Neoclassical Production Theory Research Articles

The Role of Education towards Economic Growth: Evidence from Indonesia

Education is an important variable in economic activity since competent human resources are originated from good quality education. Human resources are primary input in Neoclassical Production Theory, so that this research mainly aims to estimate the impact of education, labor, and foreign direct investment towards the economic growth in Indonesia. The research data are in the forms of panel data consisting of 34 provinces in Indonesia in the period of 2006 until 2019. The average length of school time is employed as the education variable, the number of labor as the labor variable, and foreign direct investment as capital variable. Based on the estimation results, the selected model for analysis is random effect model. The main findings indicate that education is proved to be significantly positive towards the formation of gross regional domestic product; every 1% increase in education can improve economic output by 2.01%. Labor and foreign direct investment are also proved to be significantly positive towards the gross regional domestic product in Indonesia. Therefore, it requires strategic policies for quality-oriented education improvement and literacy program to all corners of Indonesia since education is a long term investment.

Solving the Reswitching Paradox in the Sraffian Theory of Capital

The possibility of the reswitching of techniques in Piero Sraffa’s intersectoral model, namely the recurring capital-intensive techniques with monotonic changes in the interest rate, is traditionally considered as a paradoxical violation of the assumed convexity of technology putting at stake the viability of the neoclassical theory of production. It is argued here that this phenomenon can be rationalized within the neoclassical paradigm. Sectoral interdependencies can give rise to the well-known price Wicksell effect, which is the revaluation of capital goods due to changes in relative prices triggered by monotonic variations in income distribution. The reswitching of techniques is, therefore, the result of cost-minimizing technical choices facing returning ranks of relative input prices in full consistency with the pure marginalist theory of factor rewards. The theoretical analysis proposed in this article is applied empirically to the counterexamples of various case studies presented in the literature.

Implications of smart decision-making and heuristics for production theory and material welfare

Conventional theory assumes that economic agents perform at optimal levels of efficiency by definition and this is achieved when individuals behave in a particular fashion. Moreover, neoclassical production theory masks the process by which optimal output can be achieved. I argue that economic theory should be revised to incorporate some key findings of behavioural economics, while retaining the conventional theory’s normative ideal of optimum output whilst rejecting its normative procedural ideals of how to achieve optimality in production. I argue that neoclassical procedures can be expected to yield sub-optimal levels of output and therefore should not be benchmarks for procedural rationality. I present an alternative more realistic and analytically precise specification of the production function related to the fast and frugal heuristics narrative pioneered by Gigerenzer and Leibenstein’s x-efficient theory. This approach incorporates an understanding of the appropriate procedures, psychological and organization variables, decision-making capabilities and end-goals required to achieve optimality in production and, thereby, grow the wealth of nations, thereby enhancing the material wellbeing of the population at large. This also provides us with the tools to better identify economic inefficiency and the conditions that contribute to it.

Der geplante Mensch im Unternehmen – Teil 1

In practice, it is always amazing to observe that companies do not have sufficient personnel planning. However, it is also just as astonishing that the working human being in the value-added work-sharing process still does not receive the acknowledgment that is actually due to him as the only new value-adding factor in connection with nature. In contrast,the capital endowed by the dominant bourgeois economy is merely a derivative factor of production, and the neoclassical marginal productivity theory completely bypasses economic reality. However, it is also a fact that the added value created by humans in production must always first be realized on the market. However, the risks that arise here do not necessarily affect only the owners of the capital but also the employees. They are general business risks and not just business risks.All of this is worked out in the first chapter of the article and made calculable and verifiable in the second chapter. On the basis of business-related (derived) added value, these include various key personnel policy indicators that reveal valuebased labor intensity and labor productivity as well as the distribution of added value in the wage and value added quota. In the third chapter of the article (Part 2 (4/2019)), the conditions for a labor demand (recruitment), but also for redundancies in a market-capitalist enterprise, and their influence are shown. This shows that the personnel plan is dependent on the sales, production and investment plan of a company and is also determined by political and legal measures. Annoying in the use of personnel is from the point of view of capital, the economically indeterminate employment contract. The fourth chapter deals with the determination of the quantitative and qualitative human resources needs. Here, special emphasis is placed on a practically never performed gross-net-bill as well as on a calculation of the gross and net working volume. Important in this context are dynamic input-output establishment plans. The final fifth chapter then deals with strategic personnel adjustments in corporate crisis situations to avoid possible redundancies.

