As I discussed in a recent article for CapX, the hyperloop, a pneumatic tube transportation system using magnetic levitation to propel transport pods through an air tight pipeline at near-sonic speeds, seems poised to begin operations by 2018. The project is in part the brainchild of Silicon Valley tech entrepreneur and venture capitalist Elon Musk—who has been subjected to a great deal of derision and scorn from across the political spectrum—each side painting the picture of a man who serves as the living embodiment of everything that makes the opposing political tribe worthy of contempt.
Liberals and progressives will laud Musk’s commitment to addressing climate change, as well as his support for projects that attempt to wean the U.S. off an addiction to fossil fuels. Indeed, that is a goal well worth applauding. However, he is also hoisted up by writers such as Richard Eskow at Salon as an example of what happens to someone who casually hangs out with Silicon Valley style libertarians like Peter Thiel and Marc Andreessen: they end up contracting second-hand libertarianism. This is unfortunate for folks like Eskrow, who believe “government is how we create a better world,” and any infusion of libertarian style market-based economics would only sully the good work government is already doing.
And it’s not just the Left that complains about him.
On the Right, conservatives and libertarians complain Musk is addicted to government subsidies, tax breaks, and easy government-backed loans—the antithesis of everything a disruptive innovator from Silicon Valley should be embracing. Some praise his entrepreneurial spirit as quintessentially libertarian, while others contend he’s a “pretty shady dude” who “exhibits a clear pattern of cronyist behavior” and argue that “Musk is no libertarian. He’s just damn good at playing the game.” But if the major complaint against Musk is that his empire is fueled by government subsidies, then surely those complaints also apply to major conservative and libertarian donors whose companies also receive government handouts, despite stating their avowed opposition to subsidies. The reason for this position is clear: no company ever wants to place itself or its employees “at a competitive disadvantage in the mixed-market economy in which [they] compete.” Musk’s businesses are no different.
Many of his public-private partnerships involve negotiating terms with local municipalities and government—we do, after all, live in an age of global commerce and communication, where global innovation arbitrage forces competition amongst governments seeking to attract capital and labor. But what exactly are we talking about when discussing Musk’s political favors and subsidy-fueled empire? Is he actually as bad a “cronyist” as some make him out to be?
First, let’s take a brief look at some of the major gambles he’s involved in.
Gamble #1: Tesla
Many people, conservatives and libertarians in particular, argue that if there is one company that epitomizes the folly and hypocrisy of Musk’s investment strategy, it’s Tesla. Specifically, his desire to sell directly to consumers comes up against local and state automotive dealership regulations that forbid direct sales—an auspicious irony for some given that Tesla is “a company that government advances with special preferences one moment, and impedes with schemes for the protection of market incumbents the next.” And while there might be some jovial jeering at this, one of the issues often left out of the Tesla narrative is that Musk has never been shy about making his early reliance on existing government subsidy programs known.
Indeed, Musk said as much in Tesla’s 2010 registration statement to the Securities and Exchange Commission. When commenting on Tesla’s viability as a company, the registration goes to painstaking lengths to fully disclose any and all potential hiccups that would adversely impact the company’s future performance. Among those highlighted concerns, it states:
Any reduction, elimination or discriminatory application of government subsidies and economic incentives because of policy changes, the reduced need for such subsidies and incentives due to the perceived success of the electric vehicle, fiscal tightening or other reasons may result in the diminished competitiveness of the alternative fuel vehicle industry generally or our electric vehicles in particular. This could materially and adversely affect the growth of the alternative fuel automobile markets and our business, prospects, financial condition and operating results.
Our growth depends in part on the availability and amounts of government subsidies and economic incentives for alternative fuel vehicles generally and performance electric vehicles specifically. …
In addition, certain regulations that encourage sales of electric cars could be reduced, eliminated or applied in a way that creates an adverse effect against our vehicles, either currently or at any time in the future. For example, while the federal and state governments have from time to time enacted tax credits and other incentives for the purchase of alternative fuel cars, our competitors have more experience and greater resources in working with legislators than we do, and so there is no guarantee that our vehicles would be eligible for tax credits or other incentives provided to alternative fuel vehicles in the future. This would put our vehicles at a competitive disadvantage. (Emphasis mine)
This last emphasized point brings up an important consideration to mull over. Musk’s real competition isn’t other firms vying for dominance in a market defined by free enterprise and competition. It’s other firms vying for dominance in an industry heavily polluted by government regulations, cronyist handouts, and political favoritism. If the only means by which one can compete in, and disrupt, such an environment is by capitalizing on existing subsidy programs, is it wrong to do so? I’ll offer some thoughts on this point later.
