In fact, with globalisa-
tion and large free-trade areas and massive involuntary unemployment, the free circula-
tion of the workforce leads to a ‘world war between workers and employees’(Sergio
Rossi), resulting in a continuous pressure on wages. And, in line with the external
mechanism, employment is equally regulated by power relations. Huge corporations,
finance big players and, above all, nation states are struggling for market shares for
final products, on the one hand, and for raw materials and energy resources, on the
other. In this struggle, corruption as well as political and military power plays an
eminent role. Since antiquity (the Peloponnesian and Punic Wars) and mercantilism
and colonialism since, broadly, 1500, and, most importantly, two world wars, the exter-
nal employment mechanism has been associated with conflicts, culminating at times in
terrifying wars. And since the breakdown of socialism circa 1990, the neoliberal capi-
talistsystemseemstohavebecomeevermorecrisisridden.Howtostopthesecumu-
lative destructive processes, leading to conflicts, even civil wars, with the threat of hot
wars ever present? In the next two sections we shall argue that the only way out is to
switch from the external mechanism to the internal mechanism of the functioning of
monetary production economies.
24 H. BORTIS
VIII. A Sketch of a Desirable Situation Based on the Internal Employment
Mechanism
In the preceding section we suggested that the presently dominating and conflict ridden
external employment (and development) mechanism, now associated with globalisation
and huge free-trade areas, cannot provide the conceptual basis for sensible distribution
and employment policies in the sense of Keynes and Beveridge. Only the internal mech-
anism associated with the classical-Keynesian super-multiplier (Bortis 1997, pp. 191–
194) can provide the appropriate theoretical basis for efficient and sensible socio-eco-
nomic policies. This is valid universally, since theoretical principles and their associated
policy principles are valid prior to their implementation in space and time. The specific
way in which policy principles are implemented will depend upon the way of life of some
country or region, in fact on institutions that have developed historically, which, in turn,
have been shaped by a specific hierarchy of values, being historical expressions of funda-
mental and immutable values such as striving for truth, beauty and goodness. This was,
broadly, also Keynes’s view; he perceived with incomparable clarity that the materialist
capitalist era must be followed by an epoch dominated by ethics and culture if modern
civilisation is to survive. Keynes’s vision is in line with the classical-Marxian, material
basis–institutional superstructure vision of the economy, society and the state, which
ultimately goes back to Aristotle. The classical-Keynesian internal mechanism is thus
associated with a fundamental change in the value system: material (economic) values
must not dominate, as is the case at present; on the contrary, the economy —the material
basis —should be but a means, implying that cultural values in the widest sense should
dominate and economic values should become of secondary importance.
Given this, what then are the principles underlying employment and distribution pol-
icies along classical-Keynesian lines? Regarding distribution, the surplus principle of dis-
tribution implies that, positively, distribution is regulated by social forces (social power or
mutual agreement), as was alluded to in the preceding section. From a normative per-
spective, the surplus principle of distribution implies that distribution should be regu-
lated by the principle of distributive justice, which is at the heart of social ethics and
regulates part–whole relationships, represented by shares in national income of individ-
uals and social groups. In fact, distributive justice is about socially appropriate propor-
tions (Bortis 2003, pp. 445–460). Two great issues arise with regard to the principle of
distributive justice. The first concerns money wage structures (w
i
/w
j
). Most important
are wage structures within individual enterprises based upon the evaluation of work-
places. Subsequently, trade unions and entrepreneurial associations have to establish
socially appropriate wage structures within and between industries, that is, finally for
the economy as a whole. The second great distributional issue is associated with the
socially appropriate normal rate of profits. To establish the level of the normal profit
rate is a social and political issue in classical-Keynesian political economy, not a
market issue as is the case in neoclassical economics. Profits are necessary for various
reasons. Profits are primarily a reward for the risk incurred by engaging in production.
Moreover, profits have to provide own means to finance gross investment. However,
profits are also required to sponsor cultural and sporting events. These ways of spending
profits represent aspects of the socially appropriate use of the social surplus of which
profits are part.
