Cover: Homecoming: The Path to Prosperity in a Post-Global World by Rana Foroohar (Crown Publishing Group, 2022)
This is exactly how America leapt ahead of Britain in global trade over a hundred years ago. The neoliberal thinking that has defined globalization in the West since the eighties decrees that state involvement in the economy is verboten. But that’s actually antithetical to America’s origins. Until very recently, the United States itself did exactly what China today does—funnel capital to the most productive places, connect the dots between job creators and educators, and link the public and private sector to pursue goals in the national economic interest. That’s industrial policy—which has been a dirty word in the United States for decades now, but it wasn’t always. As Cornell professor and legal scholar Robert Hockett, who has advised several presidential hopefuls, puts it, “In our very own Hamiltonian development model, the public sector played a crucial coordinating role, empowering the private sector, and enabling its efforts not to be scattered, haphazard or wasted.”
Alexander Hamilton, one of the founding fathers and the first U.S. treasury secretary, supported the creation of a national bank, which he viewed correctly as a “political machine of the greatest importance to the state.” He also started a public-private partnership to provide cheap water power and financial capital to investors in the early republic. Subsequent administrations—from Lincoln to Roosevelt, Eisenhower, and Kennedy—took pages from his book. The U.S. auto industry, for example, was a crucial part of the ramp-up for World War II. Public- and private-sector actors worked together on economic strategy geared toward preparing for battle. Bill Knudsen, chairman of General Motors, was tapped by Franklin Roosevelt to lead the retooling of civilian industry for wartime production. The production lines that were created not only helped win the war, but also increased productivity and bolstered growth and competitiveness in the postwar period.
You can draw an invisible line directly from this strategy back to Hamilton’s own Report on the Subject of Manufactures, published at the end of 1791, which outlined why manufacturing had an importance to the nation that went far beyond security: it would not only protect citizens, but help them diversify their own industrial efforts, raise productivity and wages as a result, and bolster investment. Hamilton expected that as American manufacturing grew, “parts of Europe, which have more Capital, than profitable domestic objects of employment,” would invest and import U.S. goods, making the country richer and stronger. He was right. The United States under Hamilton (and, in fact, until the postwar period of the 1960s) protected its industrial base, using tariffs and state subsidies to help bolster it. Hamilton strengthened patent protections in order to lure entrepreneurs and inventors to the United States. The nation used its growing prosperity to help push westward expansion, which in turn fueled more growth and prosperity. That’s exactly what China does so successfully today, using industrial policy and state subsidies to protect industries, investors, and workers and moving people and infrastructure where it makes the most sense.
This strategy has always made sense for the United States, which is a large economy with plenty of food, fuel, and consumer demand. It makes sense for China, too (which doesn’t have access to as much of an agricultural base as the United States, but which has bought farmland and ports in other countries to ensure its own security). It makes less sense for smaller nations like the United Kingdom, birthplace of Adam Smith and David Ricardo, the father of today’s neoliberal trade theory. Ricardian economics has shaped today’s trading system. But it’s arguably not the best formula for a bigger, more self-sufficient nation like the United States or China (or even a region like the European Union, which can essentially act as a large self-sufficient bloc). In a world that is more regionalized, there are inherent tensions within the Ricardian model, and cracks that are only just now beginning to show.
Ricardo, a financier who made a fortune betting correctly on the Battle of Waterloo and subsequently bought himself a seat in Parliament, was a fan of Adam Smith’s Wealth of Nations, which outlined, among other things, how productivity could be increased when nations specialized in certain tasks. Smith’s oft-cited example was of a pin factory in which different workers performed different tasks, each becoming faster and more productive.
Ricardo took the idea farther, arguing that free trade could make two countries richer and better off, even when one country was more productive than the other in every way. His 1817 book, The Principles of Political Economy and Taxation, put forward a case against mercantilism and economic planning, arguing that open markets and national specialization was the way to grow the pie globally. Ricardo famously compared Portugal and Britain: The former could make both wine and cloth more cheaply, but it would benefit greatly by being able to sell wine in particular (where it had a huge cost advantage) over Britons. Great Britain, for its part, would be better off using its industrial skill to produce more cloth, because its relative disadvantage in wine making was so great. Ricardo’s idea, which is really the basis of laissez-faire trade, took off. The British became the low-cost producers and manufacturers to the world, importing relatively cheap raw materials and churning out finished goods. Britain in 1860 was the “factory of the world,” with virtually no trade barriers.
