On firms like Berkshire partner 3G Capital, which takes big companies and streamlines them:
I’m sensitive to the issue of cutting costs, which usually means a lot of people losing jobs. Rich people end up getting richer and a lot of people get fired. But ultimately, I think we don’t do the world a favor by employing more people than we need for companies to run efficiently. On the whole we advance civilization when companies run better.
> On the whole we advance civilization when companies run better.
I understand that's a tenet of capitalism and is almost a religious belief beyond question. But, empirically, how do we know that this is actually true?
Because being deliberately inefficient in order to give more people jobs is a slightly concealed case of the broken window fallacy; so all the same arguments apply.
Basically, when companies do that, they're engaging in a form of welfare, but it's neither fair (because of differences in implementation) nor efficient (because it involves wasted labor). It's fairly obvious that it would be better to have the same people who wouldn't be employed if not for inefficiencies, employed to work on something else efficiently - even if it's public projects, for example - and pay them by taxing the increased (due to higher efficiency) output of the original company.
I think it's both logically pretty clear, and empirically "proven" by comparing countries like the US with e.g. Russia. I write "proven" in scare quotes because it's hard/impossible to really empirically prove these kinds of claims without true experiments, which you can't really do, just look at the imperfect experiments of history and infer.
Either way, there is a sneaking assumption hiding inside the "we advance civilization" quote that can't be proven no matter what, and that is what does it mean to be a more advanced civilization? This is not something that can be proven because it depends on your value system. I am compltely in the camp that this is true and that civilization today is better (e.g. less people dying, more material wealth, more stuff we'd like to do being available, more art, etc). But you can also disagree with that and thus disagree that efficiency is so great.
Because efficient companies produce goods and services for lower prices than inefficient companies, which, happening at scale throughout the economy, lowers the cost of living and raises the standard of living for everyone. An increase in the amount of goods and services produced per head is the definition of economic growth, which most of us consider to be a good thing. Improvements to our quality of living essentially require economic growth.
Take a listen to this NPR Planet Money podcast (and article) called "The History of Light" [1]. It describes how much it cost to light a room, in terms of a typical day's wages, at various points in history until today:
> The history of light is the history of economic growth — of things getting faster, cheaper, and more efficient. In Babylonian times, 4,000 years ago, a day's labor would buy very little light. You could buy enough light to illuminate a room but not for very long. Maybe 10 minutes. It was really expensive.
Today, a day's worth of wages can afford to light a room for thousands of hours. This affordability has radically changed our society, mostly for the positive. It's now possible to study and be productive in the evening. Many of the improvements to the efficiency of lighting also enabled cheap heating as well.
Another related interesting article is "The $3500 Shirt - A History Lesson in Economics" [2]. This one traces the cost of clothing from the middle ages to today. Consider: why did people used to wear clothing until it became rags? Because clothing was extraordinarily labor-intensive and thus expensive. A single shirt back then might cost $3500 in today's money. Now clothing is a negligible cost for most people in the USA, including the poor.
Companies (and individuals) and their desire for efficient production have brought these costs down, and the costs of so many other goods. I've heard it said that today the average person in America has a quality of living substantially better than that of a medieval king. I believe it: with our lighting, heating, and potable water delivered to our homes; sanitary food & restrooms; medical and dental care, etc. -- all available to (mostly) everyone due to low prices. Not to mention the luxuries available to us in our homes like television, music, radio, video games, etc. Cheap spices from everywhere in the world. Food from most everywhere is available at low prices and high quality in local supermarkets. Travel is cheap, and many people can afford to travel virtually anywhere urban in the world within 24 to 48 hours by aircraft - amazing by any historical standard. And it's so reliable we take it for granted.
All changes that originate from economic growth.
During the industrial revolution, a lot of automation replaced human labor in clothing production. This did have the negative effect of putting the spinsters and weavers and so on out of business, but had the positive effect of making clothing vastly cheaper for everyone. People found new jobs and society continued, and was better off overall. Similarly, the development of the automobile largely put the industry supporting the horse-and-buggy out of business. But everyone was better off overall having fast and cheap transportation.
So how do we know that it's true? I suppose we don't have any way of saying in a particular case, but we can look to history to see how innovations that made products and services cheaper have benefited society overall.
Perhaps 1000 years in the future, they will trace how much computing a day's wages could buy, and how that went on to transform society too.
You overstate the reliability a bit (or rather, the things we take for granted are not so reliably supported) but I'm not going to argue your broader point at all.
However, this:
Because efficient companies produce goods and services for lower prices than inefficient companies
Is not correct. Efficient companies are capable or producing goods and services for lower prices than inefficient ones, but they will typically only do so in the presence of true competition. Otherwise, companies are always quite happy to realize the fruits of higher efficiency as higher margins.
That may be an nit to pick, but it's an important one.
Efficient companies require less resources to produce the same amount of goods and services. The resources that are not used to produce goods and services can be used to do other things. This is true even if the company uses the savings to realize higher margins instead of lowering prices.
More efficiency increases purchasing power (or reduces working hours or resource usage, at least) even if there is no competition. Competition just gives an incentive to become more efficient.
