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On the Rental Price of Capital and the Profit Rate: The Perils and Pitfalls of Total Factor Productivity Growth


  • Jesus Felipe
  • J. S. L. Mccombie


This paper considers the implications of the conceptual difference between the rental price of capital, embedded in the neoclassical cost identity (output equals the cost of labor plus the cost of capital), which is used in growth accounting studies; and the accounting profit rate, which can be derived from the National Income and Product Accounts (NIPA). The neoclassical identity is a 'virtual' identity in that it depends on a series of assumptions (constant returns to scale and perfectly competitive factor markets). The income side of the NIPA also provides an accounting identity for output as the sum of the wage bill plus the gross operating surplus. This identity, however, is a 'real' one, in the sense that it does not depend on any assumption and thus it always holds. It is shown that because the neoclassical cost identity and the income accounting identity according to the NIPA may be expressed as formally equivalent expressions, estimations of aggregate production functions and growth accounting studies are tautologies. Likewise, the test of the hypothesis of competitive markets using Hall's (1988) framework gives rise to a null hypothesis that cannot be rejected statistically. Finally, it is argued that the NIPA identity does hold in constant prices, pace Denison (1972a, 1972b).

Suggested Citation

  • Jesus Felipe & J. S. L. Mccombie, 2007. "On the Rental Price of Capital and the Profit Rate: The Perils and Pitfalls of Total Factor Productivity Growth," Review of Political Economy, Taylor & Francis Journals, vol. 19(3), pages 317-345.
  • Handle: RePEc:taf:revpoe:v:19:y:2007:i:3:p:317-345 DOI: 10.1080/09538250701453014

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    References listed on IDEAS

    1. John Fernald & Brent Neiman, 2011. "Growth Accounting with Misallocation: Or, Doing Less with More in Singapore," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 29-74, April.
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    3. Felipe, Jesus & McCombie, J. S. L., 1999. "Wan's "New Approach" to Technical Change: A Comment," Journal of Comparative Economics, Elsevier, vol. 27(2), pages 355-363, June.
    4. 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.
    5. Shaikh, Anwar, 1974. "Laws of Production and Laws of Algebra: The Humbug Production Function," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 115-120, February.
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    7. E. H. Phelps Brown, 1957. "The Meaning of the Fitted Cobb-Douglas Function," The Quarterly Journal of Economics, Oxford University Press, vol. 71(4), pages 546-560.
    8. 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.
    9. Chang-Tai Hsieh, 2002. "What Explains the Industrial Revolution in East Asia? Evidence From the Factor Markets," American Economic Review, American Economic Association, vol. 92(3), pages 502-526, June.
    10. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
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    Cited by:

    1. Jesus Felipe & John S.L. McCombie, 2013. "The Aggregate Production Function and the Measurement of Technical Change," Books, Edward Elgar Publishing, number 1975.
    2. 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.

    More about this item

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology


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