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The CES Production Function, the accounting identity, and Occam's razor

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  • Jesus Felipe
  • J. S. L. McCombie

Abstract

This paper reconsiders the argument that empirical estimations of aggregate production functions may be interpreted merely as statistical artefact. The reason is that Occam's razor, or Herbert Simon's principle of parsimony, suggests that the aggregate production function, together with the side equations derived from the usual neoclassical optimizing conditions, simply reflect the underlying accounting identity that value added definitionally equals the wage bill plus total profits. This argument is illustrated with respect to the empirical evidence presented by Arrow, Chenery, Minhas and Solow (Review of Economics and Statistics, XLIII, 225-50, 1961) and which led them to derive the Constant Elasticity of Substitution aggregate production function. It is shown that their results are more parsimoniously explained with reference to the underlying accounting identity than to any technological relationship.

Suggested Citation

  • Jesus Felipe & J. S. L. McCombie, 2001. "The CES Production Function, the accounting identity, and Occam's razor," Applied Economics, Taylor & Francis Journals, vol. 33(10), pages 1221-1232.
    • Handle: RePEc:taf:applec:v:33:y:2001:i:10:p:1221-1232
    DOI: 10.1080/00036840122836
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. "Heterodox Economists Don't Do Math" Reader
      by Mike Isaacson in Vulgar Economics on 2015-06-16 22:00:00
    2. Neoclassical Production Function Reader
      by Mike Isaacson in Vulgar Economics on 2015-07-27 19:00:00

    Citations

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    Cited by:

    1. Murach, Michael & Wagner, Helmut & Kim, Jungsuk & Park, Donghyun, 2022. "Trajectories to high income: Comparing the growth dynamics in China, South Korea, and Japan with cointegrated VAR models," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 492-511.
    2. Kronenberg, Tobias, 2010. "Finding common ground between ecological economics and post-Keynesian economics," Ecological Economics, Elsevier, vol. 69(7), pages 1488-1494, May.
    3. Andrew Martin Fischer, 2014. "Redistribution as social justice for decarbonising the global economy," The Economic and Labour Relations Review, , vol. 25(4), pages 574-586, December.
    4. Thomas Fredholm & Stefano Zambelli, 2013. "Production Functions Behaving Badly - Reconsidering Fisher and Shaikh," ASSRU Discussion Papers 1305, ASSRU - Algorithmic Social Science Research Unit.
    5. Jesus Felipe & Carsten Holz, 2001. "Why do Aggregate Production Functions Work? Fisher's simulations, Shaikh's identity and some new results," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 261-285.
    6. Jesus Felipe & John McCombie, 2010. "On Accounting Identities, Simulation Experiments and Aggregate Production Functions: A Cautionary Tale for (Neoclassical) Growth Theorists," Chapters, in: Mark Setterfield (ed.), Handbook of Alternative Theories of Economic Growth, chapter 9, Edward Elgar Publishing.
    7. Eric Kemp-Benedict & Crystal Drakes & Timothy J. Laing, 2018. "Export-Led Growth, Global Integration, and the External Balance of Small Island Developing States," Economies, MDPI, vol. 6(2), pages 1-25, June.
    8. Jesus Felipe & F. Gerard Adams, 2005. ""A Theory of Production" The Estimation of the Cobb-Douglas Function: A Retrospective View," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 427-445, Summer.
    9. Paul E. Brockway & Matthew K. Heun & João Santos & John R. Barrett, 2017. "Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation," Energies, MDPI, vol. 10(2), pages 1-23, February.
    10. Jesus Felipe & Franklin M. Fisher, 2003. "Aggregation in Production Functions: What Applied Economists should Know," Metroeconomica, Wiley Blackwell, vol. 54(2‐3), pages 208-262, May.
    11. Dennis O. Kundisch & Neeraj Mittal & Barrie R. Nault, 2014. "Research Commentary —Using Income Accounting as the Theoretical Basis for Measuring IT Productivity," Information Systems Research, INFORMS, vol. 25(3), pages 449-467, September.
    12. Palazuelos, Enrique & Fernández, Rafael, 2009. "Demand, employment, and labour productivity in the European economies," Structural Change and Economic Dynamics, Elsevier, vol. 20(1), pages 1-15, March.
    13. Aramendia, Emmanuel & Brockway, Paul E. & Pizzol, Massimo & Heun, Matthew K., 2021. "Moving from final to useful stage in energy-economy analysis: A critical assessment," Applied Energy, Elsevier, vol. 283(C).

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