Monetary Policy: Some Fairly-Recent Should- and Must-Reads

Jamie Powell: Who cares if Elon is incinerating capital?: "The great American railways provide a helpful illustration...

...Its genesis, much like Britain's railways, was a period of investor mania and torched capital.... Here's a table of prices for various railroad shares over 1857.... We think it's fair to say holders of LaCrosse-Milwaukee stock were not best pleased with their 1857 returns.... Yet as Chandler notes, the railroads eventually ended up transforming America.... 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.... 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.... 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...