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On The Rental Price Of Capital And The Profit Rate: The Perils And Pitfalls Of Total Factor Productivity Growth

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  • Jesus Felipe
  • J. S. L. McCombie

Abstract

This paper considers the implications of the conceptual difference between the rental price of capital, embedded in the neoclassical cost identity (output equals the cost of labor plus the cost of capital), and used in growth accounting studies; and the profit rate, which can be derived from the national income and product accounts (NIPA). The neoclassical identity is a “virtual” identity in that it depends on a series of assumptions (constant returns to scale and perfectly competitive factor markets). The income side of the NIPA also provides an accounting identity for output as the sum of the wage bill plus the surplus. This identity, however, is a “real” one, in the sense that it does not depend on any assumption and thus it holds always. It is shown that because the neoclassical cost identity and the income accounting identity according to the NIPA are formally equivalent expressions, estimations of aggregate production functions and growth accounting studies are tautologies. Likewise, the test of the hypothesis of competitive markets using Hall’s (1988) framework gives rise to a null hypothesis that cannot be rejected statistically.

Suggested Citation

  • Jesus Felipe & J. S. L. McCombie, 2004. "On The Rental Price Of Capital And The Profit Rate: The Perils And Pitfalls Of Total Factor Productivity Growth," CAMA Working Papers 2004-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2004-10
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    Cited by:

    1. Thomas Fredholm & Stefano Zambelli, 2013. "Production Functions Behaving Badly - Reconsidering Fisher and Shaikh," ASSRU Discussion Papers 1305, ASSRU - Algorithmic Social Science Research Unit.
    2. 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.
    3. Jesus Felipe & John S.L. McCombie, 2013. "The Aggregate Production Function and the Measurement of Technical Change," Books, Edward Elgar Publishing, number 1975.

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    More about this item

    Keywords

    aggregate production function; national income and product accounts (NIPA); profit rate; rental price of capital; total factor productivity;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

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