Among the many extraordinarily articulate statements from Winston Churchill is one which has exceptional resonance in today’s global economy and to today’s investment imperatives. In the mid-1940’s after the Battle of Britain when the House of Commons was being rebuilt following the bombings, Churchill made the statement: “We shape our buildings; thereafter they shape us.”
Churchill was simply expressing the truth that our infrastructures are a reflection of the knowledge and values of those who design and construct them. And once they are built, those who inhabit and use these frameworks are deeply affected by them in the present and future. In this note, we argue that drawing insight from “Churchill’s Voice” offers an opportunity to more comprehensively consider the investment analyses associated with meeting the global challenges of the twenty-first century.
We consider both the broadest definition of “infrastructure” and the economic theory of “sunk costs” to argue that Churchill’s simple observation demands that we find ways to ramp up investments by both the private and public sector in areas including renewable energy, technology, education and healthcare. Churchill’s voice would tell us to be conscious of our own biases and be strong enough to make rational decisions going forward.
A broad definition of infrastructure would include both the physical and organizational structures needed for the functioning of any economy or enterprise. While we think most obviously of buildings, roads, bridges, water, electric, technology, telecommunications, sewer and transit systems, a more complete definition would include management structures and operating practices and policies that weave all the physical elements together. It’s often this “soft” infrastructure which includes governance, regulatory, legal, economic, financial, education, healthcare, cultural and social standards that defines the resilience and endurance of an economy, industry, or company.
In other words, infrastructure can be extraordinarily inclusive, complex and interdependent. And given this reality, for investors to make optimal investment decisions ahead, it’s even more important that we think hard about our biases and the incentive structures built into our organizations. And we need to be conscious of economics. So, turning the “sunk cost theory” in business decision-making, we need to come to terms with the fact that society has spent trillions of dollars to build the world’s current fossil-fuel based energy infrastructure. But it is serving us incredibly badly now. The costs already have been incurred. They cannot be recovered. In fact, we have not even been properly accounting for them. The real costs of the natural capital exploited have not been reflected. In moving forward for future infrastructure development, the only rational course is to consider future costs. As they are the only ones relevant to investment decisions ahead.
Unfortunately, while we may rationally know that all players across all functions of the global capital markets shouldn’t let sunk costs influence future decisions, the reality is that investment decisions aren’t made exclusively on their own merits. Rational decisions for any given entity vary according to their own incentives and profitability profiles. We also know that people tend to allow the original price paid for something to become a benchmark for real value. Further, people tend to overestimate investment returns on expenditures once they have been made.
All of this represents the huge challenge of our day. Turning full circle back to the strong voice of that great British leader Winston Churchill, we are reminded of a piece of game theory referred to by some as the “Concorde Fallacy.” It refers to Britain’s continued funding of its joint development of the Concorde aircraft despite the dreadful commercial case for it. The political and legal framework, or infrastructure, around it made it unpalatable to pull out of the program. We wonder if Churchill himself had a say in the matter, would he have had the force of will and political capital to let go of a lost cause, recognize that throwing good money after bad makes no sense, and steer a better course for future investments. Drawing insight from Churchill’s Voice offers good business practice and good investment wisdom for the long term.