A Comment on ‘The Measurement of Prices of Production’ by Peter Flaschel,Reiner Franke & Roberto Veneziani

After giving a summary of the Cambridge debate, the comment criticizes the proposal by Flaschel, Franke and Veneziani to base the classical approach on systems of production with unequal rates of profit both theoretically and on empirical grounds: The classical gravitation of market prices towards normal prices is hard to defend, if there are persistent differentials of profit rates, but the profit rate differentials in the paper are not even stable. The comment further defends the idea of representing states of knowledge about technology by means of input-ouput tables against objections regarding the transferability of methods between countries and discusses alternative approaches to the treatment of fixed capital. It is shown that the data used by the authors for capital stocks are not supported by the data of the German Statistical Office. I agree with the authors in the most essential point, however: Contrary to the position taken e.g. by Joan Robinson, we all believe that the problems of capital theory raised in the Cambridge debate must be analyzed not only in abstract theory but also at the applied level. We all were surprised to find that empirical wage curves tend to be close to straight lines so that double intersections of such wage curves, hence reswitching and reverse capital deepening, must be rare. This phenomenon needs to be explained; a possible explanation can be derived from the random nature of the input-output matrices, and, so far, no other explanation has been proposed.     

The aggregate neoclassical theory of distribution and the concept of a given value of capital: towards a more general critique

The aim of this article is to show the weakness of the neo-Ricardian critique of the aggregate neoclassical theory of distribution which affirms the intrinsic inability of this theory to describe a stable equilibrium. The article shows that within the aggregate neoclassical framework both the supply curve for capital, founded on the concept of a given value of capital, and the demand curve for capital are each, and for different reasons, without any appreciable economic meaning. The kind of equilibrium determined by these curves is economically irrelevant. The article stresses the consequence that capital reversal and reswitching are unimportant for the critique of the aggregate neoclassical theory of distribution.     

The Cambridge capital controversies: contributions from the complex plane

This article takes a fresh look at reswitching. When two production techniques are compared, reswitching occurs when one technique is more viable than the other at a high interest rate, switches to being less viable at a lower rate, and reswitches to being more viable again at even lower rates. For some, reswitching undermines the foundations of neoclassical economics because it belies the idea of a monotonic relationship between relative capital values and factor price. The reswitching equation is an nth degree polynomial having n roots, implying the existence of n interest rates. Conventional analysis uses one interest rate but ignores the others. We argue that the others should not be ignored because all rates are determined simultaneously, and when one rate shifts, all rates shift. We demonstrate that the Samuelson reswitching model possesses a ‘dual’ expression containing every interest rate, the rates being compressed into a composite, interest-rate variable, thereby establishing a role for interest rates previously thought lacking in use and meaning. The relationship between this composite interest rate and capital value does not exhibit reswitching. The notion of a composite interest rate has implications for economics beyond reswitching.     

Nachfragefunktionen für die Produktionsfaktoren Arbeit und Kapital

Summary In this paper we present dynamic factor demand functions for labour and capital, and the underlying production function for the Austrian economy. Our approach is neoclassical. By definition, the production function is of the Cobb-Douglas type; experiments with a CES production function were not successful. Our empirical results look very plausible. The adjustement speeds, the output and price elasticities of both factor demand functions, as well as the parameters of the underlying production function are of a order of magnitude highly compatible with neoclassical theory.     

Structural Changes in Australian Manufacturing Industry*

The paper uses a neoclassical production function and historical data to test for structural stability in Australian manufacturing industry. The production function is an extended constant elasticity of substitution form in which factor substitution elasticity, returns to scale and market structure in output, capital and labour are testable hypotheses. Tests for structural changes in homogeneity and factor substitution elasticity relations are based on overall and individual tests of covariance analysis and also on a special version of the Swerling-Kalman filtering systems as proposed by Cooley and Prescott. The empirical findings possess desirable statistical properties and indicate the existence of structural instability in the industry. The evidence also repudiates the assumptions of unitary factor substitution elasticity, constant returns to scale and market competitiveness in output and factors of production.     

Investment rates and the aggregate production function

In this paper we consider a simple version of the neoclassical growth model, and carry out an empirical analysis of the main determinants of aggregate investment across countries. The neoclassical growth model predicts that aggregate investment may be influenced by income growth, the capital income share, the relative price of capital, taxes, and other market distortions. We check these investment patterns for both OECD and non-OECD countries. We also decompose investment data into equipment and structures, and explore major factors affecting their relative prices. These empirical exercises shed light into the shape of the neoclassical production function.     

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

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.     

Existence and Stability of Steady State in an Augmented Solow Model with Multiple Capital Goods

This paper relaxes two assumptions on the traditional augmented Solow model: strict concavity of production functions and dual capital goods. It generalizes traditional conclusions of the Solow model by demonstrating that neoclassical properties of a production function are sufficient for the existence and global stability of the steady state in the augmented Solow model with multiple capital goods. Moreover, we prove necessity of essentiality of inputs for a neoclassical production function and generalize the golden rule of capital accumulation.     

