Capitalism is rapidly evolving in a way that may seem surprising: The U.S. and European Union are increasingly turning to industrial policy, or direct government intervention in the economy, to bolster specific sectors and firms. This was once the approach of socialist nations, but it’s now reemerging as a powerful global trend in capitalist countries. We think it is here to stay. The portfolios best positioned for this investment cycle may look different from the ones that worked in the last.
Although you wouldn’t know it from walking through Times Square in New York City, the United States has never been a purely capitalist country. In fact, no country is completely capitalist or socialist; instead, they exist on a spectrum between those two economic systems. For the U.S., the tension between market dynamism and state direction is foundational.
When the United States gained independence 250 years ago, Thomas Jefferson envisioned a self-sustaining, agrarian economy made up of many individual farmers who supported themselves without active government help. But Alexander Hamilton saw a focus on agriculture as a path to stagnation. He wanted the government to step in to develop a globally competitive manufacturing sector that would drive long-term growth.
Hamilton’s vision for the economy mostly won. The country industrialized throughout the 1800s with strong governmental support, including high tariffs to protect the nascent manufacturing sector. Still, Jeffersonian ideals persisted, influencing a framework of minimal regulation and legal recognition of corporate autonomy.1
Combining government support for domestic industries with limited regulation quickly propelled American businesses to global prominence. But there were drawbacks. Companies expanded rapidly, swallowing competitors and creating powerful monopolies. Credit markets experienced frequent and severe booms and busts, and these triggered frequent panics and recessions.2 Workers faced brutal conditions: In 1900, one in five children aged 10–15 worked, and adults typically labored over 60 hours per week.3
These issues intensified and contributed to unrest. In the early 20th century, the government stepped in, breaking up monopolies, stabilizing interest rates, guaranteeing union rights, setting a minimum wage and limiting the work week.4 The economy’s boom-bust cycle stabilized and working conditions improved. Union membership nearly tripled.
These policies form the bedrock of our modern capitalist economy. Some people might be surprised to learn that they were designed to keep capitalism in check.
Today’s policy shift is distinguished by its speed and bipartisan reach, which should help it endure. U.S. policymakers appear to be looking abroad at other economic systems—and borrowing a tool that has been getting results.
As the 20th century wore on, socialist countries abandoned their planned economies. Today, the world is made up of different types of capitalism, distinguished by the degree to which the government intervenes in the economy and markets.
Economist Branko Milanović wrote that three discrete varieties of capitalism exist today, each with distinct priorities. The American model prioritizes growth and innovation at the cost of higher inequality and weaker affordability. The European model leads on affordability, equality and quality of life, at the cost of lower trend growth. The Chinese model uses strong state control to prioritize rapid national development and stability. Each outperforms on what it prioritizes, but all are capitalist systems.5
Using France (a large, heterogenous nation) as a European comparison point with the U.S., the U.S. leads on growth and innovation; France leads on affordability and quality of life.
Each model wins on what it prioritizes, but priorities can shift, as been increasingly clear over the past decade.
Industrial policies, once the domain of the Chinese model, have been adopted across the capitalist world. This follows a century where they had faded into the background, despite their central role in America’s industrial rise.
Tariff policy is a clear example of this. While Hamilton’s protectionist program was in full force during the industrial revolution, it diminished in the aftermath of the Second World War as the U.S. built up a global free trade order with itself at the center.
But as the peace dividend unwinds, countries are treating stable supply chains as a critical aspect of national security.
And there are drivers beyond geopolitics. The mushrooming AI data center buildout is constrained by limited access to physical inputs, including semiconductors and power equipment; sourcing these from distant partners is a vulnerability. The clean energy transition is too massive for free markets to deliver at the required pace. And China, once it was welcomed into the global trade order,6 used its state-driven economy to outpace all rivals in manufacturing—fueling unemployment and social unrest in blue collar communities across Europe and the U.S.
All of this has countries that once prioritized globalized efficiency and growth turning inward. They are betting that coordinated market intervention and the creation or support of “national champion” firms will be a reliable path forward.
The Trump Administration’s confrontational tariff policy aimed at boosting domestic manufacturing of essential goods like steel on national security grounds is only the most visible example. Last year the U.S. government invested $8.9 billion for a 9.9% stake in Intel, and it has signaled a willingness to invest in other private companies.
The CHIPS and Science Act (2022) allocated $280 billion, including nearly $40 billion in subsidies for U.S. chip production.7 Europe’s climate programs since 2019 include carbon pricing, subsidies, and regulation with a €1+ trillion pledge to reach climate neutrality by 2050.
These policies echo the interventionist Chinese model, and they mark a sharp departure for the U.S. and Europe.
China has used industrial policy to great effect. However, its track record isn’t spotless, and it comes with downsides. Products made by well-paid domestic workers cost consumers more. Every dollar governments spend propping up strategic industries is a dollar not invested in education, infrastructure, or healthcare.
The U.S. steel tariffs introduced in 2002 are a prime example of the risks of this approach. A few steel jobs were created, but as input costs spiked, the policy cost nearly 200,000 jobs in steel-consuming sectors—more than the employment of the entire steel-producing industry.8The tariffs were rolled back within two years.
It is natural, therefore, to ask, “What if this doesn’t work?” Industrial policy has two basic weaknesses, and they’ve been repeated across history.
First, governments have trouble picking winners. Markets allocate capital through trial and error with immediate feedback. Governments allocate based on political logic and expert predictions, which are often wrong. In the 1980s, Japan bet on fifth-generation computing and analog HDTV; both failed spectacularly.9
Second, fighting for subsidies is easier than fighting for market share. As governments intervene more actively, industries compete for their support rather than for customers. U.S. ethanol subsidies have persisted decades past their economic justification because of Iowa’s political importance.10 The revolving door between industry and government spins faster, and “national champion” starts to mean “politically connected” rather than “globally competitive.”
For investors, the question isn’t whether these policies will work perfectly or last forever. It’s whether they persist long enough to reshape markets in the medium term, and we think that bet looks increasingly reasonable.
A top idea in our Mid-Year Outlook, “national champion” firms in key prioritized sectors stand to benefit from the shift towards government intervention in markets. When Russia invaded Ukraine in 2022, European governments were forced to rethink their defense budgets. Military suppliers have been the direct beneficiaries, and defense stocks have more than doubled.11
A clear risk is that this quick turn toward industrial policy could be followed by a quick turn away. While China can implement an economic plan over decades, industrial policy in democracies can be reversed in a single election. But we think the bipartisan consensus looks deep enough to persist through multiple political cycles, even if implementation details shift over time. Wind farms could receive funding one year and natural gas pipelines the next, but the flow of capital to sectors deemed “strategic” is likely to last.
The move toward industrial policy and national champions is not a rejection of markets, but a shift in priorities—one that creates a more opportunity-rich landscape for disciplined, long-term investors in a fragmenting world.
For more about the shift toward industrial policy across global markets and how it may affect your portfolios, contact your J.P. Morgan team.
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