Inputs and outputs and everything in between
Inputs and outputs and everything in between
Getting systems to deliver what you want, effectively
When you drive a car, you don’t stand outside it and command it to move at a certain speed.
You also don’t walk to the back of the car and push it to make it move at the speed you want.
When the car moves, it is the output of a process.
This process involves you getting into the car, starting the ignition, putting it in the right gear and accelerating.
The car needs to be fueled and the tyres properly inflated. And you need to know how to drive.
There are also some things that you don’t control. For example, the road conditions or the traffic could dictate if you can reach the speed you want.
All of these are the inputs to the process. If anything happens to the inputs (no fuel in the car, the car not starting or you not knowing how to drive) it affects your output.
If all the right inputs are in place, you get the output you want.
Inputs are also called constraints in some contexts. Like you not knowing how to drive is a constraint. Or not having enough fuel is a constraint.
This is all something we can explain even to a 5-year old.
But if you change the example to something slightly more complex this becomes very difficult.
A Government trying to move the economy
A government trying to design the right policies is a high complexity problem. First, you need considerable mental gymnastics to define the process and a desired output, outcome or objective.
Let us take economic policy as an example. A desired outcome or output is increasing prosperity (better wealth and health) for the people. Before we set out, we have to define how we would measure this outcome.
Ideally, you need a basket of metrics that represent prosperity. But the size of the economy as measured by GDP has turned out to be the headline metric that everyone loves to use.
The common wisdom says that the reason GDP is such a durable metric is it correlates very well with many other desired outcomes (greater life expectancy, jobs added, higher incomes, etc.).
And roughly GDP = consumption of goods and services in the economy.
Broadly speaking, GDP does well if consumers (and their representatives like Governments) can spend on a lot of goods and services. Some spending is essential and cannot be avoided but beyond that a lot of spending is discretionary.
So the idea is every year you raise the ability of consumers to spend more than last year. This raises the GDP and you get GDP growth. Working backwards, what this means is that people were able to earn more and more each year compared to the last.
How do you even get this to happen? Or in other words, what are the inputs?
Now let’s get into some specifics.
India has been trying to kick the economy into higher gear for a while. The recent past shows that the Government has significantly increased its investment in infrastructure and is also asking corporates to increase private sector investment.
So clearly the Government sees better infrastructure and higher private sector investment as at least 2 of the inputs.
You can kind of see how better infrastructure can play a role. Better roads or railways can mean that goods move faster, resulting in greater efficiency and that should have a positive effect on GDP in the medium to long term.
It also offers an additional short term boost to GDP because contractors have to be engaged for these projects to be built and they in turn employ people who then have incomes that support more spending.
What about private investment? If you were a factory owner, what would make you double your capacity?
This means deploying additional capital (through either equity or loans) to build more factories, warehouses, buy machines and employ and train more people.
This again leads to a short term boost while the assets are built. The hope is that there are sustained benefits by them employing more people who then have better purchasing power and who consume other products and services.
If many such projects come up, the effect multiplies through the economy.
But you would make this investment only if you see clear signs of demand increase. So increased private sector investment doesn’t seem like a direct input but a response to some growth or at least an anticipation of it.
If the demand actually comes then the additional investment pays off, GDP grows and everyone is happy. Without the investment you get a bit lower GDP growth but eventually you build your new capacity to meet the higher demand.
So it feels like an input when looked at this way.
There are other, more clear, inputs; for example, a healthy and skilled population. But the timelag to economic growth is on a generational scale here.
Politicians often have to prioritize between different inputs and they usually have a short term bias because they have to go back to voters.
Finally these “inputs” and “outputs” intertwine and can combine to deliver prosperity.
Healthier children have better learning outcomes which typically lead to higher incomes. Higher incomes leads to parents spending more on education. As GDP grows, a country and its people can afford to invest more and more into its health, education and infrastructure, thereby solidifying future prosperity.
One way to imagine this is like a banyan tree with many roots that have emerged and grown stronger over time. It is not easy to bring this tree down and it can last a long time.
At the risk of stretching the analogy too much, some of the key questions that come up are:
Which roots (inputs) are the most important?
Does the order in which they came matter?
When thinking about any complex system (an economy, a company or even a family), asking these questions can help define clear pathways (or at least experiments) to help reach your expected outcomes.