Alternative Approaches in Macroeconomics by Philip Arestis

Author:Philip Arestis
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

(7.5)

where λ = ar + (1 − a)w, that is, the weighted growth of the rate of profit and the wage rate are constant. If this is the case, estimating the accounting identity will give a perfect fit to the supposed Cobb–Douglas production function. More generally, the identity will give a good fit to time -series data, provided the weighted logarithm of the wage rate and profit rate can be accurately proxied by a time trend. This will often have to be a non-linear function as the wage rate and the profit rate have a strong cyclical component. The use of a linear time trend can give such poor statistical results that it often gives the impression that a behavioural equation is being estimated. It should be noted that this critique does not just apply to the Cobb–Douglas production function. If the identity has changing factor shares due to, say, the relative change in the bargaining power of firms and workers due to globalization, a better transformation of the accounting identity may be given by a CES relationship as in Eq. (7.4) (Felipe and McCombie 2001; Simon 1979). What are the implications? The use of the aggregate production function to determine the output elasticities and, hence, indirectly test and often supposedly confirm the marginal productivity theory of distribution by comparing them to the factor shares is without foundation.

Piketty is aware of the limitations of the aggregate production function and the role of the paradigm in determining what the legitimate questions are.All economic concepts, irrespective of how ‘scientific’ they pretend to be, are intellectual constructions that are socially and historically determined, and which are often used to promote certain views, values or interests. […] In particular, the notion of the aggregate capital stock K and of an aggregate production function Y = F(K, L) are highly abstract concepts. From time to time I refer to them. But I certainly do not believe that such gross oversimplified concepts can provide an adequate description of the production structure and the state of property and social relations for any society. (Piketty 2015, p. 70)

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