Society matters: A post-Keynesian approach to economic development

Marmissolle, Pablo Article Society matters: A post-Keynesian approach to economic development PSL Quarterly Review Provided in Cooperation with: Associazione Economia civile, Rome Suggested Citation: Marmissolle, Pablo (2024) : Society matters: A post-Keynesian approach to economic development, PSL Quarterly Review, ISSN 2037-3643, Associazione Economia civile, Rome, Vol. 77, Iss. 310, pp. 351-369, https://doi.org/10.13133/2037-3643/18654 This Version is available at: https://hdl.handle.net/10419/324116 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/4.0/ vol. 77 n. 310 (September 2024) Society matters: A post-Keynesian approach to economic development PABLO MARMISSOLLE* Abstract: This paper discusses methodological individualism and the perceived “need” for microfoundations in economic theory. It argues that the persistent focus on microfoundations has led a large part of the field to overlook the complexity of social interactions, the relevance of historical processes, and the characteristics of each society in understanding economic growth and development. The paper suggested focusing on social foundations as an alternative to microfoundations that is particularly relevant for studying economic development processes. It proposes framing the post-Keynesian view of demand-led growth and distribution-led growth within a conceptual framework of socio-economic development as a valid approach, consistent with social foundations, to understand a phenomenon as complex and multi-causal as development. University of Valencia (Spain) and University of the Republic, Montevideo, (Uruguay), email: pablo.marmissoll[email protected] How to cite this article: Marmissolle P. (2024), “Society matters: A post-Keynesian approach to economic development”, PSL Quarterly Review, 77 (310), pp. 351-379. DOI: https://doi.org/10.13133/2037-3643/18654 JEL codes: E12, B40, B50, O11 Keywords: methodological individualism, microfoundations, economic development, demand-led growth Journal homepage: http: //www.pslquarterlyreview.info This essay proposes an approach to analysing long-term economic development based on social foundations. First, I address the issues with methodological individualism and the perceived ‘necessity’ of microfoundations in economic theory, questioning the emphasis on individual behaviour as the ultimate explanation for economic phenomena. This perspective often neglects the complex relationships and environments that accurately reflect reality. I argue that the relentless pursuit of microfoundations has led much of the discipline to overlook the intricacies of social interactions and the significance of historical processes and societal characteristics in understanding economic growth and development. Following King’s (2012) approach, I suggest that social foundations offer a particularly relevant alternative for analysing economic * This paper is based on articles co-authored with Maximiliano Presa in different formats (conference papers, articles in newspapers, and academic blog posts). I gratefully acknowledge the comments received from Paola Azar, Luis Bértola, Carlos Bianchi, Jimena Castillo, Camilo Martínez, Mercedes Menéndez, María Inés Moraes, Gabriel Porcile, Maximiliano Presa, Carolina Román, Mark Setterfield and Henry Willebald. Funding was provided by the Uruguayan Agencia Nacional de Investigación e Innovación (ANII) through its “Becas de Doctorado en el Exterior en Áreas Estratégicas” programme, and by the Comisión Sectorial de Investigación Científica (CSIC) of the Universidad de la República, through its “Iniciación a la Investigación” programme. Special issue on structural change, social inclusion, and environmental sustainability 352 Society matters: A post-Keynesian approach to economic development PSL Quarterly Review development processes. Building on this, I propose framing the post-Keynesian theories of demand-led and distribution-led growth within a conceptual framework of proximate, intermediate, and ultimate sources of growth and development. This approach, consistent with social foundations, provides a robust means of understanding long-term economic development. The remainder of this paper is organised as follows. Section 1 presents the conceptual framework of the proximate, intermediate, and ultimate sources of growth and development. Section 2 summarizes the neo-Kaleckian theory of growth regimes and problematizes the Lucas critique. Sections 3 and 4 go further into the latter, arguing the dogmatic nature of the need for microfoundations (section 3) and criticizing the methodological individualism (section 4) of mainstream macroeconomics. Section 5 follows with an approach viewed as an alternative to the search for microfoundations for theory: social foundations. Section 6 complements the previous section by focusing on the specific case of the analysis of growth and development in the long run. It proposes the post-Keynesian theory of demand-led and distribution-led growth, framed within a scheme of proximate, intermediate, and ultimate sources of growth and development, as an approach consistent with the social foundations for the analysis of development. Finally, section 7 presents the concluding remarks. 