'Are There Laws of Production?': an assessment of the early criticisms of the Cobb-Douglas production function

Abstract

This paper traces the development of the Cobb-Douglas production function from its inception in 1927 and critically assesses its early hostile reception. Further econometric evidence is also presented on these issues. Some of the criticisms were easily dealt with, but other more serious ones remained and, although equally relevant today, have been all but forgotten. The original regressions of Cobb and Douglas using time-series data produced some spectacularly good fits, with the estimates of the output elasticities being virtually identical to the relevant factor shares. (This was erroneously argued by Douglas, and others following him, as providing strong empirical support for the neoclassical marginal productivity theory of distribution.) It is shown that these results collapse once account is taken of the existence of either outliers or technical change, or both. There is some evidence that Douglas himself realised this and his emphasis subsequently shifted to cross-industry regressions. However, an importc~nt critique by Phelps Brown in 1957, formalised later by Simon & Levy, demonstrated that all that was being estimated was an accounting identity. This criticism was later generulised by Shaikh to time-series estimations. These critiques have been largely brushed aside and ignored in the literature. If they had not been, there would perhaps be a greater appreciation of just how flimsy is the theoretical basis of the production function.

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