That's the toy model presented in introductory courses, but we have good of evidence that it isn't that simple. Or at least that we don't understand the dynamics very well. The resources used for other things do not necessarily help that much globally, they can just accumulate in less useful ways (i.e. trickle down economics is mostly wishful thinking)
The compelling impact of growth pointed out earlier (over centuries) was largely driven by the breaking of monopolies and increase in market access, as well as social change allowing more efficient allocation of resources.
Not really, history shows us lots of complicated things that give lie to most statements as simple as yours. However, even if it were that simple, the mechanism by which the consumer benefits is the one that I describe, not the production of the efficiencies. Which is why it is important. "Briefly", after all, can be most of your lifetime.
The point was that if they don't sell them for lower prices, the benefit is quite limited. You need competition and market access to spreads the benefits around.
This is a question I often have, and I've not come up with a good answer either way. Here are some of the examples I ponder:
The modern PC exists because IBM basically spread the knowledge around in their manuals, allowing many compatible devices to be made. In terms of capitalism, this was a dramatic mistake - IBM didn't make profit off of these knockoffs. But had they not, it may well have been similar to Unix (next entry), where many incompatible devices (hardware, in this case, not software) gave a fractured market that just didn't move very far.
Unix and related variants - AT&T lost the copyright to BSD because they had failed to enforce it (because that predated the Bourne convention). During the lawsuit, when the future of OpenBSD/NetBSD/FreeBSD was slightly in question, many devs worked on some little toy project known as Linux. Today, we have a healthy market of these open source solutions, but had BSD source not been freely available, would the BSDs have gotten any success? Would Linux exist in its modern form had the BSDs not served to create both a market and supporting software? GNU Herd seems to imply "no".
And of course, the Internet - Had some marketing exec been in a position do something about it, the modern Web would never have been created, and the internet itself as something that average people can connect to would be behind a series of paywalls and incompatible standards. Microsoft crushed Netscape, and announced that IE6 would be the "last version" of IE. When Firefox hit a point where it was better, competition was renewed and we eventually moved towards common standards, but that was only possible because Netscape opened their code (and reputation). Other competing browsers had been, but they went nowhere in terms of market share.
A few other non-tech examples:
Car door handles and mirrors (and etc). If you need to buy a replacement car part, it's ridiculously priced compared to what it is. Why? Because there's very little competition in that market. Even within their own brands most cars have very specific parts outside of the engine. Ideally I'd buy a car that was reliable and had standardized parts - but no such car is available, because the manufacturers not only lack an incentive, they have an incentive to keep it incompatible so they and their partners can enjoy a nice markup on replacement parts.
Coke and Pepsi - Between them, they control the vast majority of the soft drink market. But of course, their products are different. Mr. Pibb is not Dr. Pepper, Coke is not Pepsi..People will prefer one or the other, and their preferences won't line up with the corporate owner/controller, and if you have multiple people you are practically guaranteed to have preferences from both brands. Not a problem...unless you want to eat out. Virtually every restaurant (and some universities, conference centers, etc) has an exclusive deal with one or the other. Theoretically we could vote with our wallets and frequent those places that DON'T have an exclusive deal. If you can find any. And if that is more important than, you know, things like food and service and prices.
Who needs to replace a car door handle? Almost no one. If you do, it's easy to go to a pick and pull junkyard to get one. If you are making new car door handles, and have to widely distribute and store them so they are available for the few people who need a new replacement, are you going to sell at a low markup or a high markup? Being cheap won't attract pick and pullers. A low margin won't convince stores to stock slow selling parts.
And if you run a restaurant, do you really want two soft drink delivery services coming in while your staff is doing food prep? Do you want to make space for two fountain machines, double sets of replacement canisters and twice as many possible customer problems with bad mix settings, running out of syrup, etc?
PepsiCo and Coca Cola control about 75% of the carbonated beverages market in the US. Dr Pepper Snapple Group (a separate company entirely, Pepsi doesn't make a Dr-type soda) has about 17%. The rest is a whole mass of specialty and local producers.
Interestingly, you will find Dr Pepper in most quick service restaurants despite their exclusive contracts. Those contracts are not with a particular brand, but with a particular distributor. Dr Pepper has cross-distribution contracts with a bunch of major distributors so they get to ride along.
it's not even about criticizing capitalism (though there's lots to say about that) as it is about criticizing the philosophy of managerialism that Munger's comment exemplifies.
to me it seems like nothing less than an elite member of a specific social class congratulating himself, and by proxy those he represents, for being a cog in the big machine. Charlie's cog is a very big one indeed so he can make comments like that with no irony or self-awareness.
On firms like Berkshire partner 3G Capital, which takes big companies and streamlines them:
I’m sensitive to the issue of cutting costs, which usually means a lot of people losing jobs. Rich people end up getting richer and a lot of people get fired. But ultimately, I think we don’t do the world a favor by employing more people than we need for companies to run efficiently. On the whole we advance civilization when companies run better.
http://jasonzweig.com/a-fireside-chat-with-charlie-munger/