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Saturday, September 7, 2013

A Brief History of Data Revolutions in Economics

Measurement is the lifeblood of economics. And today, economists are optimistic that all the new digital sources of information â€" Big Data, in the popular shorthand â€" will open the door to breakthroughs in the ability to measure, monitor and perhaps guide the economy. That is the subject of an article I wrote, which was published on Sunday (Aug. 25, with link.)

Advances in technology have long fueled improvements in the measurement of populations and economic activity. Herman Hollerith’s punched-card tabulating machines, first used in the 1890 census, made it possible to efficiently count and categorize America’s surging population at the end of the 19th century. (And the Hollerith tabulating machines were the founding technology of the company that became I.B.M.)

In the early 20th century, the spread of automobiles and telephone service made it possible to expand and increase the frequency of the household surveys â€" done in person and by telephone â€" used to track employment and job losses.

In the 1960s, mainframe computers made it possible to mine and process larger and larger amounts of data. And the adoption of affordable digital tape storage was another vital technology, said James Poterba, president of the National Bureau of Economic Research and a professor at the Massachusetts Institute of Technology.

Vast amounts of government data â€" the equivalent of truckloads of punched cards â€" could then be stored on a few computer tape reels and easily copied. Those portable tapes could then be fairly easily sent off to curious economists and social scientists at universities across the country. “That opened the floodgates to wholesale statistical analysis of government data sets,” Mr. Poterba said.

Technology may provide tools, but the incentive for innovation in measurement is often needed. In June 1930, based on scattered reports of improvement, Herbert Hoover declared, “The Depression is over.” At the time, there was no measure of national economic activity, which we now call the gross domestic product, or G.D.P. And there was no reliable information on unemployment. Policy-making was based on guesswork, gut feel and wishful thinking.

To address the gap, the government hired economists and statisticians to come up with a scientific method for measuring the national economy. In 1934, a team led by Simon Kuznets published their report on how to calculate national income, and the field of econometrics took a giant step forward. “That work was propelled almost entirely by the necessity of the Great Depression,” said Claudia Goldin, an economist and historian at Harvard.

Economists, both in academia and in business, see a pressing need these days behind the flurry of Big Data research. After all, they note, the United States is emerging fitfully from the worst recession since the Depression. “We have more data, better tools and an urgent demand for greater understanding,” said Jed Kolko, chief economist at a Trulia, an Internet start-up that mines residential real estate data.