Economy and measurement

Grave Kilogram Standard 1793. Photo Credit Wikimedia Commons
Grave Kilogram Standard 1793. Photo Credit Wikimedia Commons

We say often that you cannot manage what you cannot measure. But what is a measurement? Well, every measurement is a comparison with a standard. For instance, the international prototype of the kilogram is a platinum-iridium cylinder kept at the BIPM in Sèvres, in France. Every measurement provides a measured result that it is stored somewhere, and it is a process with a beginning and an end. Then, it requires some time to be done.

Every measurement has an error. This error can be due to a lack of precision or a lack of accuracy. To know these concepts is very important in any activity. Precision means how well the result is when the process of measurement is repeated. Precision is related to repeatability. And accuracy is how well the results corresponds with the real value. Precision errors usually are random and they follow a distribution of probability, however, accuracy errors are systematic and they depend on the measurement process.

Scientists use these concepts often; however, when measurement passes from scientific experiments to practical matters they tend to be abandoned.

Engineering requires the use of a lot of measurements through a lot of measurement devices. To improve the accuracy of the measurements with these devices, they must be calibrated.

When we move from engineering to management, we try to emulate those processes.  However, management is not usually done under general physical laws.

If we want to measure parameters of a business, we need a standard. Businesses are measured in monetary units. The measurement standard of the business is the currency of the country. The currency of the country is a standard for value, understanding value in terms of purchasing power. This is very important because inflation modifies the purchasing power of the standard that we are using to compare any business in a measurement process. Inflation affects the accuracy of the measurement.

Purchasing power can be determined through a price index, and we can use constant monetary units correcting the deviation of the purchasing power of the standard with the evolution of the price index along time. This is very common in macroeconomics; however, constant prices are not used for most common business analyses.

The reason why inflation control is so important is precisely this one. No manager can measure his business and make decision about it if government lets that the purchasing power of the monetary units change fast with time. This is the fastest way to destroy any potentially good business, people employment and economy. A government that does not control inflation or let that the value of businesses changes without control from one year to another should not be desirable, because private business managers never will be able to control their own business under that kind of scenario.

In a multinational organization, the use of several currencies creates a problem of management, because markets can modify the value of exchange among currencies. Corporate managers will measure the business in a certain currency as a global monetary unit for the business, however, local managers can develop their activity under a different one. If the local business is supported by corporate investments, the planning of these investments would not be easy in a scenario of an unstable currency exchange. That is the reason why a common currency as the Euro is so important for multinational companies, although, as we have been able to see recently it may become a problem for single national business when governments cannot carry out their supranational agreements due to a bad management of the public expenditure because they will try to extract more resources from the private economy affecting the employment and the proper development of the economy.


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