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 3: Simulation studies, the aggregate production function and the accounting identity

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


In the previous chapter, it was shown why the existence of an underlying accounting identity is responsible for the good statistical fits of aggregate production functions, even though the latter in all probability do not theoretically exist. In this chapter, we consider some simulation studies that illustrate the problems associated with the estimation, and interpretation, of aggregate production functions. The advantage of simulation experiments is that they allow us to know precisely what the underlying technological structure of the economy is. If the Cobb–Douglas production function gives a good fit to the aggregated data when we know that either the underlying technology of the firms in no way resembles the Cobb–Douglas production function, or, if it does, the conditions for successful aggregation are (deliberately) violated, then this should at least give us reason to pause for thought. We start with a simulation exercise that we undertook to determine what precisely conventional regressions of production functions using value data are actually estimating. We also consider the extent to which we can be confident that estimates of total factor productivity (TFP) are approximating the rate of technical progress, or the rate of increase inefficiency of an economy.

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information