Collection: Charlie Munger - #234 'Charlie Munger Challenge Academic Economics'



[Transcript]

CHARLIE MUNGER 00:00

There are implications, of course, in this attitude of mine in academia and the implication is very simple. Social science in America is very poorly taught and the people who are the denizens and the people that they teach are way more incompetent than they need to be.


The solution is to get all these social scientists or the ones that have the capacity to do it at least – so that they are comfortable across the boundaries of discipline and see where the ideas conflict.


Let me give you a simple example, I once – if you went around Caltech and ask people, where do the laws of chemistry not apply? Practically, everybody would say, well, they don't work in a hot plasma. No big deal.


But if you ask a bunch of people who've taken the main course in economics and have gone on to business school in America. You say, well, you're selling something in which is measured in units and you want to sell more units, do you raise the price or lower the price?


Well, we've seen supply and demand curves, you lower the price. Then you say, tell me the occasions in which if you want to sell more units, you raise the price. Now, this is an intelligent group, you've been through social science, I'm giving you some time. (Laughter) Will anybody who has the right answer, raise his hand?


AUDIENCE MEMBER 01:41

Luxury goods.


CHARLIE MUNGER 01:42

Yeah, luxury goods.


That stats went to about 1 in 50 comes up with the idea of luxury goods that the prices is sort of a signal that it's high quality and if it's not a signal of high quality, it's a way of bragging to your friends that you have both discrimination and money. (Laughter)


And but the interesting – one other interesting example is the one that happened to my Caltech educated friend, Will Ballhaus, who was CEO of Beckman Instruments, company founded by another eminent Caltech professor.


And Ballhaus had in his business collection, a company that made some complex gizmo that they sold for a lower price than the other two gizmos in the market and yet it was much better, and it had lousy figures.


And Ballhaus took one look at it and he realized that it was a gizmo where it failed imposed enormous costs on the owner of the gizmo, and he recognized that the price being low was sending the signal wrong and reverse.


This can't be very good or it would – so he raised the price enormously and sold way more units. And of course, the profits went up at a truly dramatic way. So these idiots that can't answer the question are leaving a lot of money on the table that a man like Ballhaus knows how to get. And the world is just full of opportunities like that for people who get the main points and go across it.


But of course, that's not the main answer to the question. That's just the Ballhaus by way. The main answer to the question is very simple, suppose you raise the price and use the money to bribe the other guys purchasing agent... (Laughter)


Well, you can laugh because it's so obvious, once somebody points it out, but who was raising his hand over that one after all the fancy education you've had. (Laughter)


So – And the kissing cousin of that direct bribery of the other guys purchasing agent, that's the way title insurance is sold in America, that's the way load mutual funds are sold in America, that's the way a certain amount of defense contracting has been done or had tempted to be done.


It's just – it's a huge important part of capitalistic life that business of raising the price and using the money to enhance sales, of course, they're legitimate ways to do it too, like legitimate information through advertising or otherwise. But there's a lot of illegitimate use of increased price to increase sales and that's a big part of the capitalist condition.


And if you don't have a brain that automatically has these things pop into it, you haven't really assimilated social science correctly. What good does it do to be able to pass a test parroting back to the professor what he told you?


Well, that will get you an academic label. But it won't get you the many millions of dollars Ballhaus made by raising the price and it won't get you a really fabulous investment results in life – if takes some imagination – if you don't see how all these things work and how they interplay.


And of course, the way to get that competency like any other competency is to adopt the necessary elements and practice using it over a considerable period of time and a considerable area of complexity.


(Source: https://youtu.be/S9HgIGzOENA)

 

[YAPSS Takeaway]

Based on supply and demand curves, to increase the units sales of a product, you got to lower the price. But if that is the case, why does luxury goods sell so much better with a much higher price?


It's because price is sort of a signal of high quality or it's a way of bragging to your friends that you have both discrimination and money. And that add social science into the equation and it changed the concept of supply and demand curves. So don't blindly follow the academia.