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The CES Production Function, the accounting identity, and Occam's razor

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  • Jesus Felipe
  • J. S. L. McCombie

Abstract

This paper reconsiders the argument that empirical estimations of aggregate production functions may be interpreted merely as statistical artefact. The reason is that Occam's razor, or Herbert Simon's principle of parsimony, suggests that the aggregate production function, together with the side equations derived from the usual neoclassical optimizing conditions, simply reflect the underlying accounting identity that value added definitionally equals the wage bill plus total profits. This argument is illustrated with respect to the empirical evidence presented by Arrow, Chenery, Minhas and Solow (Review of Economics and Statistics, XLIII, 225-50, 1961) and which led them to derive the Constant Elasticity of Substitution aggregate production function. It is shown that their results are more parsimoniously explained with reference to the underlying accounting identity than to any technological relationship.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840122836
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 33 (2001)
Issue (Month): 10 ()
Pages: 1221-1232

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Handle: RePEc:taf:applec:v:33:y:2001:i:10:p:1221-1232

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Cited by:
  1. Thomas Fredholm & Stefano Zambelli, 2013. "Production Functions Behaving Badly - Reconsidering Fisher and Shaikh," ASSRU Discussion Papers 1305, ASSRU - Algorithmic Social Science Research Unit.
  2. Jesus Felipe & Carsten Holz, 2001. "Why do Aggregate Production Functions Work? Fisher's simulations, Shaikh's identity and some new results," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 261-285.
  3. Kronenberg, Tobias, 2010. "Finding common ground between ecological economics and post-Keynesian economics," Ecological Economics, Elsevier, vol. 69(7), pages 1488-1494, May.

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