Solving the Reswitching Paradox in the Sraffian Theory of Capital

The possibility of the reswitching of techniques in Piero Sraffa’s intersectoral model, namely the recurring capital-intensive techniques with monotonic changes in the interest rate, is traditionally considered as a paradoxical violation of the assumed convexity of technology putting at stake the viability of the neoclassical theory of production. The purpose of this paper is to demonstrate that this phenomenon is rationalizable within the neoclassical paradigm. Sectoral interdependencies can give rise to the well-known Wicksell effect, which is the revaluation of capital goods due to changes in relative prices. The reswitching of techniques is, therefore, the result of cost-minimizing technical choices facing returning ranks of relative input prices in full consistency with the pure marginalist theory of factor rewards. The proposed theoretical analysis is applied empirically to revisit various numerical examples presented in the literature.

How Reliable is Duality Theory in Empirical Work?

AbstractThe Neoclassical theory of production establishes a dual relationship between the profit value function of a competitive firm and its underlying production technology. This relationship, commonly referred to as duality theory, has been widely used in empirical work to estimate production parameters such as elasticities and returns to scale. We generate a pseudo‐dataset by Monte Carlo simulations, which, starting from known production parameters, yield a dataset with the main characteristics of U.S. agriculture in terms of unobserved firm heterogeneity, decisions under uncertainty, unexpected production and price shocks, endogenous prices, output and input aggregation, measurement error in variables, and omitted variables. Production parameters are not precisely recovered when performing econometric estimation based on the duality approach, and the elasticity estimates are inaccurate. Deviations of own‐ and cross‐price elasticities from initial median values, given our parameter calibration, range between 6% and 690%, with an average of 90%. Also, own‐price elasticities are as imprecisely recovered as cross‐price elasticities. Sensitivity analysis shows that results still hold for different sources and levels of noise, and sample size used in estimation.

Assessing the role of futures position substitutability in a monthly model of factor demand for softwood lumber

We combine cointegrated VAR modeling with basic neoclassical production theory in a new way that tests for, and illuminates the empirical nature of, the monthly US housing sector’s factor demand for softwood lumber. Statistical evidence strongly suggests that the US housing sector has a Hicksian Cobb-Douglas lumber factor demand arising from applying Shephard’s lemma to the sector’s cost function and that the US housing sector’s residential homebuilding agents treat lumber and lumber futures positions, not as identical factors, but as separate and time-differentiated, factor substitutes. Evidence suggests that homebuilding agents shift between demands for the two substitutes based on movements in the lumber/lumber futures price ratio. This establishes a theoretical link between a number of futures price-impacting market trends and events of great concern to US regulators and the underlying lumber commodity market through effects on futures price.

Testando modelos alternativos em economia da sustentabilidade: Baumol versus Georgescu-Roegen

Given the ubiquitous nature of the laws of thermodynamics, it would be reasonable to expect that the divergence between strong and weak sustainability could be subjected to critical tests. That is, it should be possible to use the neoclassical production theory and the laws of thermodynamics to generate predictions able to question the empirical adequacy of the neoclassical research program in terms of sustainability. However, the current state of the debate normally suggests the opposite, that is, the currently available evidence is not sufficient to build refutations. Contrary to this prognosis, we argue that it is possible to build critical tests to evaluate the models in dispute using evidence already available. However, such a construction requires that the analysis of the sustainability be not restricted to the type of evidence traditionally used by such models. We argue that alternative theories must be explicitly used to give meaning to new types of evidence. Without the explicit mobilization of alternative theories to evaluate new types of evidence, critics of the orthodox theory dwell on an epistemological trap, in which the questioned research program determines what is or what is not scientifically meaningful. To illustrate the prospects of the methodological proposal presented here, we apply this approach to a particular neoclassical model – the Baumol’s model –, which explicitly supports the ability to indefinitely continue the trajectory of economic growth triggered by the Industrial Revolution. The results refute the tested neoclassical model, demonstrate the need to distinguish between intensive and extensive substitution of natural resources, and corroborate the Geogescu-Roegen fund-flow model.

