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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.

Suggested Citation

  • Jesus Felipe & J. S. L. McCombie, 2001. "The CES Production Function, the accounting identity, and Occam's razor," Applied Economics, Taylor & Francis Journals, vol. 33(10), pages 1221-1232.
  • Handle: RePEc:taf:applec:v:33:y:2001:i:10:p:1221-1232
    DOI: 10.1080/00036840122836
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. "Heterodox Economists Don't Do Math" Reader
      by Mike Isaacson in Vulgar Economics on 2015-06-16 22:00:00
    2. Neoclassical Production Function Reader
      by Mike Isaacson in Vulgar Economics on 2015-07-27 19:00:00

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    Cited by:

    1. Kronenberg, Tobias, 2010. "Finding common ground between ecological economics and post-Keynesian economics," Ecological Economics, Elsevier, vol. 69(7), pages 1488-1494, May.
    2. Jesus Felipe & F. Gerard Adams, 2005. ""A Theory of Production" The Estimation of the Cobb-Douglas Function: A Retrospective View," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 427-445, Summer.
    3. Paul E. Brockway & Matthew K. Heun & João Santos & John R. Barrett, 2017. "Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation," Energies, MDPI, Open Access Journal, vol. 10(2), pages 1-23, February.
    4. Thomas Fredholm & Stefano Zambelli, 2013. "Production Functions Behaving Badly - Reconsidering Fisher and Shaikh," ASSRU Discussion Papers 1305, ASSRU - Algorithmic Social Science Research Unit.
    5. 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.
    6. Jesus Felipe & John McCombie, 2010. "On Accounting Identities, Simulation Experiments and Aggregate Production Functions: A Cautionary Tale for (Neoclassical) Growth Theorists," Chapters,in: Handbook of Alternative Theories of Economic Growth, chapter 9 Edward Elgar Publishing.

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