Aggregate Production Functions: A Pervasive, but Unpersuasive, Fairytale

Abstract

This article reviews the case against aggregate production functions and then consider its implications. There are two types of aggregation problems involved in the existence of an aggregate production function for the economy as a whole or even for some sector thereof. The first of these consists of aggregation over different factors to form aggregate labor or aggregate capital and of aggregation over different products to form aggregate output. The second problem consists of aggregation over firms. The consequences of the non-existence of aggregate production functions have been too long overlooked. Attempts to explain the impossibility of using aggregate production functions in practice are often met with great hostility, even outright anger. To that, the moral is : Do not interfere with fairytales if you want to live happily ever after.

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