Re-reading my old macroeconomic books the other day, I ran over a familiar equation.  Anyone into macroeconomics will recognize this famous formula:

You’re right!  It’s the famous Cobb-Douglas function.  Quite possibly one of the most common and basic functions in ‘no-so’ modern economics (it is almost 82 years old to this day…).  For those who have a more techy background, this function is an aggregate decomposition of a country total production Y, given the quantity of capital K and labor L.  The Beta value is the estimated return value attributed to capital.  In other words, for every dollar produced in Y, a certain percentage of this production is due to the fact we own machines.  The ‘A’ factor measures how efficiently capital and labor are used together to produce Y.  It is said that Beta’s value in America is about 0.3, so 30% of the country’s production is caused by machines.

Now here’s my question: in the world of the IT industry, what would the value of Beta actually be?  Programmers do most of the work to produce electronic goods (software and applications), but the actual hardware used is necessary for him to work.  Not to mention ad networks who let their servers distribute advertisements to their publishers!  So who’s working harder in the IT business?  The machines themselves or the humans behind them?

If some day, the world truly is regulated by virtual reality like some would acclaim (I’ll get the sources back I promise), my first guess would be that the value of Beta would get closer to 1 right?  My second guess would come back to my team at work who have been building a software for more than year now, and it’s a lot of work.  While once the technology itself will bring in some revenues and we will just have to sit down and watch them come in (boy would that be nice!), we’ll still need to think about all the hard and long hours the whole team put into building it.  Let’s not forget all the maintenance and other supporting costs.  So in the end, if all IT companies have to go through all this hard work, the actual value of Beta might be going down below 0.3 as we become more and more digital!