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Szirmai: Application of production function

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In analyzing social-economic development, you start with simple measurable things. Like: output is produced using people, labour, using machinery, capital, and combining these in an efficient way. This is influenced then in technological change, which is the changes in production technology, which also create more output, or better output, or new products. It has to do with structural change, which tells you whether these people and this machinery are invested in the most productive things. So if you shift, for instance, people from low productive agriculture to high productive cheap manufacturing. These are all things that can be measured and the mathematical equation between the total output and the various inputs – I can mention more of these, if you want – that is what we call a production function. What I like about this is that it gives you what I call the “proximate” sources of growth, the immediate sources of growth. Which we can measure, we can go out and try to measure; it’s actually very difficult to measure the labour force. It’s one of the greatest mysteries to find out who is actually working where and doing what. It seems easy, but it’s very hard. While measuring capital is also difficult, because it’s so diverse. You have all these different types of machinery, and equipment, and buildings, which you have to somehow put into a number… but I will talk not about that. But at least it is measurable. If you collect the data, you can put them together. Then you move away from these immediate measurable things to the broader social-economic setting. But instead of talking about the social-economic setting in a very vague sense, you look at things which are related to the proximate sources. Who is accumulating the capital, who is doing the investment? Well, it has to do with entrepreneurs. Entrepreneurs are part of the social setting. Why are some people more entrepreneurial than others? Why do some people take more risks than others? Does that have to do with culture? Does it have to do with political safety? Does it have to do with family? Is the family culture something which opposes entrepreneurship, because everybody wants a slice? Or does it help you, because you can get resources from your family? So difficult things like culture then become connected with this more measurable part, which is studied by economists.

Added on 02 Apr 2017
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