How do people assess the value of an item? The macroeconomist and the chief financial officer of a business (CFO) are likely to approach it from different perspectives — so would the ordinary worker.
What is macroeconomics? How is it different from microeconomics? I would explain this in simple terms. Macroeconomics has to do with the behavior of an economy as a whole rather than individual markets. In other words it deals with the sum total of economic activity. Macroeconomists look at issues such as government spending, deposits in banks and money in circulation. Macroeconomics looks at how the sum total of your daily labor, my daily labor and the daily labor of everyone else in a country and around the world lead to the improvement of the living standards of all. Microeconomics in contrast studies the behavior of individuals and firms in making decisions. It usually deals with individual markets. In microeconomics individuals and firms try to maximize their wealth and profits. It is easy to conclude then that not all decisions which seem prudent in microeconomics are prudent macroeconomically speaking.
The most common macroeconomic topics that politicians talk about at rallies, conventions and debates are jobs, deficits and tax cuts. In the 2012 US Presidential debate Barack Obama criticized “trickle down economics” while Mitt Romney criticized “trickle down government”.
When the average worker thinks of the macroeconomy he or she is likely to think of jobs and the prices and availability of good and services. Today I would be focusing on software and the economy.
To answer the question we posed earlier. The individual in assessing the value of an item may look at the intrinsic value of an item or the utility the item brings. In assessing the utility the item brings calculation of the present value of all expected cash flows is frequently used. The individual may also look at the amount of labor-hours and skill that went into producing the item. Another factor which determines the value of an item is demand and supply. Of course one is likely to offer more for the last available item in the presence of other interested shoppers.
Software as we all know leads to a factor of 10. There is no doubt now. When we talk about software and the economy we may tackle the topic from the macroeconomic point of view bearing in mind what I stated previously or we may approach it from the microeconomic angle. We may also look at it from the perspective of the buyer or the perspective of the developers. The terminology technology to be precise is broader than software but we could use it here interchangeably. One might argue that in many fields the two are linked by an umbilical cord.
Let me first talk about how individuals and businesses save money by using software. This is a topic I know all too well as a the sole share holder, CEO and a software developer. What is the lifetime value of software? I would approach this issue by looking at the opportunity cost or the next best alternative. What would a firm do without software? Without software a firm would have to hire individuals to perform the work that software does
Suppose we hire an individual to perform the task how much would it cost the business. We assess this value with the assumption that the software we purchased is going to be used for the next 8 years. In accounting though software is has a life time of 5 years but for our purposes we would use 8 years. According to Payscale in 2015 the average hourly wage of an accountant was $18.63/hr and that of an administrative assistant $14.85/hr. The minimum salary an individual would accept would most likely cover the most essential items on his budget: rent, groceries, transportation and cell phone bills etc. Now let us take the sum of the two assuming that without the right software or without software it would take the two additional workers to accomplish the same task. It would be difficult to believe that the two could accomplish the same task within the same time that software does. They would take more time but in this assessment we would assume that the two accomplish the task that the software to be acquired does within the same time.
It would cost the business $33.48/hr to accomplish the task. For our assessment let us round it of to $30/hr. Assuming the two work 8 hours a day 6 days in a week for 8 years it would cost us.
$30 * 8 hours * 6 days * 52 weeks * 8 years = $599,040.00
It would cost us not less than $599,040 estadounidensi. So the life time value in purchasing the software to accomplish the same task cannot be less than $599,040. Assuming that the software is so easy to use that it does not require additional training and the developer is charging only $200 for lifetime license with a year of free support the firm actually gains saves:
$599,040 – $200 = $598,840
Needless to say that the software costs are negligible.
Earlier on in talking about macroeconomics we talked about jobs. It is easy to see that in using software some jobs would be lost but the ramifications are more profound. Some jobs would be created as well. I am sure you would say sure it would be in software and computers — the technology sub-sector of the economy. Well that is true. But would jobs be created only in this industry?
To answer the question posed I would say no. The savings gained would spawn new businesses. It shouldn’t be too difficult to see that the startup capital for businesses would reduce. This would lead to the creation of more businesses. Let us take an entrepreneur with a business idea wanting to quit his or her job and start a business. This may have been an impossibility without software. Looking at the cost of employing an accountant and an administrative assistant for 8 years, which we rightly concluded to be not less than $599,040, the prospective small business owner might end up holding his or her job and shelving the business idea all together.
Credit may be available but the competition may end up killing his business. So with software around more jobs are being created. The challenge macroeconomists would then face would be striking the right balance. Ensuring that the number of jobs being created are more than the number being lost.
According to one study, the use of software increased the productivity of other industries, thereby contributing to the growth of their production. Analysis shows that software accounted for 12.1 percent of all U.S. labor productivity gains from 1995 to 2004 and 15.4 percent of those gains from 2004 to 2012.
Another benefit that the economy or individuals would gain from the reduction in the operating costs of businesses would be cheaper goods. With the reduction in operating costs there would be cheaper and better services. With an increase in profits in an industry there would be an increase in supply or in other words there would be new entrants so the competition would would lead to better products. Needless to say that the cost of living would reduce.
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We must not forget the speed and efficiency with which software accomplishes tasks. How would that affect the economy and the individual?
One more benefit that the economy gets from the software industry is the impact it has on better governance and better decision making. With the right software, macroeconomists are able to allocate resources more effectively. They are able to respond more effectively to changes in money supply in different parts of the country and apply the monetary policy tools optimally.
Custom software is more expensive than off the shelf packages. With off the shelf packages software developers know or assume that it would be purchased by many people — the cost is shared — so prices are relatively low. Businesses and organizations that benefit immensely from free software must support their efforts by making a good donation to the developers.
The topic of macroeconomics and microeconomics cannot be exhausted in this article. I have not only scratched the surface; I have made far reaching deductions in this article.
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Credits: Yaw Boakye-Yiadom is the Founder, CEO and 100% Share Holder of Boachsoft