1. Development and growth Development can be understood as a social process that enables changes aimed at improving living conditions, both materially and culturally, and that involves economic, social, and political factors. Two main approaches can be identified in the literature on development: the fight against poverty and the analysis of long-term social and economic development (Szirmai, 2015). The latter approach is particularly valuable for examining economic disparities, as it explores a wide range of factors that could explain the different development processes and their characteristics. Of course, this distinction between the “two approaches” is extremely broad; there are many ways of understanding development, which are not necessarily opposed. Development can be conceived as a synonym for economic growth, as a synonym for improved social welfare, as structural change (Abramovitz, 1989; Kuznets, 1966; Pasinetti, 1983), as modernization (Myrdal, 1968), as poverty reduction (Seers, 1979), as sustainability (Brundtland, 2010), or as freedom (Sen, 2001). Beyond the debate about what development is, it could also be debated whether it is a desirable process for human societies: development may involve the destruction of traditional lifestyles, the expansion of capitalist mass culture, the exploitation of workers, and the “westernisation” of the values of other societies, among other issues (Szirmai, 2015). Without delving into the debate on the aforementioned criticisms, it is important to highlight two points: first, development is a costly process, and, second, the concept of development has strong historical specificity and reflects the dominant cultures and powers of each historical period (Szirmai, 2015). It seems clear that the concept of economic development is normative and involves choices and values. While conceptualizations vary, there is some consensus that productivity growth is a necessary condition for development, although it is clearly not sufficient to generate it. From the above, it is evident that the choice of a conceptual framework to analyse development processes must necessarily consider the complexity of the concept, its multiple dimensions, and historical specificities. In this sense, it is particularly interesting to consider Szirmai’s (2012) approach, which, more than a theory, should be understood as a way of ordering the study of development and its sources. Indeed, various perspectives and theoretical P. Marmissolle 353 PSL Quarterly Review approaches can be integrated into this analysis. This framework, developed by several authors (Abramovitz, 1986, 1989; Maddison, 1988; Rodrik, 2003; Szirmai, 2012, 2015), proposes to analyse which forces drive growth and development at the proximate, intermediate, and ultimate levels of analysis, and to contribute to the debate about the relative relevance of internal and external factors as drivers of long-term growth. In this framework, four levels of analysis are distinguished: ultimate sources of growth and development, intermediate sources of growth and development, proximate sources of economic growth, and socio-economic outcomes. Immediate or proximate sources are those that are directly measurable sources of output growth (Szirmai, 2012): discovery and exploitation of natural resources and wealth; higher labour utilisation intensity; savings and capital accumulation; investment in education and human capital; appropriation of resources and capital from other societies; increased productivity; greater efficiency; structural change; exploitation of economies of scale; technological change. These factors can be represented by a basic production function that relates output to the proximate sources of growth. Once these proximate sources of growth have been quantified, it will be possible to explore their links to broader economic and social growth and development sources (Szirmai, 2012). The intermediate sources of growth and development include three sets of factors: the evolution of domestic and international demand; economic, social, and technological policies; and the evolution of the terms of trade. Considering demand patterns is key to understanding the trajectory (and path dependence) of the economic development processes (Szirmai, 2012). These proximate and intermediate sources are underlain by deeper social factors, called ultimate sources of growth and development. These include: geographical conditions; demographic characteristics; political, economic, and social institutions; culture; class, and power relations between social groups; historical shocks; long-term developments in science and technology; and distance from the international technological frontier. It is worth noting the difference between institutions, which regulate human interaction in specific areas, and culture, which encompasses a broader set of values, norms, and social knowledge. Institutions rely on culture but are oriented towards more specific domains (Szirmai, 2012). The final component of this conceptual framework consists of socio-economic outcomes, the ‘results’ of development: the health of the population; levels of education and literacy; levels of consumption; the number of people living in poverty; income and wealth distribution; decent employment opportunities; and environmental sustainability. Socio-economic outcomes encompass both economic and social dimensions. In this paper, development is defined as the process of improving these socio-economic outcomes. These outcomes are what truly matter in the development process (Szirmai, 2015). Adopting this framework, it can be argued that economic growth is a necessary condition for development. If an economy achieves high growth rates but the living conditions of its population do not improve, it is not possible to talk about development; nonetheless, the importance of increasing productive capacity remains crucial. At least in today’s developing societies, improving social outcomes is not possible without a long-term sustainable increase in productive capacity. Economic growth is an essential precondition for improving social outcomes. It is important to clarify that this article does not aim to discuss the concept of development; what is relevant here is the study of the factors that facilitate this process, understood as the long-term improvement of socio-economic outcomes. It should be noted that the use of the terms “ultimate”, “intermediate”, and “proximate” does not imply a linear model of causality. In this conceptual framework, causality is circular at all levels 354 Society matters: A post-Keynesian approach to economic development PSL Quarterly Review (Szirmai, 2015). The difference between the ultimate, intermediate, and proximate sources of causality lies mainly in the ease of quantification and the temporal extension of causal chains. In this essay, I propose adopting a post-Keynesian (specifically, neo-Kaleckian) approach to analyse how demand factors are determinants of long-run economic growth and, through this, of development. In other words, the framework of proximate, intermediate, and ultimate sources of growth is narrowed to examine how the evolution of demand (an intermediate source) affects growth. Going a step further within this framework and following the neo-Kaleckian approach, demand is considered a variable closely related to income distribution between social classes. Functional income distribution depends on: long-term trends in scientific and technological knowledge; demographic trends and conditions; economic, political, and social institutions; historical developments; culture; social attitudes and capabilities; and changes in the class structure and relations between social groups. In other words, distribution depends on the balance of power between social classes and its determinants. Within this framework, all these factors are regarded as ultimate causes of growth and development. 2. Distribution, demand, and development A common topic in economic science is the analysis of the relationship between distribution and growth. Among the classics, there was a long tradition of analysing the effects of low wages on consumption levels and aggregate demand, as well as the link between aggregate demand and the accumulation process (Blecker, 2002). In the mid-20th century, Kalecki formalized the link between distribution and production in a model with two social classes, workers and capitalists, each with different propensities to consume (and thus to save) (Kalecki, 1996). In this model and its derivatives, prices are determined in oligopolistic markets, where firms set prices by establishing mark-up rates on their costs. Economies are assumed to have excess capacity; that is, aggregate demand determines the equilibrium levels of effective output (Blecker and Setterfield, 2019; Marmissolle, 2021). Kalecki’s work inspired a series of neo-Kaleckian (or, more generally, post-Keynesian) macroeconomic models that give functional income distribution a central role in explaining the level and evolution of output. Within the post-Keynesian tradition, the seminal work of Bhaduri and Marglin (1990) spurred a prolific literature on the influence of functional income distribution on countries’ macroeconomic performance. This literature analyses the various channels through which the wage share of income (and profit share and, more recently, land rent share) affects consumption, investment, and net exports. From these effects, it can be determined whether increases in the wage share of income contribute to economic growth. If they do, it indicates that the growth regime of the economy is wage-led and, if not, profit-led (Blecker, 2002; Lavoie and Stockhammer, 2013). Identifying an economy’s growth regime is extremely useful for understanding its past growth performance and future prospects. The nature of a growth regime is not determined by the economic policy implemented by a given government; it is not designed by policies but by the institutional structure of the economy. It is influenced by the country’s income distribution, the propensity to consume of different social classes, the responsiveness of entrepreneurs to changes in sales possibilities and profit rate, the responsiveness of exporters and importers to changes in costs, exchange rates, external demand, and incentives to innovate that distributional changes may generate (Blecker and Setterfield, 2019). P. Marmissolle 355 PSL Quarterly Review While the literature on growth regimes is framed within demand-led growth theories (Blecker, 2002), supply-side analyses have also been incorporated into these models. 