REVIEW OF POLITICAL ECONOMY 25
Classical-Keynesian employment policies are grounded on the principle of effective
demand. The distributional policies just mentioned are the most important means to
bring about higher levels of output and employment. In fact, socially fair distribution
leads to high spending power on the part of the population. This immediately
emerges from the super-multiplier relation, set forth by relations (5) and (9) above:
higher spending power of the population due to fair distribution of incomes leads, in
principle, to a higher consumption–output ratio (c) and thus to a higher level of
output and employment. Hence wage rates are not, from a classical-Keynesian perspec-
tive, the prices of different types of labour, as is the case in neoclassical economics;
rather they represent distributional magnitudes to be determined by social and political
considerations in relation to the principle of distributive justice. Given this, distribution
emerges as the primary and fundamental problem of political economy, as perceived by
both Ricardo and Keynes. The second factor governing the level of output and employ-
ment is government expenditures (G), which set the economy in motion as shown by
relations (5), (6), (7) and (9) above; a macroeconomic equilibrium is reached once tax
receipts equal government expenditures: (G = t Q). This relation expresses the funda-
mental employment policy principle of classical-Keynesian political economy: with dis-
tribution appropriately fixed along the social ethical lines just suggested, government
expenditures (G) and the tax rate (t) have to be fixed in such a way that permanent
involuntary unemployment is gradually absorbed and full employment is realised.
Needless to say, realising this simple principle in the real world is an immensely
complex process.
It is an important feature of long-period classical-Keynesian employment policy that
there is no need to influence the long-period level of investment. Indeed, with income
distribution regulated and government expenditures (G) and the tax rate (t) fixed, invest-
ment appears, according to relations (5), (6) and (9), as derived demand. However, it
follows from relations (6), (7) and (9) above, that the policy principles associated with
the internal mechanism can only be implemented generally if there is a strong and
secure device to bring about a persistent tendency to equilibrium in the current
account balance and the balance of payments in all countries. To this issue we now
turn in the next section.
IX. A New World Economic Order is Required, Based on Keynes’s Bancor
The present economic, financial and monetary world order, in principle based on free
trade and the free flow of capital within a globalised world, and with the existence of
large free-trade unions having a common money, inevitably leads to the domination
of the stronger over the weaker and hence to steadily widening gaps between rich and
poor continents, countries, regions, social classes and individuals. Eminent political
economists have been aware of these cumulative disequilibrium processes at work in
so-called free market economies, from Friedrich List to Nicholas Kaldor (1985) and
Gunnar Myrdal (1957). The greatest political economist of the 20th century, John
Maynard Keynes, was fully aware of this problem and proposed a very simple and inge-
nious solution: the creation of a supranational money, the bancor, associated with devices
that force deficit as well as surplus countries to restore a balance on current account equi-
librium and to control international capital flows (Keynes 1980/1940–44). The setting up
26 H. BORTIS
of Keynes’s bancor system is absolutely necessary to render possible the employment and
distribution policies based upon the internal employment and development mechanism.
Indeed, with the balance on current account in equilibrium (X = M), the super-multiplier
relation (5) is transformed into equation (6), which tells us how the internal employment
mechanism functions in principle. The application of the internal mechanism would also
enable each country to pursue sensible social policies as well as efficient environmental
policies worldwide to prevent a global climate disaster. Moreover, migration would
largely become voluntary if full employment could be gradually achieved worldwide.