But as Peking University professor Michael Pettis has explained in his co-written book Trade Wars Are Class Wars, economic specialization was a win-win only when capital and goods were far less mobile than they are today:
Neither Smith nor Ricardo thought it would make sense to divide the stages of pin-making or textile manufacturing across national borders. Rather they were thinking of the world as it was then—two hundred years ago. In those days, people happily traded raw materials and finished goods with each other across long distances, but would not trade intermediate goods or services. The communications technologies available at the time—carrier pigeons and couriers on horseback or sailing ship—would not have been adequate for coordinating the various stages of production across disparate locations. Travel was dangerous, and wars were common . . . what many forget today is that Ricardo’s argument made sense only under these primitive conditions.
The laissez-faire case for free trade made more sense when entire supply chains couldn’t be outsourced to myriad countries and when international capital was far less mobile. Ricardo thought that all the risks that Pettis outlined would prevent British financiers from simply outsourcing the entire industrial supply chain to Portugal (or whichever country could produce pins or cloth most cheaply). He also suspected that national patriotism would be a limiting factor in the outsourcing of entire production systems. As he put it, “most men of property [will be] satisfied with a low rate of profits in their own country, rather than seek[ing] a more advantageous employment for their wealth in foreign nations.” This is a crucial point—Ricardo himself realized that if capital were entirely mobile, his own theory wouldn’t hold up, and excess offshoring would lead to job loss and economic decline.
For a long time, the “laissez-faire” approach held. But with the invention of the telegraph, the steamship, the limited liability company, and global banking, his theory began to break down. Between 1870 and 1900, the United States surged ahead of Britain in nearly every sector.
Ricardo’s case for free trade worked for Britain in the preindustrial age. But the financier’s theories “depended on persistent differences in rates of return across countries, which in turn depended on investors’ unwillingness to move money abroad,” as Pettis quite rightly sums it up. “Those assumptions broke down as technology improved, communication costs collapsed, and global politics changed.” While the risks of investing in a faraway place (not to mention a sense of national pride in the industrial commons) were limiting factors in 1817, they were far less so by the twentieth century.
The age of hyperglobalized capitalism from the 1980s onward was enabled by technologies that Ricardo never imagined. Consider that today we live in a world in which the production of both goods and services can be spliced, diced, and located anywhere and that the software that tracks and enables it all can be endlessly reproduced for near-zero cost.
Add into that the realities of this level of interdependence with nations that have entirely different political economies, and the fact that there has been a huge shift in authority over who negotiates trade deals (it used to be Congress, but now it’s the White House that appoints the U.S trade representative) we’ve moved well beyond the nineteenth century. It’s one thing to trade Portuguese wine for English wool. It’s another thing to give up your entire industrial base to Asia and then not be able to, say, put masks on your citizens in the beginning of a pandemic because the country that supplies 70 percent of your masks, China, has an entirely different economic and political model and decides to nationalize its personal protective equipment industry and (quite understandably) cover the mouths and noses of its own people first.
And that’s just the most extreme example of how fragmented global production systems have changed the world. As Israeli entrepreneur, academic, and author Dan Breznitz puts it in his 2021 book, Innovation in Real Places, which looks at why keeping a broad range of industries and skill sets at home is important to economic competitiveness and national well-being, “Great innovations and entrepreneurship always translate to growth and job creation. However, in the current global economy, growth and job creation do not necessarily occur at the place of innovation.” U.S. taxpayers funded plenty of basic research that is making the middle classes in Denmark, Ireland, and Switzerland wealthy, just as software created in Silicon Valley actually results in more job creation in Asia, which is where most of the actual work of putting together electronic gadgets happens. It’s not all bad, but you can’t make good economic policy if you don’t acknowledge these basic facts.
None of this should have come as a surprise. Indeed, we’ve understood the risks of this sort of globalization for decades. Consider the Barry Lynn essay in Harper’s Magazine in June 2002, titled “Unmade in America,” which formed the basis for his later book on supply chains. As Lynn wrote in Harper’s, “even as the corporations celebrate” the rise of the globalized industrial network, “almost no one asks what would happen if just one of the still very sovereign nations that underlie this web was to grab hold of a few of the strands and start yanking.” Lynn also points out that while the first wave of post–World War II globalization involved European nations with quite similar values, each successive wave involved trade between nations with more and more political divergence, culminating of course with China’s World Trade Organization entry. As Adam Smith could have told us, trade gets tougher when the partners don’t have a shared moral framework.
This excerpt has been reformatted from the original.
Reprinted with permission from Homecoming by Rana Foroohar, published by the Crown Publishing Group. © 2022 by Rana Foroohar. All rights reserved.
Rana Foroohar is the global business columnist and associate editor for the Financial Times, the global economic analyst for CNN, and the author of Don’t Be Evil (Currency, 2021) and Makers and Takers (Currency, 2017).