A better loom would have closed the mill

Munger’s point in 1994 was about textiles, but it applies to the “AI as competitive advantage” conversation in 2026.

Excerpt from a talk at The University of Southern California Marshall School of Business, April 14, 1994:

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.

Conversely, if you own the only newspaper in Oshkosh and they were to invent more efficient ways of composing the whole newspaper, then when you got rid of the old technology and got new fancy computers and so forth, all of the savings would come right through to the bottom line.

The moral of this story is that adding “AI” and talking about being at the “frontier” won’t help your business grow. Great, employees at your company will start automating tasks, and developers will code features faster. The same thing will happen to your competitors. Your industry will follow. There won’t be growth because everyone will work faster and cheaper. Why would your customers pay more if you have a faster hammer? “AI” is not a business strategy because technology never helps the owner in a competitive industry where you don’t have a moat.