The aggregate neoclassical theory of distribution and the concept of a given value of capital: a reply

In this reply to Paola Potestio, it is argued that there are cases in which both the “supply” of and the “demand” for “capital” can be conceptualised in an economically meaningful way and used in the conventional long-period neoclassical manner to determine an equilibrium or to investigate the adjustment process towards it. This conceptualisation is based on strict assumptions. If, for the sake of the argument, we concede these assumptions, the critique of the theory that tries to generalise the determination of distribution in a simple one-good model, or “corn-economy”, to multi-good models can be safely founded on the possibility of reswitching and capital reversing, contrary to Potestio's critique.     

UNEMPLOYMENT,LABOR MARKET TRANSITIONS,AND RESIDUAL WAGE DISPERSION

It is commonplace in the debate on Germany's labor market problems to argue that low wage dispersion is a major reason for the high unemployment rate. This paper analyzes the relationship between unemployment and residual wage dispersion for individuals with comparable attributes. In the conventional neoclassical point of view, wages are determined by the marginal product of the workers. Accordingly, increases in union minimum wages result in a decline of residual wage dispersion and higher unemployment. A competing view regards wage dispersion as the outcome of search frictions and the associated monopsony power of the firms. Accordingly, an increase in search frictions causes both higher unemployment and higher wage dispersion. The empirical analysis attempts to discriminate between the two hypotheses for West Germany analyzing the relationship between wage dispersion and both the level of unemployment as well as the transition rates between different labor market states. The findings are not completely consistent with either theory. However, as predicted by search theory, one robust result is that unemployment by cells is not negatively correlated with the within‐cell wage dispersion.     

Investment and interruption: effects of the US experience on the earnings of return migrants in Mexico

Migration is widely viewed as an investment in human capital. However, due to the imperfect transferability of skills and knowledge across countries, migration trips are also career interruptions, especially for return migrants who may meanwhile experience depreciation of home country-specific skills. This article demonstrates that migration experience increases return migrants’ earnings in the home country on the condition that the migration stay is sufficiently long and mostly uninterrupted. Employing the revised human capital earnings function, the empirical study shows that only a barely interrupted US experience longer than five years, regardless of the legal status of the migration trips, predicts higher earnings of male return migrants in Mexico than comparable non-migrants. Robust findings emerge controlling for unobserved individual \]acteristics or using instrumental variables to deal with the self-selection and endogeneity. Short migration stays in the US and frequent traveling provide return migrants no wage premium in Mexico.     

Efficiency Wages and the Regulated Firm

This paper develops empirical tests of "efficiency-wage" hypotheses and applies these tests to data on a regulated firm. According to efficiency-wage theory, wage levels positively affect employee performance and, moreover, cost minimization requires that employers pay a wage premium above the supply price of labor. To explore these issues, we use company-level data to estimate production and quit functions that allow for efficiency-wage effects. Our empirical results support efficiency-wage theory: payment of a wage premium reduces the firm's quit rate, raises labor productivity, and lowers operating costs. These findings call into question the regulatory practice of disallowing labor expenses when the regulated firm's wage levels exceed market averages.     

Labour Demand and Wage-induced Innovations: Evidence from the OECD countries

This paper shows that increasing real wages steepens or reverses the slope of the labour demand schedule because increasing wages give firms incentives to innovate and to invest in newer and more efficient vintages of capital. Using macroeconomic data for the OECD countries it is shown that the efficiency inducement of higher real wages steepens the traditional neoclassical labour demand function substantially. Taking into account the adverse demand effects of wage reductions it is doubtful that real wage reductions are a cure for the unemployment problem in the OECD countries.     

On technological implications of the wage-profit frontier

This paper examines the equilibrium relation between the wage and profit rates for a technology in which technical parameters vary continuously. It is shown that the existence of a wage-profit frontier implies the existence of functional relationships among the technical parameters. These relationships, called herein characteristic functions, can be expressed in terms of one or more than one independent variable, and it is shown that given certain weak conditions on the functions, only in the former case is reswitching of techniques possible. An inequality is established involving the rates of change, as the profit rate varies, of the technical parameters; it is argued that this inequality can be used to construct functions that order the eligible techniques. Finally, it is argued that the characteristic functions can embody specific, nontechnical relations, so that a “technology” should be broadly interpreted as a collection of techniques of production plus “exogenous” relations that determine which techniques are to be included in the technology.     

