250 Years of US State Capitalism
TL/DR –
The United States’ prosperity was not solely built on laissez-faire capitalism as often believed, but on a hybrid model in which the state directs, subsidizes, and occasionally bails out private enterprise in the interest of national priorities. This began as early as the first US administration under George Washington, with Secretary of the Treasury Alexander Hamilton proposing government protection for infant industries. Furthermore, a recent study analyzing congressional acts and presidential orders between 1973 and 2022 revealed that the U.S. issued more than nine new industrial-policy directives per year across a half-century period, showing a commitment to state intervention in the economy.
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The Unveiled Truth: The US Economy Was Never Laissez-faire
The popular belief that the U.S. economy is founded on laissez-faire capitalism is widely accepted. As we celebrate 250 years since the signing of the Declaration of Independence, it’s time to debunk this myth. In reality, from its inception, the U.S. has operated on a hybrid model where the government intervenes, supports, and at times rescues private companies to meet national priorities. Despite the dominant narrative praising free markets, the way policy is made has always been more practical.
Industrial Policy: From Alexander Hamilton to the 21st Century
The roots of America’s industrial policy can be traced back to the presidency of George Washington. In 1791, Alexander Hamilton, then Secretary of the Treasury, presented a compelling argument to Congress in support of government intervention to protect emerging industries. His Report on Manufactures, possibly the world’s first government document advocating for industrial policy, argued for tariffs and subsidies to support nascent industries, especially textiles and garments, to compete against established British manufacturers.
Hamilton initially lost his battle as Congress, still favoring an agrarian economy, tabled his report. Nevertheless, his concepts influenced American economic policy for the next century and beyond. The “American System” by Henry Clay, protective tariffs that industrialized the North, and federal land grants that built the transcontinental railroads all showed Hamilton’s influence. The concept of industrial policy did not originate in Brussels, Beijing, Tokyo, or Moscow, but in the U.S.
20th Century and Present: Pragmatism Reigns
The pragmatism of America’s founding fathers persisted through the 20th century and beyond. The Cold War resulted in the formation of the military-industrial complex. DARPA invented the internet. NASA developed technologies that underpinned various industries. Federal procurement contracts kept America’s aerospace and semiconductor sectors afloat for decades. The massive infrastructure investment known as the Interstate Highway System, built under the Dwight Eisenhower administration, was a sizeable federal subsidy to the automobile industry. Even during the 2008 financial meltdown, the government took equity stakes in banks and automakers, defying free-market principles.
Despite these instances of government intervention, the myth of laissez-faire America endures. The gap between the narrative of free-market capitalism and the reality of economically prudent government intervention is significant. A recent research paper, “The United States as an Active Industrial Policy Nation,” by Jiandong Ju, Yuankun Li, and others, systematically analyzed all congressional acts and presidential orders issued between 1973 and 2022. They found a consistent pattern of policies intended to modify the economic structure towards outcomes that diverge from laissez-faire principles.
Features of US Industrial Policies
The research paper also uncovers exciting features of U.S. industrial policies. A considerable portion of these policies have clear limits to their application. About 59% of all industrial-policy laws and orders have an explicit expiration date, averaging around four years. Many are framed as pilot programs that can be terminated if unsuccessful. Some even include conditional triggers, like “Buy America” procurement preferences that apply only if the domestic price is within 125% of the international market price. If the inefficiency becomes excessive, the subsidy ends.
As the U.S. approaches its 250th anniversary, it is clear that the nation has always blended state intervention with a competitive private sector to drive growth and innovation. The CHIPS and Science Act, the Inflation Reduction Act, and aggressive tariffs implemented by both President Donald Trump and Joe Biden are all part of a long-standing American tradition rather than significant departures. The real key to America’s economic success over the past 250 years is neither a strict adherence to markets nor the state but a pragmatic approach to using both.
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