Munger on Economics, Incentives, and Markets — collected commentary
The most powerful force in economics is the power of incentives. Show me the incentive and I will show you the outcome. The federal welfare system is a master class in unintended incentive failure. Modern executive compensation is another.
Compounding is the eighth wonder of the world. The first rule of a happy life is low expectations. The first rule of investing is don't lose money. The combination of these two rules with patient compounding is the recipe for wealth.
Most academic economics misses the boat by ignoring psychology. Real markets are made of real people with real biases — overconfidence, social proof, deprival super-reaction, envy. Without these in your model, you cannot understand market behavior, especially at extremes.
Microeconomics is the discipline that lets you remove the most ignorance, because microeconomics is so connected to incentives. Once you understand microeconomics, you understand a huge fraction of how the world works.
The cost of capital matters enormously. A business that can earn 25% on capital indefinitely is worth far more than one earning 8%, all else equal. The math of compounding is unforgiving — small differences in return on capital, sustained over time, produce vast differences in wealth.
I would like to make a few observations about how modern monetary theory is going to be taught in textbooks one hundred years from now: as a cautionary tale. The idea that you can create wealth by printing money has been disproven by every civilization that has tried it.
Inflation is a tax that no legislature voted on. It is the cruelest tax because it falls hardest on those who can least afford it — the poor, the elderly on fixed incomes, the savers. Wealthy people own assets that inflate; ordinary people hold cash and labor.
Capitalism, properly regulated, with property rights enforced, with reasonable rule of law, is the only economic system that has produced widespread prosperity. The right question is never "capitalism vs. socialism" — it is how to keep capitalism honest.
— Charlie Munger
The most powerful force in economics is the power of incentives. Show me the incentive and I will show you the outcome. The federal welfare system is a master class in unintended incentive failure. Modern executive compensation is another.
Compounding is the eighth wonder of the world. The first rule of a happy life is low expectations. The first rule of investing is don't lose money. The combination of these two rules with patient compounding is the recipe for wealth.
Most academic economics misses the boat by ignoring psychology. Real markets are made of real people with real biases — overconfidence, social proof, deprival super-reaction, envy. Without these in your model, you cannot understand market behavior, especially at extremes.
Microeconomics is the discipline that lets you remove the most ignorance, because microeconomics is so connected to incentives. Once you understand microeconomics, you understand a huge fraction of how the world works.
The cost of capital matters enormously. A business that can earn 25% on capital indefinitely is worth far more than one earning 8%, all else equal. The math of compounding is unforgiving — small differences in return on capital, sustained over time, produce vast differences in wealth.
I would like to make a few observations about how modern monetary theory is going to be taught in textbooks one hundred years from now: as a cautionary tale. The idea that you can create wealth by printing money has been disproven by every civilization that has tried it.
Inflation is a tax that no legislature voted on. It is the cruelest tax because it falls hardest on those who can least afford it — the poor, the elderly on fixed incomes, the savers. Wealthy people own assets that inflate; ordinary people hold cash and labor.
Capitalism, properly regulated, with property rights enforced, with reasonable rule of law, is the only economic system that has produced widespread prosperity. The right question is never "capitalism vs. socialism" — it is how to keep capitalism honest.
— Charlie Munger