1 Changes in the wage share of income (or in real wages) can impact productivity growth (or technological progress, from a broader perspective). For example, the impact of distributional changes on productivity can be considered from the perspective of efficiency wage theory (Shapiro and Stiglitz, 1984). Another possibility is to consider an approach in line with the Kaldor-Verdoorn “law” (Kaldor, 1966; Verdoorn, 1949), which proposes that wage increases will positively impact firms’ incentives that, seeking to satisfy demand and reduce their costs, will achieve improvements in the production processes, thus generating productivity gains (Bengtsson and Stockhammer, 2021; Storm and Naastepad, 2013). Post-Keynesian macroeconomic theory is useful for both shortand long-term analyses (Mott, 2002). Contrary to the mainstream views, 2 in long-run post-Keynesian analysis, output and employment are not determined by the supply of labour and capital remunerated according to their marginal productivities. Equilibrium is determined by the components of aggregate demand, whose evolution is linked to income distribution, among other variables. The supply of productive factors will determine the activity level only when aggregate demand exceeds the output of full employment and full capacity utilisation. However, as Steindl (1952) argues, this scenario is not very plausible, because firms tend to accumulate productive capacity in excess of demand. In this context, firms with lower costs will be able to sell at lower prices than their competitors, displacing them and growing faster in the market, thereby generating economies of scale. In the long run, this process leads to oligopoly and overcapacity (Steindl, 1952). This excessive installed capacity implies output levels below full employment levels, supporting the use of models focused on demand and income distribution to study long-term economic growth. Post-Keynesian theoretical models usually consider the impact of distributional changes on different macroeconomic variables, treating distribution as an exogenous variable. This raises the following questions: What underlies functional income distribution? What determines wage and profit shares, and how do they evolve over time? Similar to the classical economists of the 19th century, Bengtsson et al. (2020) explore these questions, motivated by a stylised fact: the decline in the wage share in many countries. This trend is associated with various economic and political changes in developed countries since the end of the “Golden Age”, such as globalisation, production automation, and labour market deregulation (Bengtsson et al., 2020; Karabarbounis and Neiman, 2014). From a theoretical perspective, many variables could influence functional income distribution. However, throughout the 20th century and so far in the 21st century, the most relevant factors have been institutional. Party politics, unionisation of workers, and fiscal policy are the main determinants of functional income distribution in the long run (Bengtsson et al., 2020). The factors mentioned in the previous paragraph are identified by Bengtsson et al. (2020) as proximate causes of changes in income distribution, but they all arise from a single fundamental cause: power balances in society. 3 In other words, power relations are key to defining what lies behind the income distribution between different productive factors (or social classes), which, in 1 The emphasis on the evolution of effective demand to explain economic growth is not opposed to supply-side considerations, even when the latter is not explicitly considered in the models. See Blecker (2002), Botta et al. (2018), Blecker and Setterfield (2019) and Lavoie (2022) for more details on these aspects. 2 To simplify, I assume the position of Lavoie (2022) and use the terms “mainstream”, “orthodox economics”, and “neoclassical economics” as if they were synonyms. Although this is common in the literature, Colander (2000) and Davis (2006) have argued that this is a mistake. See Lavoie (2022) for more detail on this topic. 3 Bengtsson et al. (2020) understand “proximate” and “ fundamental” causes in the sense proposed by North and Thomas (1973); it is interesting to note the parallelism with the conceptual framework adopted by Szirmai (2012). 