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 7: Why are some countries richer than others? A sceptical view of Mankiw–Romer–Weil’s test of the neoclassical growth model

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

Previously, we raised some serious problems concerning the foundations of the aggregate production function and with Solow’s growth model. But his model became established as the foundation of modern growth theory, to the extent that it appears, with subsequent developments ingrowth theory, in nearly every modern macroeconomics textbook (for example, Mankiw, 2010). Yet, during the 1980s there was growing dissatisfaction with the predictions of the model. Given the assumption that all countries (or regions) have access to the same level of technology, the model predicts that the steady-state rate of growth of productivity will be equal to the (common) rate of technical progress. Any differences ingrowth rates can only be transitory, the result of countries not all being at their steady-state capital–labour ratio. The productivity growth rate of those countries where their actual capital–labour ratio is below the steady state value will temporarily exceed the rate of technical progress. If the countries all invest the same proportion of their GDP then there should bean inverse correlation between the growth of labour productivity and the initial (log) level of productivity.

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