Parameters measuring bank risk and their estimation

The paper develops estimation of three parameters of banking risk based on an explicit model of expected utility maximization by financial institutions subject to the classical technology restrictions of neoclassical production theory. The parameters are risk aversion, prudence or downside risk aversion and generalized risk resulting from a factor model of loan prices. The model can be estimated using standard econometric techniques, like GMM for dynamic panel data and latent factor analysis for the estimation of covariance matrices. An explicit functional form for the utility function is not needed and we show how measures of risk aversion and prudence (downside risk aversion) can be derived and estimated from the model. The model is estimated using data for Eurozone countries and we focus particularly on (i) the use of the modeling approach as a device close to an “early warning mechanism”, (ii) the bank- and country-specific estimates of risk aversion and prudence (downside risk aversion), and (iii) the derivation of a generalized measure of risk that relies on loan-price uncertainty. Moreover, the model provides estimates of loan price distortions and thus, allocative efficiency.

Human capital and economic growth: A macroeconomic model for Pakistan

The paper presents a small macro model for Pakistan economy focusing the impact of investment in human capital on the key macroeconomic variables. The demand side is modeled along the Keynesian lines while the supply side is modeled as per neoclassical theory of production. This framework allows analyzing the effects of investment in human capital on supply side variables (like labor, physical and human capital) and demand side variables (like consumption and investment) at the same time.The model has small forecasting horizon in which three alternative scenarios regarding government spending on education are evaluated from 2012 to 2016. The model shows that the link between human capital and labor market is weak however a change in education spending affects output through enhancing productivity and through multiplier-accelerator principle. Though the model is small in size and forecasting horizon, it can help in evaluating the future paths of key macroeconomic variables associated with education spending.

A general model of technical change with an application to the OECD countries

In the neoclassical production theory technical change (TC) is specified as a function of time. However, some exogenous external factors other than time can also affect the rate of TC. In this paper, we model TC via a combination of time trend (purely non-economic) and other observable exogenous factors that shift the technology. The exogenous economic factors are used to define several technology indices. These technology indices are embedded into the production function in a flexible manner. By estimating this generalized production function, we get estimates of rate of TC which is decomposed into a pure time component as well as several components attributed to technology indices. The empirical model uses panel data on OECD, accession and enhanced engagement countries observed during 1980–2006.

No institution is a free lunch: a reconstruction of Ronald Coase

The two major contributions of Ronald Coase, written at distant points of his long life, have been often interpreted as different and, somehow, contradicting views of the merits of the market mechanism. We argue that the underlying point of the two articles is the same, and it can be summarized by the statement that no institution is a free lunch. When the unity of the Coasian theory is properly understood, it offers a powerful challenge to standard neoclassical production theory and opens new analytical tools to understand and to compare the institutions of production.

C.E. Ferguson and the Neoclassical Theory of Capital: A Matter of Faith

In 1969 the American neoclassical economist C.E. Ferguson wrote that reliance on neoclassical aggregate production and distribution theory is a ‘matter of faith’ to be sorted out (he says ‘answered’) by econometricians. Ferguson was criticized on both sides of the debate for invoking this religious metaphor. Using the methodological framework of A.J. Cohen & G.C. Harcourt (2005), Introduction: capital theory controversy: scarcity, production, equilibrium, and time, in: A. Cohen, G.C. Harcourt & C. Bliss (Eds) Capital Theory, 3 Vols. Northampton, MA: Edward Elgar, this paper argues that faith plays a recurring role in all capital controversies and especially in modern theories of growth that rely wholesale on the aggregate production function. Ferguson's faith proves to be much more insightful than previously recognized.

Two-sided micro-matching with technical progress

We develop a two-sided micro-matching framework with heterogeneous workers and machines that permits a complete analysis of technical progress commonly used in Neoclassical production theory. Using the concept of “production core,” we determine stable task assignments and the corresponding factor-return distributions and then examine how these equilibrium outcomes respond to neutral technical progress pertaining to a particular worker or to all factors. Technical progress that is uniform in all factors will not alter equilibrium micro-matching. Technical progress of the labor-augmenting type may (i) cause a “turnover” by destroying existing stable task assignments and creating new stable task assignments, (ii) generate a richer pattern of wage redistribution than that under labor-improving technical progress in Neoclassical production theory, and (iii) create “spillover” effects from the innovating worker to his/her potential matching machines and his/her directly and indirectly competing workers. The possibility of turnovers and the extent to which factor returns are redistributed depend on the value of the current matches, the extent of outside threats from latent technologies, and the size of technical progress.