356 Society matters: A post-Keynesian approach to economic development PSL Quarterly Review turn, is key to defining how demand will behave and, ultimately, the economic growth and socioeconomic achievements of a given society. In summary, the determination of the growth regime of an economy and the analysis of how income distribution impacts economic growth (and, therefore, the development process) depend on the impact that different income shares have had on aggregate demand and/or growth rates. Based on these effects, it is possible to identify whether the regime has been wage-led or profitled (among other options). One might ask whether identifying a wage-led (or profit-led) regime implies that policies favouring wages (or profits) should be implemented. A priori, the answer to this question should have some nuances: concluding that the growth regime has been wage-led in a given period may indicate that the country’s “future” economic growth would benefit from pro-wage redistributive policies, but this may not necessarily be the case (Marmissolle, 2021). Palley (2014) argues that the wage-led or profit-led character of an economy is not necessarily exogenous; it can be affected by policy decisions taken from a certain point onwards. In this sense, Palley (2014) suggests what could be understood as a post-Keynesian analogue of the Lucas critique (Marmissolle, 2021). Against this Lucas critique of post-Keynesian theory, it is relevant to highlight the position of Storm (2021), which, although not strictly referring to models of growth regimes but to macroeconomic models in general, discusses the relevance of the Lucas critique. Storm (2021) argues that the requirement that macroeconomic theories must overcome the Lucas critique is, in a sense, a fallacy. Lucas’s (1976) original proposition is that macroeconometric models using fixed parameters fail because their estimated values are unstable and may change in response to policy interventions during the study period. In his own words, the statement can be summarised as: “...given that the structure of all econometric model consists of optimal decision rules of economic agents, and that optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, it follows that any change in policy will systematically alter the structure of econometric models” (Lucas, 1976, p. 41). As a result, macroeconometric models are not useful for counterfactual policy analyses. There are two ways to interpret the Lucas critique: (i) take it as a positive statement about the application of a model, i.e., as a criticism of models used to do out-of-sample counterfactual analysis, or (ii) interpret it not positively but prescriptively, as a ‘purist’ methodological rule, a theoretical absolute (Storm, 2021). Regarding (i), it is claimed that, while it is true that drawing policy conclusions from an estimate when it is possible that policy changes may modify the relationships between macro variables in the structural models involves risk, very few policy changes are capable of generating these modifications (Storm, 2021). Empirical evidence shows that the impact of policy changes on the parameters of macro models is, in most cases, insignificant. Moreover, micro-founded dynamic stochastic general equilibrium (DSGE) models generally fail the (self-imposed) Lucas critique (Storm, 2021). Regarding (ii), it can be noted that this position has been adopted in mainstream DSGE models. The reasoning behind this approach is tautological, given that the idea is: (a) models that are robust to the Lucas critique have deep parameters that are invariant to changes in policy; (b) only models that are robust to the Lucas critique are useful; (c) let us assume that the parameters of DSGE models are invariant to policy changes; and (d) therefore, DSGE models are robust to the Lucas critique (Storm, 2021). This conclusion is incorrect because, in the end, the microfoundations of the model that set the estimated parameters are always potentially affected by policy. In recent years, there have been significant efforts to identify more “deeper” microfoundations for DSGE models; however, these can always be criticised using Lucas’s P. Marmissolle 357 PSL Quarterly Review approach. 4 Against this, Storm (2021) argues that actually the estimated parameters in a model change and evolve continuously, and it is impossible to predict the future without modifying it. After all, models that are robust to the Lucas critique do not exist; the behavioural rules of individuals or groups of individuals (such as social classes) will always be affected by policy changes. Storm (2021) concludes that it is not recommended for macroeconomics to insist that models be robust to the Lucas critique, while noting that this is not a problem because the impact of policy changes on the parameters of macro models is generally insignificant. The key to drawing policy conclusions from a model is to be cautious, especially when the estimated coefficients can be expected to be affected by policy. The Lucas critique can be ignored for practical purposes (Storm, 2021). The same arguments can be developed for the specific case of post-Keynesian growth theories in response to Palley’s (2014) critique. Beyond the application of this critique to the neo-Kaleckian theory of growth regimes and Storm’s (2021) replication noted in the last paragraphs, it is worth noting that the