The Bear’s Lair: History shows infrastructure has diminishing returns

In my researches into the Industrial Revolution, I have been looking at British canal building. There were three “canal manias” in 1766-75, 1786-93 and 1816-25, but only the first yielded truly attractive investments and economic gains, while the last wave lost money in general. This decline in returns for the later investments has lessons for us today: over-investing in infrastructure density is a huge waste of money, especially if undertaken by the government, and a rocket to Mars is almost certainly a better investment than yet another high-speed train.

Apart from a couple of small earlier projects, the Canal Age was opened in 1759 by Francis Egerton, 3rd Duke of Bridgewater, in financing the Bridgewater Canal to take coal from his Worsley mines more cheaply to the Manchester market. In today’s terms, the Duke was Elon Musk; at the age of 23 he was undertaking an investment project that had never been attempted in Britain before, financing it entirely out of his own pocket, and employing a designer of genius (James Brindley) to bring it to fruition. The Bridgewater Canal was a typical billionaire project in other ways; it was hopelessly “gold-plated” with several luxury features, costing three times as much per mile as later projects that were financed by local businessmen of more modest means.

The Bridgewater Canal had the same effect as Tesla (without the state subsidies) and other Musk projects – it acted as a demonstration, convincing others that there were opportunities here and money to be made. The result was a series of canal investments, gaining Parliamentary authorization between 1766 and 1770, that sparked off the Industrial Revolution and changed the world.

To understand the seismic effect of the first industrial canals, consider the problem of transporting heavy goods by road in 1760. Roads had been improving over the previous century, but they were not yet Macadamized (that process did not appear until around 1820) and so in an English winter or the usual wet English summer they tended to descend into quagmires if the traffic over them was heavy. Heavy goods were transported by horse-driven cart, which limited the weight of each load to 2 tons at most, making coal, limestone and other bulky goods impossibly costly to transport inland. Even less bulky goods, such as Josiah Wedgwood’s china, suffered badly – for that, the problem was the roads around Wedgwood’s factory in Burslem were made of precisely the clay that potters had been using in their products for centuries – hence the potters tended to dig up the road, surreptitiously if necessary, making its surface even more treacherous.

The great ironworks owner Sir Ambrose Crowley (1658-1713) had solved this problem a half-century earlier by placing his ironworks on a river near Newcastle, shipping bar iron from Sweden, and shipping his products to London and other Naval dockyards (his primary customers) by sea, thereby undercutting his inland Midlands competitors. However, the canal designer James Brindley (1716-72) came up with a solution: a network of canals connecting the Trent, Mersey, Severn and Thames rivers, thus giving Midlands manufacturers a huge advantage in transporting both their raw materials and their products. He then became involved as chief consulting engineer on all the canals that fulfilled his vision, as well as a few others, working himself to death in the process and accumulating incredible quantities of “horse miles.”

A canal boat was no faster than a horse, but a canal boat drawn by a single horse could once the canals were developed transport 50 tons of goods in a single load. The Bridgewater Canal halved the price of coal in Manchester the day it opened; the Birmingham canal did the same for Birmingham’s coal the day it reached the nearest mine, about 8 miles north of Birmingham. With canals, Wedgwood’s china could take advantage of his clever luxury-goods marketing and be sold competitively all over the country, and quite quickly all over the world, with transshipment through Bristol on the Severn, Liverpool on the Mersey or London on the Thames.

The Staffordshire and Worcestershire Canal (authorized 1766, opened 1771), the Trent and Mersey Canal (1766/1777) and the Birmingham Canal (1768/1772) all opened before or shortly after Brindley’s death and were supremely profitable, returning over 1,000% to their investors over the next 50 years. The Oxford Canal (1769/1790) which completed Brindley’s dream and the Leeds and Liverpool Canal (1770/1816) — 129 miles long and crossing the Pennines — were also very profitable but less so, as their costs were horribly escalated by running out of money and having to wait till the next canal boom – or in the case of the Leeds and Liverpool, the next but one – to get finished.

There were however diminishing marginal returns to canal building. Canals authorized in the second boom (1786-93) were mostly profitable, but much less so than the first canals, whose economic benefit had been much greater because of their “first mover” advantage and optimal routes. Then the third wave of canals, in 1816-25, were mostly unprofitable over their lifespan, because in the 1830s, often before they had been completed and had paid off their bonded debt, they ran into horrible competition from the superior technology of the much faster railways. The early canals had seen industry grow up around them and had paid off their construction debt; hence were able to compete against high capital cost railways and remain profitable into the 20th Century. The later canals had less time for industry to grow up along them or debt to be repaid, and so the railways mostly overwhelmed them.

There are lessons from the Canal Age and its economics for our infrastructure investments today. Infrastructure investments work best if they represent a truly new technology, which allows us to do something that has never been done before, or at a cost orders of magnitude lower than was possible previously. The first canals satisfied this criterion; Wedgwood would never have been able to build up his business as he did without the ability to transport large quantities of his products to markets domestic and worldwide. Later canals, wider or cutting off bends from the route (Brindley liked following the land’s contours to keep costs down, so his canals were much longer than straight-line routes) or providing a branch to a new destination, offered less economic advantage and so paid investors less.

Thus, today the very expensive high-speed trains are almost certainly an economic nonsense. We already have trains, and if we want to go faster we have aircraft. Thus, the British HS2, cutting half an hour off the journey from London to Manchester, is a monstrous waste of $150 billion or so. The same applies to the California HST, which will still be slower than an airplane between San Francisco and Los Angeles.

Conversely, the possible Galloway to Ulster sea bridge, if a road bridge not a rail tunnel, may well make sense. At about a quarter the cost of the HS2 project, it will allow a rapid, cheap connection between two parts of the United Kingdom that have never had such a connection and have relied on slow and uncomfortable steamships to connect. You can expect new industries to grow up at each end of the Bridge, enriching two areas – Galloway and rural Ulster – that are relatively undeveloped and impoverished. The other alternative, a rail tunnel, is much less attractive because it will force consumers to adhere to a timetable and will be captive of the rail unions, preventing free private access and usage of its facilities.

This seems trivial but isn’t. If Eurotunnel had been built as a road bridge, as my late friend Peter Greenhalgh proposed in 1986 on behalf of a rival consortium, then ordinary people driving across it in their cars, rather than only the businessmen and bureaucrats using the Eurostar rail connection, might have made economic and personal links with the Continent so close that Britain would still be in the EU! (Remainers, you can curse the civil servants and French President Francois Mitterrand, who bullied Lady Thatcher into the tunnel project.)

This principle can be taken to an extreme. Elon Musk’s proposed manned Mars expedition appears likely to cost about the same as Amtrak’s proposed high-speed rail between Washington and Boston, and to be completed somewhat more quickly. Since Mars is a much more attractive destination than Washington, is it possible even to doubt that Musk’s Mars expedition is economically as well as scientifically the superior alternative?

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)