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| CES Production Function: The CES (Constant Elasticity of Substitution) production function models output as a combination of inputs—typically capital and labor—allowing for a constant elasticity of substitution between them. It generalizes the Cobb-Douglas function by permitting varying degrees of input substitutability, influencing income distribution and growth analysis in economic modeling. See also Cobb-Douglas rpoduction function, Production function, Aggregate production function, Capital._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Geoffrey C. Harcourt on CES Production Function - Dictionary of Arguments
Harcourt I 51 CES Production Function/Harcourt: The CES* production function is another famous example where malleability, perfect competition, disembodied technical progress, static expectations and constant returns to scale were, initially at any rate, crucial assumptions. This particular function made its debut to a wide audience in an article published in 1961 by Arrow, Chenery, Minhas and Solow(1) (ACMS) (see also, Minhas [1963](2)).** The particular empirical findings which led to its debut were the close associations, as confirmed by the appropriate regressions, between the logarithms of labour productivity and money-wage rates in the same industries in different countries. >Production function, >Cobb-Douglas production function. Labour productivity: The observations on labour productivity were treated as if they came from a constant-returns-to-scale production function which spanned national frontiers. The function was characterized by disembodied technical progress and ex post variability of factors; so that, at any moment of time, the machines in the capital stock of each country could be treated as if they had been moulded into the form of the most up-to-date machines, namely, those which would be chosen from the various possibilities currently existing and known in each country by cost-minimizing, profit-maximizing businessmen who had static expectations. >Expectations, >Entrepreneurship. To suppose that the observations, some facts in search of a theory, should be so treated was, to ACMS, just the natural thing to do - or, at least, 'a natural first step', see ACMS [1961](1), p. 228. Harcourt I 52 With these assumptions, the regression coefficients of the relationships (…) were shown to be estimates of the elasticity of substitution between capital and labour, were usually less than one and greater than zero, and varied considerably as between industries. These findings were in turn brought to bear on such diverse topics as the factor-price equalization theorem, see, for example, Minhas [1963](2), and the measurement of technical progress, see, for example, Sampson [1969](5). Indeed a considerable new literature was born as a result, so that the coming out of the CES in 1961 was quite a fecund debut. Method: The essential methodology of ACMS is as follows: if the form of the production function is known, and provided that there are constant returns to scale and perfect competition in the factor and product markets, it is always possible to derive the implied form of the relationship between productivity and the wage rate. ACMS then turn this procedure around and suppose that the form of the relationship between productivity and the wage rate is known (as it was to them). * Constant elasticity of substitution, now referred to as the homohypallagic production function, see Minhas [1963](2) ** The first person to use the function was Champernowne in the mid-forties. Solow [1956b](3) used it in 1956 and Pitchford [1960](4) exhaustively examined its role in growth models in 1960. 1. Arrow, Kenneth J., Chenery, Hollis B., Minhas, Bagicha S., and Solow, Robert M.[1961] 'Capital-Labor Substitution and Economic Efficiency', Review of Economics and Statistics, XLIII, pp. 225-50. 2. Minhas, B. S. [1963] An International Comparison of Factor Costs and Factor Use (Amsterdam: North-Holland). 3. Solow, R. M. [1956b] 'A Contribution to the Theory of Economic Growth', Quarterly Journal of Economics, LXX, pp. 65-94. 4. Pitchford, J. D. [1960] 'Growth and the Elasticity of Factor Substitution', Economic Record, xxxvi, pp. 491-504. 5. Sampson, Gary [1969] 'Productivity Change in Australian Manufacturing Industry', Monash University: unpublished Ph.D. thesis._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Harcourt I Geoffrey C. Harcourt Some Cambridge controversies in the theory of capital Cambridge 1972 |
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