Lucas critique has become one of the cornerstones of modern (at least mainstream) macroeconomics. The basis of this cornerstone is the search for microfoundations for economic theories and econometric models. The idea is that macroeconomic models must be based on structural parameters that reflect the fundamental and immutable rules of individual behaviour and therefore do not change when macroeconomic policy changes. These microfoundations would ensure that the models can be used to make robust predictions of the effects of macroeconomic policies. According to this approach, macro models without microfoundations would not be useful because they would not be able to generate predictions that would overcome the Lucas critique. The Lucas critique led economic science to a persistent search for microfoundations. I consider that this focus has led much of the economics discipline to ignore the complexity of social interactions in the real world and the relevance of historical processes and the characteristics of each society in understanding complex issues such as growth and development. 3. The microfoundations dogma The ‘microfoundations dogma’ refers to the claim that all propositions in macroeconomics can be reduced to microeconomic propositions, that is, statements about the behaviour of individual agents (King, 2012). This dogma is not unusual in modern macroeconomics. Since the 1980s, both mainstream and heterodox economists have regarded microfoundations as a mark of rigor in their theories. Philosopher Alan Nelson (1984) identified the microfoundations doctrine as an example of micro-reduction, concluding that the project was highly unlikely to succeed, given its long history of failure dating back to classical antiquity debates about the reduction of one science to 4 The criticism of DSGE models is not exclusive to heterodox economics. As Lavoie (2022) argues, Solow – considered the father of neoclassical growth models – has himself repudiated DSGE models, claiming that their foundations were “dumb and dumber macroeconomics”, and that adding realistic frictions does not make these models plausible (Solow, 2008). Hoover (2023) considers that DSGE models deserve to be considered by academia and evaluated against other alternatives, but he criticises the position of mainstream macroeconomists who defend the set of “prior constraints” on model form (representative agents, rational expectations, dynamic optimisation, general equilibrium), which, when absent in alternative models, automatically make them inadmissible. Hoover (2023) concludes: “I sometimes think of the DSGE models as haiku. The 5/7/5 syllable pattern of haiku is arbitrary. That’s OK for poetry. But the arbitrary rules of DSGE are not OK for science. Haiku is not the only admissible form of poetry; nor should the DSGE model be the only admissible form of macroeconomics” (Hoover, 2023, p. 87). 358 Society matters: A post-Keynesian approach to economic development PSL Quarterly Review another. This scientific pyramidism suffers from two issues: the fallacy of composition and downward causation (King, 2012). To illustrate these concepts more concretely, consider this example provided by King (2012): What is a car, and what are its attributes? We can know all the pieces of the car, but it is impossible to infer the characteristics of the vehicle from the knowledge (however, complete) of all the pieces. A car has social, economic, and cultural significance. Denying this implies a fallacy of composition. Cultural, economic, environmental, and social changes directly affect the car as a machine and its different pieces. Causality, in this case, goes from the largest to the smallest units (top-down), and not just bottom-up. We can know everything about the pieces, but this would not allow us to explain the social, economic, and cultural significance of cars (King, 2012). Returning to economics, the anti-reductionist principles of the fallacy of composition and downward causality are closely related to the need for microfoundations in the study of macroeconomics. As King (2012) points out, the microfoundations dogma is a clear example of the fallacy of composition: something true and valid for an individual agent may not be true and valid at the aggregate level. There are many examples in economic science. 5 The idea that the economy is based on “isolated atoms” is an essential feature of the lack of realism of orthodox theories (Lavoie, 2022; Vergés-Jaime, 2023). In contrast, heterodox schools, including the post-Keynesian, have adopted a more holistic approach. For example, social classes are present in several heterodox models. Considering their existence becomes necessary once it is assumed that individual preferences are not sufficient to understand how society works (Lavoie, 2022). Recognising that individuals are social beings rather than atomistic beings allows institutions to be introduced into the conceptual frameworks of economics. While, for the mainstream, institutions are market imperfections that limit perfect competition, for heterodoxy, institutions are a factor that generates a certain