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Chapter 9: On Accounting Identities, Simulation Experiments and Aggregate Production Functions: A Cautionary Tale for (Neoclassical) Growth Theorists
Jesus Felipe and John McCombie1 1 Introduction A sine qua non of neoclassical growth theory is the existence of an aggregate production function. It is the very first equation of Solow’s (1957) seminal paper. The widely used growth accounting approach, following Solow’s (1957) seminal work, as well as the recent developments in endogenous growth theory, are grounded in the aggregate production function. (See, for example, Barro and Sala-i-Martin, 2004, especially Chapters 4 and 10.) Yet it has been known for a long time just how flimsy are its theoretical foundations. Indeed, Solow (1957, p. 312) himself conceded that “it takes something more than the usual ‘willing suspension of disbelief’ to talk seriously of the aggregate production function”. But this reservation was quickly glossed over – it “is only a little less legitimate a concept than, say, the aggregate consumption function”. The theoretical criticisms of the aggregate production function involve both the “aggregation problem” that dates from the 1940s and the Cambridge capital theory controversies of the 1960s and 1970s. Fisher (1992) has shown with respect to the former that the problems of aggregation are so severe that the aggregate production cannot be said to exist – not even as an approximation.2 The Cambridge capital theory controversies proved to be more controversial and generated a great deal of heated debate in the leading academic journals. Fisher (2003) has argued that the issues involved are merely a subset of a more general aggregation problem, although Cohen and Harcourt (2003a, 2003b) consider that there is...
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