The Aggregate Production Function and the Measurement of Technical Change

The Aggregate Production Function and the Measurement of Technical Change

‘Not Even Wrong’

Jesus Felipe and John S.L. McCombie

This authoritative and stimulating book represents a fundamental critique of the aggregate production function, a concept widely used in macroeconomics.

Chapter 1: Some problems with the aggregate production function

Jesus Felipe and John S.L. McCombie

Subjects: economics and finance, methodology of economics, post-keynesian economics, radical and feminist economics, innovation and technology, economics of innovation

Extract

The heart of the neoclassical theory of production and price theory is the concept of the plant, or firm, production function. In its simplest form it expresses the maximum or optimal amount of output that can be produced with usually two factors of production, capital and labour, measured in physical terms. The problem of whether these individual micro-production function scan be aggregated to give an aggregate production function for the industry, or even the whole economy, is sometimes, but not often, alluded to in the literature. For example, Estrin and Laidler (1995, p. 134) note that, not withstanding the problems of constructing unambiguous indices of the quantities of capital and labour services, ‘the results of the two input/one output special case are both useful and often capable of being generalised, and are therefore well worth the reader’s attention’. Although not mentioned, there is also the problem of aggregating individual production functions with different functional forms to give an aggregate production function.