Endogenous Growth, Increasing Returns and Externalities: An Alternative Interpretation of the Evidence

Abstract

A number of recent papers have used aggregate production functions in an attempt to measure the degree of returns to scale and possible external effects in US manufacturing industries. In this paper I argue that the methods used and the results obtained are deceptive. The reason is that underlying every aggregate production function is the income accounting identity that relates output in value terms to the sum of wages and profits. This identity can be transformed, depending on the empirical paths of the wage and profit rates and of the factor shares, into different mathematical forms which resemble neoclassical production functions. Estimation of these forms, as is done in the literature discussed in the paper, poses serious problems for the interpretation of the results.