In today’s WSJ, Bill Gates writes about the power of data collection and analysis. He writes; “In the past year, I have been struck by how important measurement is to improving the human condition. You can achieve incredible progress if you set a clear goal and find a measure that will drive progress toward that goal …”
I have been told that before Gates dropped out of Harvard that he audited first year Ph.D. econ classes there. If he takes his goal seriously, he will need to grapple with some frontier research questions. All micro econ students are taught the production function. In the typical boring example, a firm hires labor and capital to produce pizza. The professor stands at the board and writes; pizza = f(L,K) and talks about the demand for inputs where f(L,K) is the production function. What makes this boring is that the firm knows f(L,K) and inputs are homogeneous. All workers (L) and all robots (K) are identical.
But, diversity and uncertainty are the spice of life and of modern economics! For a taste of this, read Sherwin Rosen’s AEA Presidential Address. What Gates’ article is really about is how from observing some noisy measures of output, and inputs do we infer what the production function f() is? Gates doesn’t care about “pizza production”. He cares about healthy kid formation and human capital formation but on some level it is the same question. Consider the following example: