This post presents an argument I get from Shaikh (1974). During the post (World) War (II) "golden age", the share of profits in U.S. national income stayed fairly constant. As a matter of algebra, an aggregate Cobb-Douglas production function fits the data. One cannot legitimately cite the goodness of such a fit as empirical evidence for the aggregate marginal productivity theory of distribution. The theory has not passed any potentially falsifying empirical test.
Shaikh built on past work in developing his argument, and a body of more recent work has extended and generalized the argument. Why do economists continue to use measures of Total Factor Productivity and Solovian growth theory when they have neither theoretical nor empirical support?
2.0 A Common Version Of Aggregate Neoclassical Theory
Consider the Cobb-Douglas production function:
Now impose further neoclassical assumptions. By the exploded aggregate neoclassical theory, competitive firms are maximizing profits when the interest rate is equal to the marginal product of capital:
3.0 Some Accounting Identitites
Begin anew. I start with the accounting identity that national income is the sum of total wages and total profits:
Take integrals of both sides:
Update: Originally posted on 5 August 2006. Updated to provide better formatted equations.
- Shaikh, Anwar (1974). "The Laws of Production and Laws of Algebra: The Humbug Production Function", The Review of Economics and Statistics, V. 56, Iss. 1 (Feb.): pp. 115-120