Neglected Implications of Neoclassical Capital-Labour Substitution for Investment Theory: Another Criticism of Say's Law

Abstract

Recent mainstream macroeconomic models take Say's Law for granted. This paper argues that the justification for this assumption is not found in general equilibrium theory but in the ‘neoclassical-synthesis’ (and then monetarist) criticism of Keynes, which relies in a fundamental way on a treatment of investment that turns out to depend not only on neoclassical capital-labour substitution (called into questioned by the Cambridge controversies) but also on an assumption of full labour employment that on the contrary should be a result of the analysis. This paper first criticizes the attempt to justify a negative interest-elastic investment function through adjustment costs, that is, without relying on traditional neoclassical capital-labour substitution, with special attention on the treatment in Romer's advanced textbook. Then it proceeds to its new contribution, the demonstration that an endogenous determination of labour employment raises questions about the capacity of decreases in the real wage to raise employment even accepting neoclassical capital-labour substitution, because when the latter is correctly understood the rate of interest does not suffice to determine investment; hence, there is an inevitable role for the accelerator (and Say's Law is thereby undermined). This was perceived by Dornbusch and Fischer but they did not realize that then reductions of real wages will reduce investment instead of raising it. Thus, the ‘neoclassical synthesis’ reply to Keynes is undermined even apart from the inconsistencies of neoclassical capital theory. So the paper exposes a deficiency of the neoclassical arguments in support of a tendency toward full employment, additional to the inconsistencies revealed by the capital critique.     

Cornelius Castoriadis on the Scope and Content of Neoclassical and Marxian Economics

The paper presents the thought of the political philosopher Cornelius Castoriadis on economic methodology and the neoclassical and Marxian traditions. Castoriadis suggested that the scope of economic theory includes the identification of “local” regularities and not the search for invariant “laws.” He criticized the use of equilibrium and the utilitarian framework in the neoclassical tradition and proposed to approach human agency based on the Aristotelian concept of the “social individual.” In addition, he criticized the deterministic nature of the Marxian “laws.” According to Castoriadis, the use of concepts such as the “production function” and “capital” presents a number of caveats.     

C.E. Ferguson and the Neoclassical Theory of Capital: A Matter of Faith

In 1969 the American neoclassical economist C.E. Ferguson wrote that reliance on neoclassical aggregate production and distribution theory is a ‘matter of faith’ to be sorted out (he says ‘answered’) by econometricians. Ferguson was criticized on both sides of the debate for invoking this religious metaphor. Using the methodological framework of A.J. Cohen & G.C. Harcourt (2005), Introduction: capital theory controversy: scarcity, production, equilibrium, and time, in: A. Cohen, G.C. Harcourt & C. Bliss (Eds) Capital Theory, 3 Vols. Northampton, MA: Edward Elgar, this paper argues that faith plays a recurring role in all capital controversies and especially in modern theories of growth that rely wholesale on the aggregate production function. Ferguson's faith proves to be much more insightful than previously recognized.     

Empty sources of growth accounting,and empirical replacements à la Kaldor and Goodwin with some beef

Standard sources of growth accounts are empty of content because they rely on neoclassical production theory. Rather, analysis can be based on productivity growth equations derived from national income and product accounts (NIPA) accounting conventions and a helpful algebraic identity. These schemes impose valid restrictions on growth rates of the wage rate, profit rate, capital, labor, and their respective average productivities. One states that the output growth rate equals employment growth plus productivity growth. The standard “convergence” model basically adds accumulation dynamics to this identity. Replacing the aggregate production function with proper accounting restrictions gives a growth model with detailed results that differ markedly from those of the standard model. Alternative, essentially Kaldorian supply- and demand-based alternatives to sources of growth based on a familiar output growth versus productivity growth diagram with constant employment growth contours added in look like a useful alternative to the mainstream models. With distributive dynamics added in, the model would also generate Goodwin-style cycles.     

Decreasing fertility,economic growth and the intergenerational wage gap

Persistent low fertility rates lead to lower population growth rates and eventually also to decreasing population sizes in most industrialized countries. There are fears that this demographic development is associated with declines in per capita GDP and possibly also increasing inequality of the wage distribution. We investigate whether this is true in the context of neoclassical growth models, augmented with endogenous fertility decisions and endogenous educational decisions. Furthermore we allow for imperfect substitutability across workers of different age in the production process and learning by doing effects as well as human capital depreciation. In particular, we assess the intergenerational wage redistribution effects which follow after a demographic change to persistent low fertility rates.     

A variable-production generalisation of Lerner's theorem

A government wishes to choose an optimal set of wage rates, but it is uncertain of individual characteristics. All it knows for certain is that each utility function is strictly quasi-concave and that the production function is linear. We assume that it can determine probability distributions, for each individual. of possible utility functions and ability levels. If each of these probability distributions is the same for every individual, expected social welfare is maximised by equalisation of wage rates. But since actual utility functions, and therefore labour supplies, will generally be unequal, incomes will then be unequal.