AGGREGATE PRODUCTION FUNCTIONS AND THE ACCOUNTING IDENTITY CRITIQUE: CRITICISMS AND MISUNDERSTANDINGS WITH SPECIAL REFERENCE TO TEMPLE

The aggregate production function continues to be widely used, notwithstanding the fact that the Cambridge capital theory controversies and aggregation problems have shown that its foundations are tenuous in the extreme. The main reason for its use seems to be the instrumentalist position according to which aggregate production functions "work", in that they usually, but not always, give close statistical fi ts with plausible estimates of the parameters. However, Anwar Shaikh was one of the fi rst to show that this is simply the result of the existence of an underlying accounting identity together with the use of value data. This interpretation with reference to the subsequent work of Felipe and McCombie has been challenged by Temple in two articles. While Temple concedes the argument has some validity, he erroneously believes, inter alia, that the critique only holds under certain ad hoc assumptions. As a consequence, he argues that the criticism only works "part time". This paper further discusses Temple's arguments and demonstrates that none of them is compelling and the critique, in fact, works "full time". Because of the underlying accounting identity, estimates of the parameters of aggregate production functions cannot be regarded as refl ecting the underlying technology of the industry or economy and Anwar Shaikh's original insights remain valid.