Aggregate production functions — neoclassical fairytales

12 April, 2016 at 18:33 | Posted in Economics | Leave a 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 production functions are fairytales generating pure fictional results. So why do mainstream economists still use these useless constructs? Probably because it’s tough for people to admit that what they have built their academic careers around is nothing but meaningless nonsense on stilts.

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