Globally flexible functional forms: The neural distance function

The output distance function is a key concept in economics. However, its empirical estimation often violates properties dictated by neoclassical production theory. In this paper, we introduce the neural distance function (NDF) which constitutes a global approximation to any arbitrary production technology with multiple outputs given by a neural network (NN) specification. The NDF imposes all theoretical properties such as monotonicity, curvature and homogeneity, for all economically admissible values of outputs and inputs. Fitted to a large data set for all US commercial banks (1989–2000), the NDF explains a very high proportion of the variance of output while keeping the number of parameters to a minimum and satisfying the relevant theoretical properties. All measures such as total factor productivity (TFP) and technical efficiency (TE) are computed routinely. Next, the NDF is compared with the Translog popular specification and is found to provide very satisfactory results as it possesses the properties thought as desirable in neoclassical production theory in a way not matched by its competing specification.

PRODUCTIVITY CONVERGENCE ACROSS INDUSTRIES AND COUNTRIES: THE IMPORTANCE OF THEORY-BASED MEASUREMENT

Cross-country studies of economic growth have been hampered by the scarcity of reliable data on productivity at the industry level; see Bernard and Jones [American Economic Review, 91 (4) (2001), 1168–1169] and Rogerson [Journal of Political Economy, 116 (2) (2008), 235–259]. We bring together literature on industry prices, human capital, and capital assets to construct industry-level productivity measures that are well grounded in neoclassical production theory. These theory-based measures differ widely from the crude measures commonly used in the literature. We use these to confirm and strengthen the finding of Bernard and Jones [American Economic Review, 86 (5) (1996), 1216–1238] that for advanced OECD countries, patterns of convergence across sectors have differed since 1970: whereas productivity in market services converged, there is no convergence in manufacturing. More detailed analysis confirms that patterns of convergence are highly industry-specific. There is no dominant convergence trend in sectoral productivity growth across advanced countries.

Neoclassical production theory and growth with unemployment: The stability issue revisited

A common belief in economic growth theory is that the instability of the balanced growth path of models based on a non-neoclassical production theory, such as the Harrod–Domar or Goodwin-type models, may be removed by introducing neoclassical technology and substitutability between factors. This does not need to be true. As shown in this paper, Solow-type models with sluggishly adjusting, non-market-clearing, real wages and endogenous fertility may suffer instability. Not only: instability may be favoured by too strong a degree of neoclassical substitution in the economy.

A Biophysical Approach to Production Theory

Most people agree that human activities are consistent with physical laws. One may naturally think that sensible economic theories can be derived from physical laws and evolutionary principles. This is indeed the case. In this paper, we present a newly developed production theory of economics from biophysical principles. The theory is a compact analytical model that provides, in our view, a much more realistic understanding of economic (as well as social and biological) phenomena than the neoclassical theory of production.

The Uneven Pace of Deindustrialisation in the OECD

AbstractThroughout the OECD, the period since the 1970s saw a secular decline in manufacturing's share of GDP and a secular rise in the share of services. Despite this being a central feature of growth, the economic forces behind deindustrialisation and the reasons why its pace varied so markedly across OECD countries are not well understood. Adopting an econometric approach founded in neoclassical production theory, we provide an empirical analysis of the role of changes in relative prices, technology and factor endowments in driving changes in production structure. The speed of adjustment to changes in these determinants of production structure varies across OECD countries and is correlated with levels of employment protection.

'Virtual Water' and Occam's Razor: An Explanation from the Perspective of New Economics of Water

Virtual Water has been criticized as merely being a jargon camouflaging crop-water requirements. This paper attempts to contest this argument. From the neoclassical production theory, it is argued that virtual water cannot simply be expressed in terms of crop-water requirements. Rather, the notion of virtual water imports has deep economics embedded in it, along with tremendous social implications. This paper brings to surface the new economics of water management that is deeply rooted in the notion of virtual water imports.