When ignorance is bliss

22 Jul, 2017 at 22:49 | Posted in Economics | 3 Comments

joanThe 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.

Joan Robinson The Production Function and the Theory of Capital (1953)


  1. Ah, yes, the production function! My favorite topic in economics.
    The phrase itself is two lies (assuming you do not count “the” which would make it three): the equation describes income distribution not a production process and the relation the equation describes does not qualify as a mathematical function.
    Joan Robinson directs our attention to variable K and asks, what is capital? Very sensible.
    We might ask in the same spirit, what is L, what is Labor? Indeed, as Joan Robinson hints in the quoted passage, we might ask, what is Q, output?
    In this theory of production, we might as well ask as well, where in this equation is management? where is land and natural resources? where is energy? where is waste and error?
    miseducation indeed.

  2. Cannot agree more……see my recent paper in the context of the debate about the sources of growth in East Asia:

    Click to access WPS178815-2_EWP512_THE-DEBATE-OF-THE-SOURCES-OF-GROWTH_16May_Web.pdf

    • Thanks for the link, Jesus.
      I especially appreciated this part of the conclusion:
      “Some may find it difficult to understand why we question one of the jewels of modern economics, the neoclassical research program on growth and its empirical counterparts, growth accounting, and the econometric estimation of the production function. Our view on this is clear: as we showed in Felipe and McCombie (2013), the hypotheses that this model generates are “Not Even Wrong” because they cannot be tested and potentially refuted. The neoclassical growth model is a virtual construct, based on two unstable pillars: first, a group of concepts and variables that are fictional, a humbug, such as the aggregate production function … the aggregate capital stock, or the idea of aggregate technology or productivity; and second, the artificial accounting identity … This identity contains the same variables as the aggregate production function (output, labor and capital stock) and can be easily rewritten as a specific form of it (e.g., Cobb-Douglas, CES, translog). This explains why aggregate production functions appear to work empirically (i.e., fit real data well) when all they do is to mimic the identity. Naturally, this gives the illusion that we know a lot about development and about the determinants of income differences (Hsieh and Klenow 2010). On the contrary, our view is that this framework cannot be used for development accounting, and what is commonly termed as total factor productivity is not the key to understand development because it is not a measure of productivity.”

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