Who cares if Elon is incinerating capital? >>>
In the many critical thought pieces Tesla, and by obvious extension Elon Musk, have generated over the past few years, there seems to be a common thread of reasoning.
The argument often goes something like this: “yes electric cars are good, and climate change is the existential issue facing planet earth, but why oh why do Elon’s businesses burn so much capital and lean so heavily on the largesse of the state?”
Critics have been quick to point out the sheer waste — of industrial and human capital alike — generated by Musk’s green empire. Take for example this 2015 Los Angeles Times piece highlighting the billions of government-subsidy dollars spent, or the Boston Review’s castigation of the “irrational vanity” of “self-seeking financiers” funding Tesla’s persistent losses.
(Alphaville, we must add, has also been writing about this to varying degrees.)
They are right of course. But a brief look at the history of capitalism as an engine for innovation and economic expansion shows that seemingly wasteful speculation can have an impact far beyond the typical time horizons of investors.
The great American railways provide a helpful illustration….
Yet its genesis, much like Britain’s railways, was a period of investor mania and torched capital.
The railroad industry, much like car manufacturing or reusable rockets, had expensive economics, requiring a large amount of upfront capital to cover the enormous fixed costs of building out the core infrastructure.
Sourcing this capital, as historian Alfred Chandler wrote in his book The Visible Hand, led the railroads to become the first private businesses to seek funding from outside their own regions as it could “no longer be raised, as it had been earlier, from farmers, merchants, and manufacturers”.
In step, French and English speculators began to purchase railroad securities in the early 1850s, stumping up close to $700m by 19*1859 (around $20bn in today’s dollars) as they sought to get rich quick in a rapidly developing frontier market. Over the 1850s, over 30,000 miles of rail-track was laid thanks to this wave of speculative finance.
To get a sense of the scale of cash injected, economist Bill Janeway calculates railroad investment amounted to approximately 20 per cent of all capital formation in the United States, or 3 per cent of gross national product, during the mid-1850s.
As with all speculation, it came to a messy end in the panic of 1857, when credit markets froze, and stocks and railroad securities collapsed under the weight of rising interest rates and a vast of oversupply of railroads with no clear economic value. Remind you of anything, solar investors?
In 1858, the mountains of wasted capital and railroads to Kansas which served no obvious economic purpose (except for helping land speculators high-tail it back to the East coast), must have looked, for lack of a better word, dumb.
Yet as Chandler notes, the railroads eventually ended up transforming America. They encouraged migration to the West coast, opened new markets for goods, created liquid capital markets (which would fund future innovators, such as Thomas Edison and Nikola Tesla) and helped develop the basic tenets of modern accounting.
Arguably the “killer application” of the railroads, the mail order catalog of Sears-Roebuck, didn’t arrive until the end of the century, as economist Brad DeLong has argued. In any event, it demonstrates that spurious financing, with no clear expected value, can produce value which outlives the inevitable losses of its initial financial backers.
The role of the state was also crucial to the railroads’ success — perhaps even more so than the current set of regional green incentives for Tesla and other businesses today. Between 1850 and 1871, for example, the federal government granted between 130m to 175m acres of land to railroad companies, depending on who you ask. This figure doesn’t even include the Pacific states, where industrialists received their own set of land grants after the Pacific Railway Act of 1862.
Parallels between 1850’s railway mania and Musk’s fiefdom (and with it, the wider green revolution) may seem tenuous to our readers. After all, a modern economy is pretty much unimaginable without rail infrastructure while we could probably do without $500 a pop Boring Company flamethrowers.
However, when the dust has settled in twenty years, will we look at the Tesla supercharging network, which reportedly just hit 10,000 locations, and think of it as anything other than key infrastructure? Even if Tesla were to disappear tomorrow, one would imagine it would not take a huge amount of work to make the charging stations brand agnostic.
Perhaps more importantly, and regardless of the businesses economics, Musk has succeeded in transforming how the general public perceives electric cars. A decade ago, a hybrid or electric vehicle was explicitly a compromise – a car could green or be sexy, but never both. It’s not hard to remember the Toyota Prius being the butt of jokes on dad-friendly automotive television.
The Model S, Tesla’s flagship luxury car, irrevocably changed this dynamic for good. Even Jim Chanos, perhaps the most renowned of Tesla bears, admitted as much in a recent podcast with Bloomberg’s Barry Ritholtz.
While bears are probably correct in citing the incoming tide of electric cars from seasoned automakers such as Jaguar and Porsche as a threat to Tesla’s market dominance, it is also often said imitation is the sincerest form of flattery. Would Porsche’s timeline for an electric vehicle look the same if Tesla hadn’t forced its hand? We can only hypothesise, but even if Tesla have pulled forward demand by only a few years, the marginal environmental benefits are sizable. Unfortunately, this value will not accrue to investors.
Let it be clear we’re not here to defend Tesla’s questionable business practices, such as its alleged treatment of workers or murky marketing of its autopilot software. Nor are we denying the equal importance of scrutiny in public markets, whether from investors or the media. For every buyer of a security there has to be a seller, after all.
However one should be aware of the role irrationally allocated capital has played in funding innovation and infrastructure, a function it usually performs with the state’s explicit support, as Bill Janeway and Marianna Mazzucato often point out.
Perhaps then it’s time to celebrate entrepreneurs who are willing to literally flame-throw cash. After all, if a business blows up, as Brad DeLong has argued, investors lose and we get to use their stuff for free.*