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1、aaI向Eo1.evyEconomics0InstituteofBardCollegeWorkingPaperNo.1045TheAggregateProductionFunctionandSolovv,suThreeDenials”byJesusFelipe(*)SchoolofEconomics,De1.aSalleUniversity(Manila,Philippines)andJohnMcCombie(*)UniversityofCambridge,Cambridge,UKMarch2024Authorcontactinformation:Felipe(iesus.felir)e(dl
2、su.edu.uh):McCombie(jslm2(5)cam.ac.uk)The1.evyEconomicsInstituteWorkingPaperCollectionpresentsresearchinprogressby1.evyInstitutescholarsandconferenceparticipants.Thepurposeoftheseriesistodisseminateideastoandelicitcommentsfromacademicsandprofessionals.1.evyEconomicsInstituteofBardCollege,foundedin19
3、86,isanonprofit,nonpartisan,independentlyfundedresearchorganizationdevotedtopublicservice.Throughscholarshipandeconomicresearch,itgeneratesviable,effectivepublicpolicyresponsestoimportanteconomicPrObIemSIhatPrOfbUndIyaffeciIhequalilyOfIifeinIheUnitedSlaIeSandabroad.1.evyEconomicsInstituteP.O.Box5000
4、Annandale-on-Hudson,NY12504-5000Copyright1.evyEconomicsInstitute2024AllrightsreservedISSN1547-366XABSTRACTThispaperoffersaretrospectiveviewofthekeypillarofSolow,sneoclassicalgrowthmodel,namelytheaggregateproductionfunction.Wereviewhowthistoolcametolifeandhowithassurviveduntiltoday,despitethreecritic
5、ismsthatundermineditsraisond,etre.TheyaretheCambridgeCapitalTheoryControversies,theAggregationProblem,andtheAccountingIdentity.Thesecriticismswereforgottenbytheprofession,notbecausetheywerewrongbutbecauseofthekeyroleplayedbyRobertSolowinthefield.Today,thesecriticismsarenotevenmentionedwhenstudentsar
6、eintroducedto(neoclassical)growththeory,whichispresentedinmosteconomicsdepartmentsandmacroeconomicstextbooksastheonlytheoryworthstudying.JE1.C1.ASSIFICATION:B22,B31,B32,B41,E13,E25KEYWORDS:AccountingIdentity,AggregationProblem,CambridgeCapitalTheoryControversies,SolowINTRODUCTIONRobertSolow,oneofthe
7、mostnotableeconomistsofthetwentiethcenturydiedDecember21,2023,attheageof99.Hewascertainlyagreatresearcher,someoneinterestedinsociety,srealproblems,andthosewhostudiedatMITduringhistenureconsiderhewasagreatinstructor.SolowarrivedatMITin1949asaprofessorofstatistics.TogetherwithPaulSamuelson,hebuiltoneo
8、fthebestregardedeconomicsdepartmentsintheworld.Botheconomistswereinstrumentalinlayingthefoundationsoftheneoclassicalsynthesis.WhilethistooksomeelementsofKeynes,GeneralTheory,itwas,insomerespects,areturntothepre-Keynesianworld.Theneoclassicalsynthesishadthreepillars:microeconomiccompetitivegeneralequ
9、ilibriumtheory,thePhillipscurve,andSolow,s(1956)growthmodel.ThesynthesisassertedtheefficacyofKeynesianpolicyintheshortrun,butassertedabeliefincompetitivemarketforcesandSay,s1.awinthelongrun(inparticularinthecaseofSolow,sgrowthmodel).Asaneconomistinterestedinsociety,srealproblems,Solowwasconcerned,in
10、teralia,withthecausesofunemployment(Solow1980),andviewedthelabormarketasasocialinstitutionandnotlikethetypicalmarketforagood(Solow1990).Hetookpartinthetwomostimportantintellectualdebatesineconomicsofthetwentiethcentury:theCambridgeCapitalTheoryControversies(CCTCs)(mainlywithJoanRobinsonintheUK)andwi
11、ththenewclassicalmacroeconomists(mainlywithMiltonFriedmaninChicago).SolowwasawardedtheNobelPrizein1987forhiscontributionstothetheoryofeconomicgrowth.Solow,s(1956)growthmodelincorporatedanaggregateproductionfunction(APF).Thisconceptbecameapillarofneoclassicalmacroeconomicsandcertainlyofsubsequentneoc
12、lassicalgrowthmodels.Productionfunctionsappearedineconomicsinthenineteenthcentury.Itwasnot,however,untilCobbandDouglas(1928)thatonewasestimatedfortheAmericaneconomyusingstatisticalmethods,whichrequiredusingaggregatedata(indices)foroutput,labor,andcapital.Inthisarticle,theyfoundtheelasticitiesofoutpu
13、twithrespecttolaborandcapitaltobe0.75and0.25,respectively,closetothefactorshares.Theirworkwasinitiallyreceivedwithgreathostility,tothepointthatDouglasconsideredgivingup.Hemovedfromtheoriginalworkwithtimeseriestocross-sectionaldata,whichproducedmuchbetterstatisticalresults(McCombie1998;FelipeandMcCom
14、bie2013,chapter4).AggregateproductionfunctionscontinuedbeingusedduringthefollowingdecadesbutitwasnotuntilSolow,s(1956,1957)twoseminalpapersthattheybecameastandardconceptinmacroeconomics.Thiswasdespitesomedoubtsabouttheirtheoreticalandempiricalfoundations,asweshallseebelow.Solow,s(1956)growthmodeliss
15、tillusedtodaytointroducestudentstogrowththeory.InSolow(1957),theAPFservedasthetooltoempiricallyapportionthecontributionsoftechnicalprogress(totalfactorproductivitygrowthorSolowresidual)andthoseofcapitalandlaborgrowth,tooutputgrowth,intheUSeconomybetween1909and1949.Althoughtotalfactorproductivityhadb
16、eencalculatedbefore,thiswasthefirsttimeithadbeenexplicitlylinkedtoproductiontheory.The1957paperlaunchedtheneoclassicalresearchprogramongrowth,inparticulargrowthaccountingexercisesandtheestimationoftotalfactorproductivitygrowth.ThepresentpaperoffersaretrospectiveviewoftheAPF,inparticularofthreefundamentalcriticismsitwassubjectedto,andofhow,despitethesecriticisms,ithassurvivedthetestoftime.ThesecritiquesaretheCambridgeCa