stability (Hodgson, 1989; Lavoie, 2022). However, what has been said does not mean that we should eliminate the microfoundations of macroeconomics and impose macrofoundations for microeconomics. What is important is that economic theories, whether micro or macro, have social foundations (King, 2012). Economic theories require social foundations rather than microfoundations. In other words: Economists need to be aware (as Marx would have said) that they are attempting to model capitalism, not simple commodity production. Hence there are two classes of agents, capitalists and workers, and it is the former who own the means of production and control the production and sale of commodities. Firms are not simply the agents of households. Production is motivated by profit, not – at least, not directly – by the utility functions of asocial, classless ‘consumers’. Since profit is by definition the difference between revenue and costs, that is, the difference between two sums of money, it is pointless to model a capitalist economy in terms of barter. These social foundations of any meaningful economic theory are exceedingly obvious, but they are routinely violated in the mainstream models that employ RARE 6 microfoundations (King, 2012, p. 25). Of course, these social foundations are far from theoretical elusions as far removed from reality as the representative agent, which does not represent society as such (Hodgson, 2001; Kirman, 1992). The dogma of microfoundations implies thinking about social issues only by considering the relationships of upward causality, eliminating the possibility of relationships of 5 Some examples could be the paradox of thrift (higher savings rates can reduce output and growth), the paradox of public deficit (imbalances in public accounts can generate a growth in private sector profits), and the paradox of costs (higher wages can generate higher profit rates for capitalists), among many others. See Lavoie (2022) for more on these questions. 6 Representative Agent with Rational Expectations. P. Marmissolle 365 PSL Quarterly Review transition from one equilibrium to another is crucial; the conditions under which this transition occurs determine the endpoint, that is, the new equilibrium (Lavoie, 2022). In other words, the trajectory determines the equilibrium; history matters and becomes particularly relevant for economics. Path dependence and hysteresis are key to the post-Keynesian understanding of economic phenomena, which are necessarily situated in historical time (Lavoie, 2022). The third characteristic of post-Keynesian theory that should be highlighted is its focus on distributional issues (Hein, 2017). Income distribution, both in personal and functional terms, has been particularly relevant within the post-Keynesian tradition in general and the neo-Kaleckian tradition in particular. For example, the rising trend in the profit share of income in developed economies since the end of the Golden Age and its impact on the slowdown of growth in these economies have been studied in depth by this school of thought. In the second half of the 20th century, it formalised earlier concerns about the effect that regressive income distribution can have on aggregate demand (Lavoie, 2022). A notable strength of the post-Keynesian theoretical framework for analysing economic development is the lower emphasis placed on the individual in the theoretical models. In contrast to the orthodox conception of the individual as an autonomous and atomistic being, postKeynesian economics adopts a holistic approach, viewing the individual as a unit of analysis embedded in social and economic relations – an “externalist” definition, as per Davis (2003). This concept is based on the idea that individuals and social structures are interdependent and indivisible, with each part constituting and determining the other through recursive social practices (Davis, 2003; Giddens, 1976, 1984). In this regard, such an approach is particularly relevant for considering the existence of social classes when analysing income distribution and effective demand. This relevance becomes clear when it is assumed that individual preferences alone are insufficient to understand the functioning of society (Lavoie, 2022). Recognising that individuals are social beings and not atomistic entities allows institutions to be introduced into economic frameworks, not as market imperfections but as factors that generate stability in a realistic context of uncertainty and interdependence among agents (Hodgson, 1989; Lavoie, 2022). Moreover, this approach explicitly enables the consideration of the historical specificities of the economy under study. It allows for an analysis of the historical and cultural contexts in which economic phenomena are generated and how these are shaped by social and political factors. Consequently, this creates more space for interdisciplinarity in economics. In this sense, the postKeynesian growth regime approach is compatible with Hodgson’s (2001) proposal to “bring economic theory closer” to historical specificities. It can enhance the understanding of how an economy’s