Aggregate production functions and marginal productivity theory — neoclassical fairy-tales

27 Dec, 2014 at 20:20 | Posted in Economics | 1 Comment

When one works – as one must at an aggregate level – with quantities measured in value terms, the appearance of a well-behaved aggregate production function tells one nothing at all about whether there really is one. Such an appearance stems from the accounting identity that relates the value of outputs to the value of inputs – nothing more.

Frank%20300dpi-1v2All these facts should be well known. They are not, or, if they are, their implications are simply ignored by macroeconomists who go on treating the aggregate production function as the most fundamental construct of neoclassical macroeconomics …

The consequences of the non-existence of aggregate production functions have been too long overlooked. I am reminded of the story that, during World War II, a sign in an airplane manufacturing plant read: “The laws of aerodynamics tell us that the bumblebee cannot fly. But the bumblebee does fly, and, what is more, it makes a little honey each day.” I don’t know about bumblebees, but any honey supposedly made by aggregate production functions may well be bad for one’s health.

Attempts to explain the impossibility of using aggregate production functions in practice are often met with great hostility, even outright anger. To that I say … that the moral is: “Don’t interfere with fairytales if you want to live happily ever after.”

Franklin Fisher

Neoclassical marginal productivity theory is a collapsed theory from both a historical and – as
shown already by Sraffa in the 1920s, and in the Cambridge capital controversy in the 1960s
and 1970s – a theoretical point of view. As Joan Robinson wrote in 1953:

joan robinsonThe production function has been a powerful instrument of miseducation. The student of economic theory is taught to write Q = f (L, K) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labor; he is told something about the index-number problem in choosing a unit of output; and then he is hurried on to the next question, in the hope that he will forget to ask in what units K is measured. Before he ever does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.

For more on the inadequacy of marginal productivity theory this article of yours truly may perhaps be of some interest.

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  1. Reblogged this on business coaching and mentoring.

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