In the meantime, how does Tesla compare in its price competitiveness and energy efficiency to other firms?
Many people have questioned the market-competitiveness of electric cars. However, according to a 2013 Global McKinsey Institute report on the commercial prospects of electric cars, the biggest impediment to making them more price competitive with traditional cars is simply battery technology. The report estimated that once the per-kWh (kilowatt-hour) costs of lithium ion batteries reached approximately $160, electric cars would be cost competitive with their internal combustion predecessors. Current Tesla batteries are estimated to run about $200 per-kWh.
Given that the electric car market is so dependent upon technological advancements in battery life technology, and declining prices in their energy use capabilities, it’s no wonder that one of Musk’s biggest endeavors is batteries. In order to ensure the long-term viability of Tesla’s market, Musk needs to help drive developments in battery storage technology.
Gamble #2: SolarCity, Tesla Energy, and the “Gigafactories”
Utter the words solar power and you’re likely to be met by one word rebuttals to suggestions that photovoltaic cells are the future of energy production: Solyndra. The bankrupted poster child for the failed “green energy” initiatives of the Obama Administration certainly stands as a striking example of how “free” government money tends to produce market losers. But what if Musk’s foray into the green energy space actually ends up being the anti-Solyndra, creating a competitive and disruption-prone marketplace for alternative energies like solar cells? That could be a game changer.
Conversely, it does seem like the SolarCity venture is treading closer to a bust than the others, especially with the recent announcement of massive layoffs in Nevada and cascading failures of green energy firms subsisting on government subsidies. Critics argue that solar power has always been a dubiously economical alternative to traditional energy sources (i.e. natural gas, oil, etc.), and is largely buoyant as an industry only due to large-scale government subsidies as part of “green energy” initiatives. But even amongst libertarians and conservatives, the debate over solar is far from settled policy.
The big impact of companies like SolarCity and the advanced battery development arm of Musk’s empire—Tesla Energy—don’t end at merely attempting to make electric vehicles more cost competitive and attractive to consumers. The true disruptive impact lies in the potential for upending the entire monopolistic energy production and distribution structure over which power utility companies preside. The Cato Institute’s Ike Brannon makes the argument that:
With the advent of Tesla’s home battery, it is possible that within the next decade (provided the batteries continue to improve–far from a sure thing) we could see some houses begin to go off the grid entirely, with solar energy producing all the energy they need. If this were to occur at a large scale, we might see utilities being forced to act as if they were a competitive firm and strive to boost efficiency where possible in order to distribute energy at the lowest possible costs to keep customers from cutting the power cord.
That type of innovation could go a long way towards curbing the power of local utility monopolies in setting prices for energy consumption and open the industry up to broader competition. Of course, as with Tesla, there’s no guarantee of success. But if the goal is “to change the way the world uses energy at an extreme scale,” Musk’s Tesla Energy initiative currently leads the pack in viability. And although SolarCity hasn’t been performing as initially expected, Musk’s gambit could be on the verge of some major breakthroughs.
The company’s multi-billion dollar investment in its soon-to-be-open Buffalo plant will be the largest solar factory in the Western Hemisphere. Expected to be complete sometime in the next 6 months, SolarCity may yet meet and exceed the expectations of its investors. Certainly Musk has big expectations for the plant’s economies of scale gains from production, aiming to achieve a per-Watt solar price of $0.50, making them far more cost-competitive with other forms of energy production, as well as competitive with Chinese-produced solar cells.
But Tesla, Tesla Energy, and SolarCity are but the tip of the iceberg when it comes to Musk’s vision of disruption and innovation. Disrupting the energy production and distribution monopolies seems like a cake walk when compared to his more ambitious goals for the transportation and space travel industries.
Gamble #3: The Hyperloop
What Tesla is doing for electric cars, the hyperloop could do for transportation writ-large.
I’ve written a few pieces on the ongoing development of hyperloop test tracks and the viability of such a system to displace conventional rail systems as ideal inter-city transportation systems. As a long-haul transport system (i.e. in excess of 900 miles), Musk has said the hyperloop is unlikely to be ideal (and he himself is more a fan of supporting a re-embrace of supersonic flight, ala the Concord). But for city-to-city transportation, it could end up supplanting incumbents in the rail and automotive industries.
