All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Welcome to the information era. You are truly in the midst of a revolution that will change in ways that we can only imagine what we do, how we do it, and where we do it. Those of you familiar with New England have a wonderful opportunity to see today the order of magnitude of the changes we will see. In a few days you can travel to Plimouth, then to Sturbridge, Mystic, or Newport-then to Pawtucket and Fall River and see how life changed when we went through our last revolution, the Industrial Revolution. In the emerging information era, the most valuable resource for the United States will no longer be water power or abundant supplies of coal, oil, or labor. It will be information.

What will remain important in the new era is efficiency, or productivity. The key to long term economic growth has been the increased efficiency with which we produce things. For example, assume that initially it takes one worker one day to produce one widget, the worker is paid $100, and the widget was sold for $100. The worker, however, wants a raise. If the worker's wage is simply raised to $200, the cost of the widget will rise to $200. If all producers follow suit then the price of all products will double and the increased buying power of the workers' higher wages will be eliminated. In fact, the worker will be back at the same level of buying power, except now the earnings will be double and the price off all things will be double.

Now consider a second possibility. As a result of some technological improvement, new machinery, or increased skill on the part of the worker, the worker's output was rose to two widgets a day. Revenue from sales would now be $200 so the worker could now earn $200 a day without any increase in prices. Again, if all producers were in the same situation, the average worker would be producing and earning twice as much as before.

The situation is the same for the individual and increasingly a key to success in this new world will be the efficiency with which one can transform data into information. This is not an easy task, but fortunately it is rewarding. It is also not a task that can be taught in one course, although one course can certainly point you in that direction. It is a skill that can be developed only with practice. Those of you who have played a musical instrument or played an organized sport know all too well the importance of practice. Behind every "thrill of victory" is the 'agony of practice'.

Where then do you begin? I suggest that we begin with some basic questions which should guide you when you interpret the work of others of when you are creating your own information- a point I first ran across in a Macroeconomics text by Rukstad who was attempting to teach macroeconomics with Harvard's case method. The five questions are:

You must begin by knowing where to get the data. At the present time you can access data/information in two primary forms, in the printed form or the electronic form. Most of you, as a result of your previous attempts at report writing, are probably familiar with the first of these. As for the electronic form of retrieval, information can be accessed electronically, at speeds that will amaze you and make most other methods of search and retrieval seem inefficient. At the present time there are two electronic possibilities open to you. One is the collection of CD-ROMs at the library which contain massive amounts of data that you can read, copy, analyze or edit on your own personal computer. You will also be able to access information via the Internet, the rapidly expanding electronic highway system that you can speed along at no cost while here at the University or via some commercial information access services.

Once you have tracked down your data, the real 'fun' begins as you attempt to interpret it or turn it from data into information. It will help if you realize that we are truly talking about creating information and that in the creation process we answer four basic questions that need to be answered. We must decide on when we will be observing, which things it is that we will be observing, what aspects we will be viewing, and how will we present our observations.

To see the importance of these questions, let's turn to our example of Slippery Slope University where we are asked to evaluate the President whose term is coming up for renewal. Although these questions are often not answered sequentially, we will begin with the which question. How should we evaluate the President? Although there are many potential measures, let us assume that the decision has been made to have the evaluation based on the president's ability to raise the school's revenue since taking office in 1991. To help you in your decision, the following data has been provided.

We must then decide on the appropriate time period for any analysis-the when question. The revenue data for school during his tenure are provided below. Would you vote for an extension of the president's contract based on these revenue figures?

On the surface, it would appear that the president is vulnerable to critics who point out that in the six years since taking office, revenues have increased a paltry 1% (101 from 100). The President points out, however, that problems were inherited from the previous president and that things have turned around since 1992, the first full year in office. To support this view, revenue data for the five prior years were added and it is very clear that the University's revenue was in decline for this 5 year period and that the decline in 1992 could be viewed as a continuation of this trend.

How much does the timing issue matter? If we use the 1991-1996 period we have a revenue increase of approximately 1%, but if we accept the President's view and use only the 1992-1996 period we see that revenue has actually increased 12 percent (101 from 90). As you can see, one's interpretation of the president's performance is dependent upon the time-frame one uses.

It is now time to address the what question-in what form do we want our data? At this time we will not worry about the specific techniques, we will briefly look at how we might transform our 'raw' data into some more meaningful form. The secret is to give our numbers some perspective.

First, let's adjust the data for inflation. We all know that during this time prices also grew so was this growth simply a result of a general increase in prices that raised all dollar figures, or did Slippery Slope actually increase. Adjusting for changes in the price level, which would probably be captured by a price index, we find that real revenue indicates that there has been little growth in revenue, even if we ignore 1991.

It is clear from the inflation adjusted data that Slippery Slope finds itself in about the same revenue position in 1996 as in 1991 since revenues increased at about the same rate as prices for this period. The president suggests, however, that this is not the end of the story and that when we compare Slippery Slope to other institutions, we actually did very well. To see how the university has done relative to other universities, the data for the entire industry was assembled and presented below.

With this new information we could look at the ratio of Slippery Slope to the revenue for the entire group of universities to see more clearly how Slippery Slope has done relative to the industry. If we adopt the President's view that we should begin in 1992, Slippery Slope has been successful at increasing it's share of total industry revenue from 6.9 to 7.5 percent- the result of revenue increasing faster at Slippery Slope (12 percent) than for the entire industry (3 percent).

Now we are down to our last question-how should we present our information? To this point we have only used tables, but we could use graphics to present the revenue data. And we will do that in the next section. First, however, let's move on to a more detailed treatment of these questions.

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