Industrial Revolutionaries – The American Prospect

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The COVID-19 pandemic has forced policymakers to revisit whether supply chains for essential health materials should be reshored to the United States. Joe Biden has called for a WWII-style War Production Board to produce COVID-19 tests and coordinate their distribution. Foreign policymakers increasingly worry that China’s rising economic power and America’s dependence on China for essential materials pose serious national-security risks. Proposals to address the existential danger of climate change through a Green New Deal involve historic investments in clean-energy research and development, green manufacturing, and the export of cleaner energy technologies.

Advocates for bold efforts in each of these areas do not believe the United States should be beholden to the market’s choices. They want policymakers to encourage domestic production in specific sectors, a practice known as industrial policy. This has been urged by an increasingly loud and bipartisan chorus, from Marco Rubio on the right to Elizabeth Warren on the left.

For the last four decades, the dominant mood among economists and policymakers has been to hurl assault after assault at industrial policy. Government shouldn’t pick winners and losers, they have said. Government can’t know what sectors to prioritize. Free markets will allocate resources better the government ever can. Any government interference will cripple economic growth. Over time, industrial policy ultimately became the Lord Voldemort of economics, so evil and dangerous that it must not be named.

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Central to this critique is the assumption that industrial policy is an inherently bad fit with the character of this country. “America doesn’t ‘do’ industrial policy,” economists Brad DeLong and Stephen Cohen have lamented. The conventional story is that industrial policy in America started with Alexander Hamilton, and that the Hamiltonian tradition was passed down to Clay and Lincoln and Roosevelt—both Theodore and Franklin—and then largely left for dead, with a prominent exception in the Defense Department.

But the conventional story misunderstands both what industrial policy is, and the American approach to pursuing it. Critics of industrial policy usually frame the field as government subsidies, protectionism, or favoritism toward specific firms or sectors, and then levy predictable criticisms against such policy. But the reality is that industrial policy is not limited to active planning or strategy along these lines. Tax breaks for specific industries, sectoral deregulation, tariff reductions, and global standards-setting can all have precisely the same effects. This is why political scientist Aaron Wildavsky observed in a 1986 paper that “regulation and its absence constitute industrial policy.”

Despite all the protests and fearmongering around industrial policy, the United States has always had one. American industrial policy falls into one of four traditions: Franklinian, Hamiltonian, Madisonian, and Jacksonian. Each of these traditions draws on characteristics of the individuals for whom they are named, even if their namesakes didn’t explicitly work out a particular theory of industrial policy, or even if they embraced multiple theories.

There is danger, of course, in naming traditions after famous leaders who contain multitudes and didn’t offer up systematic theories. But these monikers help give contours to the frameworks, fitting them into both a historical context and a set of ongoing policy debates. The four traditions in American industrial policy are also not necessarily incompatible. More often than not, they have coexisted, and all of them exist today to different degrees in different sectors. In other words, the traditions are just that, traditions. Understanding them helps clarify the possibilities and perils of industrial policy—past, present, and future.

Knowledge and Infrastructure: 
The Franklinian Tradition

Before there was a United States of America, there was Ben Franklin. Scientist, inventor, diplomat, aphorist, journalist, government official, Franklin was one of the few men who signed both the Declaration of Independence and the Constitution. Throughout his life, this polymath believed deeply in the advancement of knowledge. He invented bifocals, conducted research into electricity, and helped organize the University of Pennsylvania, the American Philosophical Society, and America’s first lending library. Franklin was also a longtime postmaster during the Colonial period, and upon independence, he became the first postmaster general of the United States. For the founding generation and those who came after, the post office was a critical piece of basic infrastructure, an essential communications network enabling commerce by linking far-flung cities and towns. The post office also ensured the functioning of democracy through the distribution of newspapers and political information.

Just as Franklin predates America, the Franklinian tradition in industrial policy emphasizes what comes before industrial production: knowledge and infrastructure. In this tradition, the public directs industrial-policy priorities in these arenas and the government provides them, either directly or through a regulated monopoly.

