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Engineering Economy for Economists

1. Abstract

The purpose of engineering economics is generally accepted to be helping engineers (and others) to make decisions regarding capital investment decisions. A less recognized but potentially fruitful purpose is to help economists better understand the workings of the economy by providing an engineering (as opposed to econometric) view of the underlying workings of the economy. This paper provides a review of some literature related to this topic and some thoughts on moving forward in this area.

2. Introduction

Engineering economy is inherently an interdisciplinary field, sitting, as the name implies, between engineering and some aspect of economics. One has only to look at the range of academic departments represented by contributors to The Engineering Economist to see the many fields with which engineering economy already relates.

As with other interdisciplinary fields, engineering economy has the promise of huge advancements and the risk of not having a well-defined “home base”—the risk of losing resources during hard times in competition with other academic departments/specialties within the same department. The primary “home base” that engineering economy has developed over the years is the proper application of time value of money concepts to capital investment decision-making. This topic, along with related topics of risk, option value, etc., are also covered in business and management schools, but engineering economy departments/sub- departments have held their ground owing to the importance of capital investments in the work of engineers.

Less studied in engineering economy has been the interface with the work of economists. Despite the use of the word “economy” in the title of the field, engineering economy has had little interface with the work of economists over the years. This paper attempts to extend that bridge.

Some previous work has been done looking for useful linkages between these fields. A paper1 presented at the ASEE conference in 1996 addressed the topic of how microeconomic theory could be used to improve the work of capital investment decision-making. Boerger2 developed in detail the application of economic theory to capital investment decision-making, focusing on the incorporation of the quality-engendering nature of capital investments into their valuation vis-à-vis their less-quality-engendering capital investment alternatives. That analysis also included a detailed application of that theory to investments in advanced automotive paint equipment. In 2002, Boerger3 presented a framework for incorporating into the investment decision-making process the value of the improved flexibility of some advanced technologies in allowing firms to compete better with other firms (by applying economists work on game theory to the investment decision).

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Boerger, P. (2008, June), Engineering Economy For Economists Paper presented at 2008 Annual Conference & Exposition, Pittsburgh, Pennsylvania. 10.18260/1-2--4463