When "That's How It's Always Been Done" Is a Winning Argument

A founding document that anticipated the Chinese Communist Party...

At dinner recently with a prominent funder of conservative organizations, I found myself recounting the tradition of American industrial policy—beginning, of course, with Alexander Hamilton. Admittedly, this is a not-infrequent experience for anyone unfortunate enough to have dinner with me.

In this instance, we had arrived here after I alleged that American industry could not expect to succeed in a “free market” dominated by Chinese state-owned and -subsidized competitors, to which he responded that we should not try to “beat China by becoming more like China.” Proudly concluding my narration with Ronald Reagan’s quota on Japanese auto imports and subsidized research consortium to revitalize the semiconductor industry, I was dumbfounded to hear in response, “well just because we’ve done something before doesn’t make it a good idea.” That was not the point.

In any policy debate, and especially one amongst conservatives, parallel assessments consider the likely efficacy of the proposal and the tradition within which it resides. In theory, presuming sufficient wisdom by the policymaker, only the former assessment would be necessary. Who cares when, where, why, or whether a government has taken an action before? Surely the question of whether to do something this time is best evaluated on its independent merits. To damn or praise an idea on the basis of past associations, or lack thereof, would seem to commit some version of the ad hominem fallacy. But conservatives rightly reject that presumption of wisdom and insist instead on understanding a proposal or argument’s ideological lineage. One can learn a great deal about an idea by who else has already had it.

On one hand, then, the common objection to American industrial policy that “we cannot beat China by becoming more like China” is entirely inbounds in a debate on whether such market intervention can rightly be understood as conservative, has any place in the American tradition of political economy, or is likely to succeed. But on the other hand, the reality of that American tradition is a comprehensive defense. Further, the tradition’s depth and extent, and its correlation with development of the American economy into a continent-spanning industrial colossus and home to the world’s most prosperous middle class, establishes a rebuttable presumption that such policy is indeed wise, and should be the nation’s default posture at least until opponents can make a compelling case to the contrary.

Hamilton’s Report on Manufactures, produced for the House of Representatives in 1791, is a seminal document in this debate. Most obvious, and most often cited, are the clear statements about manufacturing’s importance to a robust economy and the need for the federal government to play an active role in its success. Hamilton opens his report observing: “The expediency of encouraging manufactures in the United States, which was not long since deemed very questionable, appears at this time to be pretty generally admitted.” He concludes by asking, “In a community situated like that of the United States, the public purse must supply the deficiency of private resource. In what can it be so useful as in prompting and improving the efforts of industry?”

But a careful reading teaches an additional lesson: not only that an indispensable federal role in the promotion of industry has been contemplated since the founding era, but also that all the specious arguments that we hear against it today were already advanced and addressed at that time. For instance, Hamilton captured then the blind faith of today’s market fundamentalists as if he were a seasoned member of the Wall Street Journal’s editorial board:

To endeavor by the extraordinary patronage of Government, to accelerate the growth of manufactures, is in fact, to endeavor, by force and art, to transfer the natural current of industry, from a more, to a less beneficial channel. Whatever has such a tendency must necessarily be unwise. Indeed it can hardly ever be wise in a government, to attempt to give a direction to the industry of its citizens. This under the quicksighted guidance of private interest, will, if left to itself, infallibly find its own way to the most profitable employment: and ’tis by such employment, that the public prosperity will be most effectually promoted. To leave industry to itself, therefore, is, in almost every case, the soundest as well as the simplest policy.

And then, just as succinctly, he dispenses with it:

One of these turns on the proposition, that Industry, if left to itself, will naturally find its way to the most useful and profitable employment: whence it is inferred, that manufactures without the aid of government will grow up as soon and as fast, as the natural state of things and the interest of the community may require. Against the solidity of this hypothesis, in the full latitude of the terms, very cogent reasons may be offered. These have relation to—the strong influence of habit and the spirit of imitation—the fear of want of success in untried enterprises—the intrinsic difficulties incident to first essays towards a competition with those who have previously attained to perfection in the business to be attempted—the bounties premiums and other artificial encouragements, with which foreign nations second the exertions of their own Citizens in the branches, in which they are to be rivalled.

Arguments presented as deep insights from Nobel-winning economists in the 20th century were already well understood in the 18th century; they just weren’t taken seriously. Beyond the basic point that markets will not “infallibly” accomplish anything, Hamilton made the case for manufacturing as vital to broader supply chains and industrial ecosystems (“Animals, Plants and Minerals acquire an utility and value, which were before unexplored”). He recognized the value of the employment opportunities provided in manufacturing (“the community is benefitted by the services of its respective members, in the manner, in which each can serve it with most effect”) and anticipated the problem of job transitions (“these changes would be likely to be more tardy than might consist with the interest either of individuals or of the Society”).

Considering policy options, and the benefit of subsidies (which he called “bounties”) in particular, he acknowledged the “prejudice against bounties from an appearance of giving away the public money,” but argued, “there is no purpose, to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry; no Consideration more valuable than a permanent addition to the general stock of productive labour.” He acknowledged the tradeoff implicit in dedicating resources toward developing new industries, and made the case that long-run benefits outweighed short-run costs, especially because industries once developed would become efficient and competitive:

But it is the Interest of the society in each case, to submit to a temporary expence, which is more than compensated, by an increase of industry and Wealth, by an augmentation of resources and independence; & by the circumstance of eventual cheapness, which has been noticed in another place.

Perhaps most remarkably, Hamilton in 1791 anticipated the contours of the China debate precisely, and did far better in analyzing them than the hubristic economists of the 1990s. Free markets unencumbered by industrial policy might be a hypothetical ideal, he acknowledged, but American policymakers could not control how other nations behaved and, in the face of industrial policy elsewhere, the rational response for the United States was action of its own. “If the system of perfect liberty to industry and commerce were the prevailing system of nations—the arguments which dissuade a country in the predicament of the United States, from the zealous pursuits of manufactures would doubtless have great force,” he observed. “But the system which has been mentioned, is far from characterising the general policy of Nations. The prevalent one has been regulated by an opposite spirit.” Most importantly, in the humble spirit missing entirely from the declarations of modern economists 200 years later:

Remarks of this kind are not made in the spirit of complaint. ’Tis for the nations, whose regulations are alluded to, to judge for themselves, whether, by aiming at too much they do not lose more than they gain. ’Tis for the United States to consider by what means they can render themselves least dependent, on the combinations, right or wrong of foreign policy.

As George Will once wrote, “If you seek Hamilton's monument, look around. You are living in it. We honor Jefferson, but live in Hamilton's country, a mighty industrial nation with a strong central government.” That has been untrue in the 21st century, during which American policymakers adopted exactly the set of arguments that Hamilton dismissed, while ridiculing the perspective and policies that he had wisely counseled.

The nation may finally be getting back on track. Helpful in making the correction is an understanding that the course we are now charting is the same one the nation long followed, and that the purportedly farsighted and “scientific” objections of the market fundamentalists are the same ones we successfully ignored for literally centuries.

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