Looking back, the Franklinian commitment to knowledge appears over and over again in American public policy. The Constitution grants power to Congress to “promote the progress of science and useful arts” through copyright and patent laws. Programs from the Land Grant Colleges Acts in the 19th century to the GI Bill and National Security Education Act in the 20th encouraged an educated population. The Manhattan Project, research to win the space race, and the Defense Advanced Research Projects Agency (DARPA) all involved federal funding for science. These programs helped America reach critical national goals while also developing a pipeline of inventions, innovations, and ideas that fostered commerce for generations afterward.

Like knowledge, infrastructure—particularly network infrastructure and utilities—is foundational for industrial production. What made the Franklinian-style post office so valuable throughout American history was its commitment to universal service and regulated pricing. Of course, it is more expensive for the Postal Service to deliver letters from New Orleans to rural Alaska than it is to send them down the street. The post office uses a system of cross-subsidies, regulated rates, and a legally enforced monopoly to ensure consistent and affordable pricing. As a result, commerce and communication is possible throughout the vast American continent, not just in major cities on the coasts or along waterways.

This common carrier approach to network infrastructure—be it railroads, telegraph, telephone, trucking, buses, airlines, electricity, water, or highways—also enabled investment and fostered innovation. Industrialists of any stripe can invest in a factory if it is connected to roads and communication, and will settle in a city that has power and water. These basic inputs for industrial growth and development thus offer direct benefits and also catalyze private-sector investment across sectors. Regulated monopolies were also innovators. The famed Bell Labs, for example, was able to operate because its sponsoring parent, AT&T, was a monopolist. But in the Franklinian tradition, the telecom giant wasn’t free to roam the economy, crushing others; it was heavily regulated as a condition of its concentrated economic power. In fact, in the 1950s AT&T was required to license the knowledge from Bell Labs to anyone who paid a reasonable fee. This compulsory licensing regime created the predominant American high-tech industry.

Public Ends, Private Means: 
The Hamiltonian Tradition

Like Franklin, Alexander Hamilton was present at the creation. And because of a series of reports he authored as the first secretary of the Treasury, Hamilton is widely (and rightly) considered the founder of American industrial policy. In his Report on Manufactures, Hamilton outlined a system that included tariffs, subsidies, and investments. First, imposing tariffs, bans on some foreign goods, and prohibitions on exporting certain materials would protect and promote the development of infant industry in America. Subsidies, prizes, and exemptions from duties would encourage private investment in particular sectors. And nurturing discovery and investing in infrastructure would bring innovation and growth.

In his report advocating for the creation of a national bank, Hamilton also hoped to expand the national debt, extend more legal tender, and develop America’s fledgling financial system. The combination of finance and manufacturing, he hoped, would be a more stable and more dynamic commercial sector.

The thrust of the Hamiltonian system involved achieving public ends through private means.

Hamiltonians want government to have a coherent economic strategy, and as a result, they tend to design systems rather than leave policy to ad hoc decision-making. Substantively, even though Hamilton himself emphasized innovation and infrastructure, the thrust of the Hamiltonian system involved achieving public ends through private means. The report on manufactures involved tariffs to protect private industry and subsidies to encourage private manufacturing; the national bank was explicitly designed as a union of finance and government. Both sets of policies, Hamilton thought, would help bind the merchant and financial classes together with the new national government.

The Hamiltonian tradition was prominent in the 19th century, finding expression in Henry Clay’s American System, the national bank, and in Civil War–era and Gilded Age economic concerns like tariffs. In the 20th century, the Hamiltonian tradition was taken to its furthest extent in the World War I War Industries Board, the National Recovery Administration (NRA) during the first New Deal, and the War Production Board during World War II. Each involved government-sponsored, industry-wide boards that coordinated production, prices, and distribution of goods and services. During wartime, these boards guaranteed production of essential war materials; the peacetime NRA tried to address the economic challenges of the Great Depression.

