Impossible or Not, the Aggregate Production Function Has Become a Mainstay of Mainstream Economics

The next decade (1956-66) is labeled by Sinclair the “Decade of Dynamics.” It was during this period that a fork clearly appeared in the road leading from Keynes, with one path eventually heading in the Post-Keynesian direction, the other in the Neo-Keynesian. Robert Solow’s (1956) so-called neoclassical growth model brought relative factor prices into play and gave a place to capital-labor substitution within a one-sector model. In significant contradistinction to Austrian capital theory, capital was treated as homogeneous, much as it was by Frank H. Knight. Knight, however, did not conceive of an aggregate production function, which in Austrian analysis is a logical impossibility. Impossible or not, the aggregate production function has become a mainstay of mainstream dynamic economics. There developed another strain of growth models in the Cambridge (England) tradition that forms the basis of Post-Keynesian dynamics. This strain includes the models of Nicholas Kaldor (1956) and others who share a common ancestry going back to Michael Kalecki (1937). Eschewing any role for substitution, these models are driven entirely by income effects, and they render determinate the distribution of income between the owners of capital and labor.

—Don Bellante, “The Fork in the Keynesian Road: Post-Keynesians and Neo-Keynesians,” in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, ed. Mark Skousen (New York: Praeger Publishers, 1992), 121.