‘Not Even Wrong’
Chapter 2: The aggregate production function: behavioural relationship or accounting identity?
In spite of the severe problems concerning the aggregate production function, as we briefly mentioned in the last chapter, the defence by those who continue to use it is that it is a parable, or approximation, that gives plausible estimates of the coefficients and good statistical fits. While what is meant by ‘plausible estimates’ somewhat begs the question, it is generally understood to mean that the estimated output elasticities are close to the factor shares, although statistically significant estimates that display increasing returns to scale would also be considered to be satisfactory. This instrumentalist defence of estimating aggregate production functions has been eloquently put forward by Solow, who can hardly be accused of not being fully aware of the aggregation problems underlying the concept of the aggregate production function.
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