Saturday, April 26, 2014

askblog — What’s Wrong With the Neoclassical Production Function

The neoclassical production function, Y = f(K,L), is a gadget other than for a very simple situation, where is it intuitive. Is it useful to use in a policy setting, or it is just a simple teaching tool that doesn't say much about the real world?
So, should we use the NPF to guide economic policy to try to achieve the best balance among growth and the distribution of income? Some possibilities:

(1) The criticisms of the aggregate NPF are not important, so that policy conclusions are still sound.

(2) Some of the criticisms are devastating, but we need some tool to guide policy, and until something better comes along our best choice is the aggregate NPF.

(3) Some criticisms are devastating, and as a result we should be very cautious and humble about making policy pronouncements based on our understanding of the NPF.

To me, (3) makes the most sense. But that is not a popular position at the moment.
What’s Wrong With the Neoclassical Production Function
Arnold Kling
(h/t Mark Thoma at Economist's View)

1 comment:

Roger Erickson said...

What's wrong?

It's a trivially lame concept?

The Pentagon doesn't use NPF to guide military strategy.

Why on Earth would our other public agencies use it to guide other aspects of national policy?

We need dynamic policies to explore dynamic options.