Formal Description of Technology

Abstract

Traditional microeconomic theory of production uses a production function. Output is an aggregation or index of an industry’s or nation’s output (over some period of time). Firms, however, produce different outputs, and sometimes it is difficult to find an appropriate aggregation of output to serve as an index, especially in the services industries. For this and other reasons, a more general theory of technology is required. There are two components to a theory of production. The primitive elements that describe a technology must be defined, and the properties or axioms the primitive elements are required to satisfy must be delimited. In this way, one knows precisely what is and what is not an acceptable model of technology. In building a theory one wishes to impose the fewest axioms, and ideally all axioms should be testable, if one wishes to consider it a scientific theory. Often, some axioms are made for analytical convenience and are not testable, per se. If so, these axioms should be justified in some way. Finally, the theory should prove fruitful. The theory we develop in this chapter will provide the basis for the nonparametric models of technology developed in Chapter 4 and the efficiency and productivity analysis undertaken in Parts II and III.