After World War II, government-industry planning and production boards were replaced by a looser system of collaboration. The oft-decried “military-industrial complex” was the Cold War heir to the Hamiltonian tradition. Big business, with the collaboration of big labor and big government, could provide economic stability and long-term (private-sector) planning for production. John Kenneth Galbraith celebrated this model as “the new industrial state.” Even today, the Pentagon is the primary location in the federal government of strategic industrial-policy thinking. The Department of Defense regularly issues reports discussing the resilience of the defense industrial base, problems with consolidation and offshoring, and the weeds of supply chains.

Despite notable successes, Americans have always had misgivings about the cozy relationship between corporations and government that characterizes the Hamiltonian tradition. Hamilton’s plans for manufactures and the national bank were attacked from the start as giving power and privileges to the wealthy, with potentially disastrous consequences for democracy. The war over the second national bank featured charges of corruption, and ended in defeat for the Hamiltonians, as populists decried the plutocratic alliance of finance and government. And throughout the 19th century, the Hamiltonian approach was largely associated with Northern commercial, industrial, and financial interests, with skepticism frequently coming from populist Westerners and Southerners.

The 20th-century variants on the Hamiltonian approach were likewise subject to serious criticism. Oversight commissions warned of corruption, fraud, and profiteering. A tight partnership between business and government could be a license for the former to exploit American taxpayers for its own benefit and in the process entrench its economic power. The military contracting sector has been particularly vulnerable to this. Government capture and corruption are the inescapable fellow travelers of the Hamiltonian tradition.

Regulated Competition: 
The Madisonian Tradition

James Madison had two solutions to the Hamiltonian problem of the powerful capturing government: fragmentation of interests and separation of powers. In Federalist 10, Madison explained why no particular interest group would dominate in America. In a small republic, a single faction can become so powerful as to gain dominance; but in a large republic, there would be so many factions that none would prevail.

One of Madison’s other great contributions in the Federalist Papers was arguing that the Constitution rightly separated the different functions of government—legislative, executive, and judicial—in order to prevent the concentration of power. Separation also created a framework for regulated competition between the branches for power and influence; each would aim to gain more power, and be checked and balanced by the others. “Ambition,” he said, would counter ambition.

The Madisonian tradition emphasizes the benefits of pluralism, competition, and checks and balances.

Today, regulated competition is perhaps best associated with anti-monopolist and Supreme Court Justice Louis Brandeis, but it has its roots in Madisonian political economy. The Madisonian tradition sees the route to economic success as requiring competitive markets, but it holds that there must be an active government regulating and channeling market activity to ensure a fragmented and separated industrial ecosystem. In other words, regulated competition is the route to productivity and prosperity.

In the agrarian economy of the founding, Madisonians supported breaking up large property holdings by abolishing land inheritance rules like the entail and primogeniture. As industrialization proceeded swiftly in the 19th and 20th centuries, the Madisonian tradition found expression in the anti-monopoly movement and in regulatory policies based on the principle of separating functions. Antitrust advocates from John Sherman to Louis Brandeis and Robert Jackson argued that a concentrated economy was dangerous both economically and politically. The Sherman Antitrust Act, Clayton Antitrust Act, Federal Trade Commission Act, and a variety of pre- and post-Depression general competition laws sought to prevent monopolies and oligopolies. Other laws were sector-specific, tailored to the characteristics of particular industries. The 1921 Packers and Stockyards Act, for example, was designed to ensure competition and fair prices in livestock, meat, and poultry. Competitive banking required rules prohibiting interstate branching and a government-backed system of federal deposit insurance.