institutions have evolved over time and how this evolution is determined by broader social forces. As discussed in section 1, the concept of economic development is normative and involves choices and values. Even though conceptualisations vary, there is some consensus that growth is necessary for development, although it is clearly not sufficient to generate it on its own. In other words, economic growth is one of the essential preconditions for improved social outcomes. I consider that, as a way of approaching the understanding of economic development processes, it can be valuable to frame the neo-Kaleckian theory on growth regimes within a conceptual framework of proximate, intermediate, and ultimate sources of growth and development. In this way, when analysing development, it becomes central to the analysis of how demand factors affect backward movement in time. As a theoretical construct, it allows for the analysis of economic models and does not relate directly to the actual passage of time. See Robinson (1980) for more details on these concepts. 366 Society matters: A post-Keynesian approach to economic development PSL Quarterly Review economic growth in the long run and, in the same vein, how income distribution affects demand. In this framework, growth, demand, and distribution are strongly linked to each other and depend on the correlation of forces among social classes, their determinants, and their historical evolution. To analyse growth and development processes from a long-term perspective, the postKeynesian approach gives a central role to the social and institutional factors of each historical context, or, in other words, to how history shapes the present. 9 In contrast, models based on the analysis of the behaviour of isolated individuals, devoid of the interrelationships inherent to life in society, cannot fully understand an intrinsically social phenomenon such as development. Social interactions always occur in an environment influenced by institutions, which in turn are determined by the behaviour of individuals themselves. This does not mean that post-Keynesian macroeconomics lacks a vision of how agents define their choices or how firms operate. The difference lies in the fact that, in this theoretical framework, we start from an organic perspective of the world in which the bases of agents’ behaviour are established on philosophical assumptions that are very different from those of mainstream micro-founded models (see table 1). King’s (2012) proposal to endow economic theories with social foundations rather than microfoundations can be refined for the particular case of growth theories, especially in cases where the aim is to analyse long-term development processes. In this sense, it can be argued that analytical models should have historical foundations. In other words, economic theories should give greater consideration to historical specificities (Hodgson, 2001). Cesaratto’s (2023) proposal to pursue the historical reconstruction of the objective and subjective characteristics of economic formations, rather than the ahistorical study of individual choices, points in the same direction. I consider that the post-Keynesian (or more precisely, neo-Kaleckian) theory of demand-led growth and distribution-led growth, which analyses how growth regimes are defined, how they change over time, and how economic policies influence the direction and speed of these changes, fulfils these characteristics. It analyses economic growth by focusing on historical processes and the interaction between different social actors. If this perspective is integrated into a conceptual framework of proximate, intermediate, and ultimate sources of growth and development, 10 it also becomes a good approach, consistent with social foundations, for analysing development processes. 7. Concluding remarks In this essay, I propose an alternative to micro-founded macroeconomic models and methodological individualism, focusing on the search for social foundations for theories that aim to understand long-term economic growth and development processes. This does not imply denying the value of microeconomics and the analysis of individual behaviour. Rather, it suggests that macroeconomic propositions cannot be reduced to propositions about individual behaviour. Such reductionism necessarily leads to scientific pyramidism, which suffers from the fallacy of composition and denies downward causation. Mainstream macroeconomics tends to focus on individual-level analyses, neglecting many social and political factors essential to understanding economic development. 9 The growth and distribution models for developing economies put forward by Porcile et al. (2023) are a good example of this. 10 As developed by Abramovitz (1986, 1989), Maddison (1988), Rodrik, (2003), and Szirmai (2012, 2015). P. Marmissolle 367 PSL Quarterly Review To address this limitation, I propose analysing development processes using post-Keynesian theory framed within the approach of proximate, intermediate, and ultimate sources of growth and development. 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