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KC Border

March 2004

In the 1920s the economist Paul Douglas was working on the problem

of relating inputs and output at the national aggregate level. A survey by

the National Bureau of Economic Research found that during the decade

19091918, the share of output payed to labor was fairly constant at about

74% (see the table in footnote 37 on page 163 of [1]), despite the fact the

capital/labor ratio was not constant. He enquired of his friend Charles Cobb,

a mathematician, if any particular production function might account for

this. This gave birth to the original CobbDouglas production function

Y = A K 1/4 L3/4 ,

which they propounded in their 1928 paper, A Theory of Production [1].

How did they know this was the answer?

Mathematically the problem is this: Assume that the formula Y =

F (K, L) governs relationship between output Y , capital K, and labor L.

Assume that F is continuously differentiable. For every output price level

p, wage rate w, and capital rental rate r, let K (r, w, p) and L (r, w, p)

maximize profit,

pF (K, L) rK wL.

The first order conditions for an interior maximum are

pFK (K , L ) = r

(1)

pFL (K , L ) = w

(2)

where FK denotes the partial derivative of F with respect to its first variable

K, and FL is with respect to L. Assume now that the fraction of output

paid to labor is a constant . For Cobb and Douglas they chose = 0.75.

The constancy can be written:

(1 )pF (K , L ) = rK

(3)

pF (K , L ) = wL

(4)

KC Border

1

FK (K , L )

=

.

K

(1 )F (K , L )

We now use the chain rule to notice that

f . This allows us to rewrite (5) as

d

dx

(5)

)

ln f (x) =

f (x)

f (x)

FK

1

.

ln F =

=

K

F

K

(6)

Similarly

ln F = .

(7)

L

L

Thus we have eliminated p, r, and w. So the above equations hold for every

(K , L ) that can result as a profit maximum. If this is all of R2+ , then we

may treat (6)(7) as a system of partial differential equations that even I

can solve. Since x1 = ln(x) + c, where c is a constant of integration, we

have

ln F (K, L) = (1 ) ln K + g(L) + c,

(6 )

where g(L) is a constant of integration that may depend on L; and

ln F (K, L) = ln L + h(K) + c ,

(7 )

these pins down g(L) and h(K), namely,

ln F (K, L) = (1 ) ln K + ln L + C

or, exponentiating both sides and letting A = eC ,

F (K, L) = AK 1 L .

References

[1] Cobb, C. W. and P. H. Douglas. 1928. A theory of production. American

Economic Review 18(1):139165. Supplement, Papers and Proceedings

of the Fortieth Annual Meeting of the American Economic Association.

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