Elon “MAC” Musk

One of the profound results from Neo-Classical price theory is that, in long run equilibrium, production costs tend will equal their Minimum Average Cost (MAC).  Profit maximising firms compete away any profits they may earn so that the most cost efficient solution is obtained.  In long-run equilibrium,  the production cost curve sits neatly at the point where the product’s price just matches  Minimum Average Cost and Marginal Cost simultaneously.  This school boy result, P=MC=MAC, masks the complexity of the competitive market dynamic that drives producers to adopt the latest technologies, allocate resources efficiently and at the same time make zero profits.  How is this optimum and equilibrium achieved?

I am reading Elon Musk’s biography and it strikes me that his gift is being able to cut costs to reach the MAC for producing cars, spacecraft, solar roofs or any other product that he makes.  The method he adopts has 2 steps.  First, cut out processes that are beyond the necessary physics underlying the product being produced.  Second, if you cut too far you should add back features that are deemed necessary.  Importantly, in this second step, if you don’t add back anything then you haven’t cut far enough.

The examples in his production of rockets are exemplary.  Musk elects to use stainless steel in his spacecraft, as opposed to expensive metal allows, because it is cheap.  His cars have a single die-cast chassis for the same reason. Whereas he had set out to replace all humans with robots at Tesla, he added back some manual features to cut delay in the production line.  Being the minimum cost producer in the industry offers an enormous advantage for securing long-term funding as well.

Viewed in this way, Elon Musk is neither a visionary technologist nor a serial innovator.  He is a cost cutter. He has a knack for identifying bloated industries that operate on favourable economic terms (e.g. the rocket ship industry was incentivised to produce on a cost + 10% contract basis meaning higher costs implied higher profits!), which he streamlines (say, by reusing the rockets used for propulsion).  Understanding the physics of the product being built, and constructing just to that level is his skill.  

There is a video doing the rounds that criticizes Tesla for just using cameras on their driverless vehicles, dumping LIDAR and RADAR as additional, supporting systems.  This clearly cuts costs and increases collision risks but there is no reason that the risk of a collision should be reduced to zero in equilibrium.  This is difficult for regulators to comprehend but Elon is fine with it.