Aggregation in Production Functions: What Applied Economists Should Know
نویسندگان
چکیده
This paper surveys the theoretical literature on aggregation of production functions from the point of view of the applied economist. We refer to both the Cambridge Capital controversies and to the aggregation conditions. The most important results are summarized, and the problems that economists should be aware of from incorrect aggregation are discussed. The most important conclusion is that the conditions under which an aggregate production function can be derived from micro production functions are so stringent that it is difficult to believe that actual economies satisfy them. Aggregate production functions do not have a sound theoretical foundation. For practical purposes this means that while generating GDP, for example, as the sum of the components of aggregate demand (or through the production or income sides of the economy) is correct, generating and thinking of GDP as GDP=F(K,L), where K and L are aggregates of capital and labor, respectively, is incorrect. And thinking of aggregate investment as a well-defined addition to capital in production is a mistake. The paper evaluates the standard reasons given by economists for continuing to use aggregate production functions in theoretical and applied work, and concludes that none of them provides a valid argument.
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