Production and Growth: What Macroeconomists Can Learn from Physics

Date: Friday, March 20
Time: 1:30 pm
Location: Arts 211

About this event

How well do we understand aggregate production?

The conventional approach to modelling a firm sector is to repurpose the microeconomic concept of the production function to describe production possibilities at a higher level of abstraction, where the main relevant inputs are aggregate capital and labour. Production functions, the characteristics of capital, and firm structure are chosen to either resemble patterns found in the national accounts or to support the specific modelling objectives.

That highly parametric approach leads to multiple problems. By assuming all important features of a firm sector, we make it impossible to derive and understand them. Moreover, any mechanisms tied to the inner workings of the production process become undiscoverable. As we cannot look deeper inside the firm sector in a meaningful way, attempts to model such mechanisms then necessitate building additional structure around an already fully specified production sector.

This paper shows what can be achieved by following a less structural and far more general approach to thinking about production. As it turns out, many stable characteristics of economic aggregates that we conventionally accept as “technological givens,” like the ones we use to parameterize the neoclassical growth model, can be fully explained and understood.

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