Adherents to this tradition also pushed for structurally separating industrial functions, by splitting the utility, exchange, or platform function from the commercial activity that trafficked across it. The 1906 Hepburn Act, for example, prevented railroads from carrying any commodities that they had mined or manufactured. As basic infrastructure, railroads would then be regulated under the Franklinian principles to ensure network access. Preventing ownership of production and manufacturing firms ensured a competitive marketplace across all sectors of commerce. Any industrialist (or investor) could rely on the rails to transport their goods—without fear of higher prices because a monopolist railroad gave special preference to its own goods. In the mid-20th century, a similar structural separation regime prohibited banks from owning non-bank companies, and under the Glass-Steagall Act, insurance, depository, and investment banking functions were separated. The Federal Communications Commission’s “fin-syn” rules likewise separated production and distribution of television programming.

The Madisonian tradition emphasizes the benefits of pluralism, competition, and checks and balances. In an ecosystem with many competitors, supply chains are less likely to be fragile. A single monopoly supplier can be snuffed out, with disastrous consequences; but the loss of one among many, in contrast, poses little danger. Competition also enables innovation, as rivals continually seek to improve and disrupt in order to make gains. That struggle ultimately yields new products, processes, and businesses—keeping America on the cutting edge.

Privatization Without Strategy: The Jacksonian Tradition

Where the Madisonian tradition tries to prevent the Hamiltonian problem, the Jacksonian tradition rejected an industrial strategy entirely. In the early 19th century, fears that the wealthy and government were far too entangled contributed to the rise of Andrew Jackson and his populist movement. State legislatures granted individual charters to corporations, leading to charges of favoritism and “special privileges.” The national bank was attacked for robbing workers and farmers to pay financiers.

The Jacksonian response was to abandon the field. The rise of general incorporation laws allowed any business that existed for a lawful purpose to incorporate without specific legislative sanction. Jackson himself vetoed the reauthorization of the national bank, leaving banking law and policy to the states.

In spite of its intentions, Jacksonian political economy backfired. Over time, general incorporation laws didn’t curtail corporate power, they unleashed more corporations into the American economy. The failure to replace the national-bank system with an alternative led to the creation of “pet banks” run by Jackson administration cronies, fraudulent “wildcat” banking, speculative bubbles, and the swift return of the boom-and-bust economic cycle with the panic and depression of 1837.

The Jacksonian tradition in industrial policy differs from the other three traditions in that it opposes the development of a coherent federal strategy or system of industrial policy in favor of decentralization to the states and privately directed activities. In its aspirations, it shares some similarities with the Madisonian commitment to competition. But because it largely eschews an active government policy to regulate sectors of the economy, it ends up with some of the same problems that afflict the Hamiltonian tradition. The consequences of a Jacksonian approach are that industrial-policy decisions are made by private corporations, with few governmental guardrails. Unsurprisingly, those decisions often end up benefitting the short-term interests of the wealthy, powerful, and well-connected.

For the last 40 years, American industrial policy has largely followed the Jacksonian approach. The neoliberal economic policies of Friedrich Hayek and Milton Friedman are, in great measure, a modernized version of the Jacksonian model. Deregulation, privatization, trade liberalization, and austerity all caution against government action. As a result, the Franklinian approach of public spending on R&D has withered under cries for austerity, and regulated sectors like airlines, buses, and telecom were deregulated starting in the late 1970s.

Outside of a small number of institutions like the Pentagon and the Fed, policymakers do not usually think in Hamiltonian terms. Even those arenas have been affected by the Jacksonian mood: deregulation in banking and finance and offshoring and consolidation in defense production have taken the place of sectoral regulation and supply chain resilience. Robert Bork’s antitrust vision placed efficiency above all other aims, abandoning Madisonian competition and creating the most concentrated economy since the Gilded Age.

The consequence of this decentralized, deregulated neo-Jacksonian approach has not been the absence of industrial policy. Instead of democratically elected officials and public-policy structures, the economically powerful determine national priorities and pursue them through outsourcing, offshoring, and, of course, lobbying Congress for tax breaks and regulatory changes. Rather than a national strategy, we have the privatization of industrial policy.

