The limitations of Jorgenson’s model

Abstract

As was seen in Chapter 5, Jorgenson describes investment as a process of optimal capital stock adjustment in which the current costs and future benefits of investment activity are balanced. However, Jorgenson’s model did not escape criticism; it is based upon a number of restrictive assumptions. Some of the key criticisms of Jorgenson’s theory are discussed in this chapter, including:

• the problems associated with aggregating a macroeconomic model of investment from the microfoundations of perfect competition;

• the failure formally to specify the expectations formation process;

• the related neglect of issues to do with rationality and uncertainty;

• the absence of an explicit dynamic structure reflected in the ad hoc nature of lag specifications;

• the absence of adjustment costs;

• the neglect of financing issues; and

• problems with measuring and defining capital goods in a world in which the capital stock is heterogeneous and made up of capital machinery of many different vintages.