Now that the project is soon to begin construction of its Quay Valley, CA test track—anticipated to be finished by 2018—it might start gaining a lot of traction as an ideal, and more cost-effective, alternative to overhyped and perpetually over-budget “high-speed” rail projects. And considering the major sources of funding have hitherto come from private investors and crowdsourcing, the hyperloop could be the first major project associated with Musk that is financed at launch almost wholly with private funds.
Musk’s most ambitious endeavor, however, is not focused planetside.
Gamble #4: SpaceX
Musk’s empire has most recently received considerable media attention and fanfare for its foray into the final frontier: space.
As with his other endeavors, Musk’s goal with turning humanity into a space-faring civilization is to hedge bets against the potential for catastrophic climate change. Musk acknowledges the need to be engaged in a public-private partnership with NASA in order to speed up his eventual plans for colonizing Mars and turning humanity into a multi-planet civilization. No small task. Especially when incumbent aerospace manufacturers and others already possess the lion’s share of the space-based market under the auspices of NASA.
And Musk made it clear that excising unnecessary bureaucratic hurdles was a key consideration in turning SpaceX into a profitable enterprise, cutting expenses wherever possible and out-performing other NASA contractors like Boeing (which has received twice the amount of money in NASA contracts than SpaceX). Once again, Musk’s vision is to inject some healthy market competition and innovation into an otherwise bloated, ineffectual monopoly supported by government. Spaceflight is expensive and the short-term profitability of such an enterprise is unmanageably small to attract the significant and sufficient amount of investment capital. As in the case of Tesla and Tesla Energy, the ability to effectively compete in such a space is dictated by an ability, and willingness, to capitalize on government subsidies.
Despite the government support for the SpaceX initiative, Musk has received more accolades for his willingness to journey into the race to private spaceflight, even if the company’s business model is, at present, focused on NASA contracts. In fact, a former PayPal executive argued that Musk’s SpaceX plans are “the ultimate in libertarian thought … because although [the company is] doing work with the government, they are also kind of taking away NASA’s monopoly.” This is the common connector between Tesla, Tesla Energy, SolarCity, and SpaceX: a desire to extricate government-sanctioned monopolies from capital-intensive industries and innovate around existing barriers to promoting innovation and competitive enterprise.
Moving beyond this brief glimpse into the Musk industrial empire, the natural question that begs an answer is whether Musk’s approach is ideal from a free-marketeer perspective, or if he is simply a capitalist crony looking for free handouts. Should we vilify the man? Or should we exalt him? I’ll offer my own, personal perspective on the matter, but first, an insight into Musk’s intentions are best served coming from his own mouth. As Musk told Charlie Rose in 2011:
My motivation in all of my companies is to be involved in something that I thought would have a significant impact … When I was in college, there were three areas that I thought would most affect the world: One was the internet, the other was sustainable energy—both production and consumption—and the third one was space exploration, particularly making life interplanetary. As things have turned out, I have been able to be involved in all three.
Clearly, anyone looking to be a major player in the aerospace, as well as automotive, industries is likely to come up against entrenched incumbents who have found a niche playing the Beltway game to their advantage. If he wants to upend the old industrial giants and disrupt these industries, part of the game is matching them in the Washington landscape.
But of course, government subsidies are hardly an ideal alternative to the natural, free-floating price signals of the free market. And just so there is no confusion as to my position, I do not support government subsidies for private business. That having been said, I also don’t think Elon Musk is the anti-capitalist bogeyman so many on the right have made him out to be. Nor do I believe the left’s characterization of him as a would-be-Galt-gulcher whose entrepreneurial adventurism is exacerbating income inequality in modern America (the digirati argument of Salon fame) is any closer to the mark. As with any vociferous, ideological debate, the truth probably lies somewhere in the middle.
Addressing climate change has been a primary focus for Musk, and his investments in these sectors illustrates a broad strategy for hedging against worst-case climate change scenarios (as an aside, he’s also a supporter of a carbon tax as the ideal way to price pollution). The common thread between Musk’s disruptive intentions in power production, transportation, and space-fearing are all massive undertakings that are aimed at industries already monopolized by the government. And disrupting government-sanctioned, high-capital intensive monopolies, is no easy feat.
