Abstract: The aggregate production function has been subject to a number of criticisms ever since its first empirical estimation by Cobb and Douglas in the 1920s, notably the problems raised by aggregation and the Cambridge Capital Theory Controversies. There is a further criticism due initially to Phelps Brown (and elaborated, in particular, by Simon and Shaikh) which is not so widely known. This critique is that because at the aggregate level only value data can be used to estimate production function, this means that the estimated parameters of the production function are merely capturing an underlying accounting identity. Hence, no reliance can be placed on estimates of, for example, the elasticity of substitution as reflecting technological parameters. The argument also explains why good statistical fits of the aggregate production functions are obtained, notwithstanding the difficulties posed by the aggregation problem and the Cambridge Capital Controversies noted above. This paper outlines and assesses the Phelps Brown critique and its extensions. In particular, it considers some possible objections to his argument and demonstrates that they are not si

The Cobb-Douglas Production Function and the Accounting Identity

It should be emphasised that there are no behavioural assumptions underlying this equation, in that it is compatible with any degree of competition, increasing or decereasing returns to scale and the existence or not of a well-baehaved underlying production function. J is the constant price measure of the value of the capital stock (normally calculated by the perpetual inventory method) and r is the observed rate of profit normally calculated as the product of the share of profits in value added (1-Ą) and the output-capital ratio, i.e., r = (1-Ą)V/K

lnVt = lnB + aln(wt Lt)+ (1-a)ln(rtJt) (16)

Some topics in this essay:
Capital Theory, Phelps Brown, Joan Robinson, Theory Controversies, Nelson Winter, Felipe McCombie, Heathfield Wibe, Cobb Douglas, Simon Levy, Fortunately Simon, production function, aggregate production, accounting identity, aggregate production function, factor shares, production functions, cobb-douglas production, cobb-douglas production function, value added, phelps brown, shares constant, rate profit, paid marginal products, theory factor pricing, factor shares constant,