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Testing the neo-classical and the Newtonian theory of production

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  • Estola, Matti
  • Dannenberg, Alia

Abstract

We search for regularities observed in the production of goods by studying Finnish data. Despite the heterogeneity of sectoral growth rates in Finland, unit root is observed in annual productions in all main sectors and all manufacturing industries. Thus a linear time trend exists in annual flows of production. This is inconsistent with the static neo-classical theory that assumes firms to produce at their equilibrium flow of production. A different framework is thus needed for modeling the behavior of firms. We test a Newtonian type of model for production against the neo-classical one, and our observation is that the former works better with annual data at every manufacturing industry in Finland.

Suggested Citation

  • Estola, Matti & Dannenberg, Alia, 2012. "Testing the neo-classical and the Newtonian theory of production," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6519-6527.
  • Handle: RePEc:eee:phsmap:v:391:y:2012:i:24:p:6519-6527
    DOI: 10.1016/j.physa.2012.07.042
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    References listed on IDEAS

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