Trying to upend the transportation market? That’s a lot of incumbency to wrest from regulatory capture there.
Attempting to reimagine power production and distribution? Better have a plan to vault over those sky-scraping regulatory hurdles.
Looking to put people into space and beyond? There’s a government agency for that as well.
Anyway you slice it, if you’re an innovator like Musk seeking to tackle such big challenges, you’re inevitably going to have to compete with entrenched government and crony-capitalist interests. And, as discussed earlier, it’s hardly libertarian apostasy to suggest the government ought not provide subsidies to businesses, while embracing the reality of doing business in a subsidy-rich environment. The existence of subsidies is an unfortunate feature of how large and unwieldy the government has grown; but if the only route to disrupt incumbent monopolies in these types of industries, thereby opening them up to greater competition, is to take advantage of tax credits and subsidies that, to be clear, already exist, then more power to Musk, I say. After all, if he doesn’t take the money and use it to benefit American taxpayers, you can bet that there are other firms (see Solyndra) that will happily suckle at the tit of government, run their subsidy-laden firm into bankruptcy, and abscond with whatever money they can make.
There’s another, more philosophical, similarity that connects these ventures, which harkens back to Musk’s previous statement of his motivation in pursuing such epic endeavors: each one involves a massive undertaking requiring a visionary glimpse of how the world could be, not merely accepting the present for what it is. Sometimes, however, we run into the problem of elevating those with grandiose visions to Pantheonic heights, ignoring the reality that they, like us, are mere humans. As Virginia Postrel wrote in The Future And Its Enemies:
the progress of a dynamic civilization depends on the special people who make play out of work. In their all-absorbing passion, they create the variations that, through trial and error, become the source of progress. They make the discoveries that drive the infinite series. A dynamic society will nurture and celebrate such people.
People don’t swoon over Musk because he serves as an idyllic paragon of virtuous capitalism; they swoon over him because he’s established himself as someone with actual plans and strategies for addressing some of the really big challenges facing humanity, from climate change to extra-planetary exploration and colonization. I definitely think Musk should be celebrated for his vision, but he should neither be exalted as an icon of free market capitalism nor vilified as a techno-oligarch intent on destroying democratic society. There’s a lot more esoteric nuance to his politics than where he falls along a bifurcated spectrum between “conservative-libertarian” and “liberal-progressive.” In fact, the politics of Silicon Valley innovators and techno-luminaries are increasingly difficult to categorize using the nomenclature of orthodox politics.
Musk never claimed to be a great Randian hero standing against the swelling tempest of the state. Therefore, let us not treat him as such. Indeed, we shouldn’t view any person through the lens of hero-worship; there are no John Galts or Howard Roarks in the real world. Paypal founder Peter Thiel, another libertarian-leaning Silicon Valley magnate who is occasionally showered with the same free market hero-worshipping heaped upon Musk, seems to agree. In his recent book, Zero to One, Thiel correctly identifies the problem with this type of reverential adulation:
That we need individual founders in all their peculiarity does not mean that we are called to worship Ayn Randian “prime movers” who claim to be independent of everybody around them. In this respect Rand was a merely half-great writer: her villains were real, but her heroes were fake. There is no Galt’s Gulch. There is no secession from society. To believe yourself invested with divine self-sufficiency is not the mark of a strong individual, but of a person who has mistaken the crowd’s worship—or jeering—for the truth. The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom. (Emphasis mine)
Wise words, a sentiment worth embracing. There will always be those that presume the titans of tech should have carte blanche to lead the world into a new arcadian future, just as there will be those who insist government is the more ideal mechanism for promoting that idyllic future.
Someone once told me that a complicated answer that is precise will always be more widely accepted than a simple answer that is true. And the simple answer of why a supposedly more-libertarian-than-average Elon Musk would immerse his corporate empire in government subsidies is because the money is there, and without it he wouldn’t stand a chance of competing with government monopolies.
Rather than trying to find the hero or demon in Musk, we should view him for what he is: a savvy, pragmatic businessman with big dreams for the future—dreams he must work with government in order to achieve. That is unfortunate for free marketeers such as myself who would love nothing more than to see a race to space or competition in alternative energy markets that is built on pure free enterprise. But we ought not let the perfect be the enemy of the good, and at the end of the day if Musk can help inject a little healthy competition into the commanding heights of government-sanctioned and -monopolized industry, with or without subsidies, then I’ll venture to say that’s an improvement over the status quo.