All these policies could be pursued because, with the foreign balance (X = M) in equilib-
rium, it would no longer be necessary to remain competitive at all costs to maintain or
increase market shares and secure high employment levels through the conflict-ridden
external employment mechanism. To conclude, Keynes’sbancor system would make it
possible to implement the internal employment and development mechanism, poten-
tially associated with harmony within and between countries. Keynes already suggested
at the very end of the General Theory that the possibility to pursue sensible distribution
and employment policies would change the nature of international trade. Indeed, inter-
national trade would no longer be a desperate struggle for workplaces; rather, it would be
associated with increasing the welfare of the trading countries:
[If] nations can learn to provide themselves with full employment by their domestic policy
there need be no important economic forces calculated to set the interest of one country
against that of its neighbours. There would still be room for the international division of
labour and for international lending in appropriate conditions. But there would no
longer be a pressing motive why one country need force its wares on another or repulse
the offerings of its neighbour, not because this was necessary to enable it to pay for what
it wished to purchase, but with the express object of upsetting the equilibrium of payments
so as to develop a balance of trade in its own favour. International trade would cease to be
what it is, namely, a desperate expedient to maintain employment at home by forcing sales
on foreign markets and restricting purchases, which, if successful, will merely shift the
problem of unemployment to the neighbour which is worsted in the struggle, but a
willing and unimpeded exchange of goods and services in conditions of mutual advantage.
(Keynes 1936 [1973], pp. 382–383)
It is well known that the institution of the US dollar as world currency represents an
immense privilege for the United States, and also a very efficient tool of power. Given
this, the great policy problem ahead will be to persuade the US to abandon the dollar
as world currency and to render possible the setting up of Keynes’s bancor as the new,
now supranational, world currency. Since the Second World War, the conditions for
implementing the bancor system have never been more favourable than at present, at a
time when the US is taking drastic measures to reduce its foreign account deficit, and
China and Russia are attempting to abandon the US dollar as the dominating currency
on the world level.
X. The Social and Political Philosophy Underlying Classical-Keynesian
Political Economy
2
John Maynard Keynes’ssocial liberalism is the social philosophy underlying classical-
Keynesian political economy; an elaborated version along Aristotelian lines of
Keynes’s social philosophy is set out in Bortis (1997, chapters 2, 3 and 7). The crucial
REVIEW OF POLITICAL ECONOMY 27
feature of this doctrine is to conceive of Man not only as a rational but also as an essen-
tially social being. This necessarily implies seeing man and society as entities. However,
this does in no way imply totalitarianism whereby the individual is, essentially, an
exchangeable part of the social machine. On the contrary, according to the doctrine of
social liberalism, society and the state are indispensable, but ancillary for the social indi-
viduals who can only realise their practical and intellectual potential based on and
through society. Based on society means that preconditions or social foundations must
exist if all social individuals are to be given the possibility of a good and decent life:
full employment, a fair distribution of incomes, a public education system, an appropriate
legal system and a diversified and large set of cultural institutions. Through society
signifies that the degree of perfection of social individuals is enhanced through activities
shaped by society, for example going to school, going to university, discussing, reading,
contemplating works of art and architecture, practising sports and, last but not least,
enhancing manual skills; in a world with ever more scarce natural resources, skilled
trades —craftsmanship —might become crucial again, as emerges from Richard Sen-
nett’s very important book, Handwerk (2008).
The notion of ‘the social state of affairs’or, to simplify, ‘the social’is thus fundamental
to characterising social philosophies (cf Bortis 1997, p. 21). It would seem that two basi-
cally different meanings of the social are conceived of and used in a great number of vari-
eties and combinations in systematic thinking on social matters. In the context of the first
meaning, implied in Liberalism, the social denotes relationships and interactions between
formally equal, autonomous and self-contained individuals and collectives striving to
achieve individual aims; specialisation, competition and substitution characterise these
relations. Social phenomena come into being through explicit and implicit contracts
between individuals and collectives. The relationship between sellers and buyers is a
social phenomenon in this sense.
The second meaning of the social stands for the relationship between unequal, incom-
plete and, therefore, mutually dependent individuals who require each other to achieve
common aims, on the one hand, and social groups or entities, including society as a
whole, on the other. Such part–whole relationships are characterised by complementarity
between various functions, which in turn requires co-operation and co-ordination.
Examples of this meaning of the social are the position and function of individuals or
groups in some enterprise within which a sophisticated division of labour prevails, the
determination of shares in a given national income, or the structure of wages in a mon-
etary production economy. This second, Aristotelian, meaning of the social is relevant to
social liberalism.
Each type of the social is associated with a specifi