It is also essential to remember the relationship between Jacksonian industrial policy and racial and geographic inequality. The original Jacksonians objected to many federal government actions in part because they feared that a strong, well-stitched union would threaten slavery in the Southern states. Racial politics thus restrained industrial policy in America. In the early neoliberal era, conservative political tacticians like Lee Atwater likewise recognized that economic policies had racial consequences, that neoliberal policies would harm Black people more than whites, and that they would prove an effective dog whistle for conservative political gain.

At the same time, whether economic growth is concentrated in a few superstar cities or dispersed across the country depends on policy choices. Deregulating network infrastructure or failing to invest in new network infrastructure like broadband, for example, means rural areas and smaller cities and towns have less potential for growth. To be sure, center-left neoliberals did not share their conservative counterparts’ racial politics or seek to widen inequality, but the structure of the economy shapes who has wealth and power. Deregulation, liberalization, privatization, and austerity meant redistributing both upward.

The Four Traditions and 
the Return of Industrial Policy

As policymakers discuss what industrial policy should look like today, the four traditions in American industrial policy offer important lessons. First and foremost, any public policy that shapes or structures a sector of the economy is an industrial policy, even the Jacksonian approach, which rejects strategic planning in any coherent sense. The choice to let powerful individuals and corporations pursue the industries they want, structure them how they want, and lobby government for ad hoc policy changes is just as much of an industrial policy as anything else, albeit not a very good one. Indeed, the “return” of industrial policy is better described as a rejection of the Jacksonian tradition.

For those who advocate for a new industrial policy, the Hamiltonian tradition offers a natural starting point. But the risks inherent in the Hamiltonian approach should be particularly concerning at this moment. There is already a pervasive view that the system is rigged, captured and corrupted by the powerful. Industry concentration in sector after sector is at an apex, bringing economic and geographic inequality with it. Applying the Hamiltonian approach in narrow areas, like determining supply chain needs or the production of public-health materials in a crisis, is both inevitable and desirable. But the agenda for contemporary Hamiltonians must be more than advocating for industrial policy; it must also be designing policies to prevent regulatory capture, whether as a function of lobbying, the revolving door, or personal friendships and elite culture. Failure to do so threatens greater inequality of wealth and power, and with it, the possibility of oligarchy or another populist backlash.

The Madisonian and Franklinian traditions, meanwhile, are in serious need of revival. Massive public spending in research and development, a public option for broadband and postal banking, and network infrastructure regulation, from tech platform rules to net neutrality, could provide a new foundation for discoveries and commerce. At the same time, antitrust enforcement and the revival of separation-of-function regimes in tech, telecom, banking, agriculture, pharmaceuticals, and other sectors will revitalize competition, enhance innovation, reduce the power of rent-seeking lobbyists, and ensure a more equitable economy through all regions of the country. These two traditions also work together as a system: Government-funded research and regulated network infrastructure provide the foundation and keep the country investing in a longer-term future; a competitive ecosystem sits atop that base, pursuing innovation in a manner that doesn’t concentrate wealth or power.

The challenge for Madisonians and Franklinians is that their traditions have been deliberately attacked for decades by Jacksonians, so much so that they are largely forgotten, and if remembered, much maligned. The neo-Brandeisian movement has started to revive principles and policies in antitrust. But both separation rules and regulated monopoly in the network infrastructure sector are still misunderstood, if they are known at all. The agenda for those interested in competition, public investment, and infrastructure must be to resurrect systems of regulated competition and regulated monopoly. Only then will the Madisonian and Franklinian traditions re-emerge in full force.

All four of these traditions—Franklinian, Hamiltonian, Madisonian, and Jacksonian—have been with us since the start of the country. The style of American industrial policy has taken on different forms and flavors, ebbing and flowing over the centuries, coexisting to different degrees at different times. As the debate over industrial policy begins anew, the question is not whether America need an industrial policy. It is how to revive three traditions that have been allowed to languish over the last generation. ν

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