Friday, September 20, 2013

Charlie Munger on technological improvement

I had to dig up this story, sending it to you for future reference. Context was a Facebook conversation on the effect of technological advancement on labor.

Me: "Sometimes the benefit of a new technology doesn't flow to the workers or even the business owners, but only to the inventors of the new machinery (and perhaps to the consumers of the product). Charlie Munger tells an interesting story along those same lines."

[Charlie Munger, from http://ycombinator.com/munger.html]

The great lesson in microeconomics is to discriminate between when technology is going to help you and when it's going to kill you. And most people do not get this straight in their heads. But a fellow like Buffett does.

For example, when we were in the textile business, which is a terrible commodity business, we were making low-end textiles—which are a real commodity product. And one day, the people came to Warren and said, "They've invented a new loom that we think will do twice as much work as our old ones."

And Warren said, "Gee, I hope this doesn't work because if it does, I'm going to close the mill." And he meant it.

What was he thinking? He was thinking, "It's a lousy business. We're earning substandard returns and keeping it open just to be nice to the elderly workers. But we're not going to put huge amounts of new capital into a lousy business."

And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners.

That's such an obvious concept—that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers.

--
Deck thyself now with majesty and excellency; and array thyself with glory and beauty.
Cast abroad the rage of thy wrath: and behold every one that is proud, and abase him.
Look on every one that is proud, and bring him low; and tread down the wicked in their place.
Hide them in the dust together; and bind their faces in secret.
Then will I also confess unto thee that thine own right hand can save thee.

I could not love thee, dear, so much,
Loved I not Honor more.

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