Nonlinear Dynamics and Pseudo-Production Functions
Aggregate production functions are still widely used four decades after it was conceded that they could not be grounded in any plausible micro-foundations. This paper shows that aggregate production functions can always be made to work on any data that exhibits roughly constant wage shares, even when the underlying technology is non-neoclassical. But in so doing, they always pick up the accounting identity that underlies the data. This is demonstrated on both actual US data and a control data set derived from a fixed coefficient model with Harrod-neutral technical change and a persistent rate of unemployment. It is proved that one can generate an infinite number of fits, each of which gives a different reading of the rate of technical change. It follows that even when aggregate production functions appear to work at an empirical level, they provide no support for the neoclassical theory of aggregate production and distribution. On the contrary, the best of fits can utterly misrepresent the true underlying mechanisms of production, distribution, technical change, and growth.
Volume (Year): 31 (2005)
Issue (Month): 3 (Summer)
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