The American system of innovation, combining strategic investment and private enterprise, made our nation's industry the envy of the world. It can pave the way for widespread prosperity and security again today.
This essay series by American Compass ventures to recover the “American System” associated with such statesmen as Henry Clay, Alexander Hamilton, and Abraham Lincoln. It also considers how to update their insights for our times. I’d like to offer my own reflection on what motivated these great men to advocate the American System: namely, their struggle for independence from hostile foreign powers.
The Founding generation won independence on the battlefield, but the road to national self-sufficiency was much longer and fraught with peril. Early American industry wasn’t strong enough to equip the nation with essential supplies, as General Washington knew. There wasn’t enough homespun cloth to cover his “naked, and distressed” troops at Valley Forge; there were even fewer homegrown muskets to arm them.1George Washington, Letter to the Continental Congress (December 23, 1777). The American Revolutionaries fought mainly with weapons from France and even Britain, great powers that spent lavishly on their own arsenals.
President Washington thus stated during his First Inaugural Address in 1790 that a “free people” ought to promote manufacturing “to render them independent of others for essential, particularly military, supplies.”2George Washington, First Inaugural Address (January 8, 1790). Alexander Hamilton repeated this theme in his report to Congress on manufactures a year later, warning that it was foolish to leave “essential instruments of national defence to the casual speculations of individual adventure.”3Alexander Hamilton, Report on Manufactures (December 5, 1791). The message was clear: sovereign nations must be prepared to defend themselves and aggressively pursue their interests, or else rely on the uncertain support of others. To remain free, America would have to arm itself.
Clay’s three-part American System of support for domestic manufacturing, a strong central bank, and commercial infrastructure investment built on this theme. America had come a long way by the 1830s, but it was still dependent on its old colonial master for many manufactured goods, a fact that rankled decades after Britain had put a torch to the White House during the War of 1812. “Have we forgotten, so soon,” Clay asked, “the privations to which not merely our brave soldiers and our gallant tars were subjected, but the whole community, during the last war, for the want of absolute necessaries?”4Henry Clay, Speech on the American System (February 1832). Widespread support for the American System shows his question was rhetorical. Americans had not forgotten the indignity of dependence on a hostile power. Have we?
The Wuhan virus pandemic has laid bare a new dependence on a hostile power, Communist China, for even basic supplies like respirator masks and basic medicine. The Chinese Communist Party has exploited this dependence by preventing supplies made by American companies in China from being shipped to the United States. Just as our troops at Valley Forge shivered for want of American cloth, our doctors and nurses are forced to reuse protective equipment to treat patients sickened by a plague that the CCP unleashed on the world.
China’s ambitions aren’t limited to basic manufactures. Beijing seeks nothing less than “the great rejuvenation of the Chinese nation,” with the technological and economic mastery that term implies. It’s clear from China’s actions and rhetoric that it views the American-built world order as the chief impediment to its dream becoming reality.
China has embarked on a long march to catch up and surpass the United States in advanced technology, especially dual-use technology. The CCP is expected to invest hundreds of billions of dollars in key technologies through its “Made in China 2025” technology strategy. These expenditures are supplemented by a brazen campaign of intellectual property theft, as well as $236 billion in funding from American investors since the turn of the century—most of it greenfield investment in new factories and capital goods.5The U.S.-China Investment Hub.
The CCP’s strategy is already yielding results. Today, China is an industrial behemoth sitting at the center of the world’s supply chains like an octopus. It is the world’s leading producer and consumer of machine tools,6Stephen Klein, Jr., “The Modern Machine Tool Boom Continues, Except in China,” Modern Machine Shop (May 5, 2019). and it installs one in every three of the world’s industrial robots each year.7Stephen Crowe, “Top 5 Countries Using Industrial Robots in 2018,” Robot Report (September 19, 2019). Massive Chinese firms like Huawei threaten to dominate the world market for advanced telecommunications, while serving as agents for Chinese intelligence.
China is increasingly a leader even in frontier technologies. China launched the world’s first quantum-communications satellite in 2016.8David Goldman, “The Digital Age Produces Binary Outcomes: Defense R&D and Innovation,” American Affairs (Spring 2017). This could have been a “Sputnik moment” for Washington. Instead it took a presidential election, a trade war, and a pandemic to awaken many to the reality that we are no longer in a 1990s-vintage “strategic partnership” with Beijing, but a new Cold War.
“Cold War One could be thought of as an arms race, featuring two contestants running in separate lanes, striving for the finish line. Cold War Two will be more akin to a wrestling match, its contestants tangled up, seeking to exploit their leverage over each other, and straining, ultimately, to force the other to the mat.”
The United States must prepare for a strategic competition with Communist China as protracted and difficult as our contest with the Soviet Union. But the contest with China may be even more challenging than the Cold War. China is already wealthier than the Soviet Union at its peak, relative to the United States. It is also far more entangled with us economically. Cold War One could be thought of as an arms race, featuring two contestants running in separate lanes, striving for the finish line. Cold War Two will be more akin to a wrestling match, its contestants tangled up, seeking to exploit their leverage over each other, and straining, ultimately, to force the other to the mat.
While aspects of this competition are new, the strategy America needs to win is not: we must secure our independence by building our military.
The federal government will have to make strategic investments in advanced technology and critical infrastructure, just as we did during the Cold War with breakthrough scientific research at the national and corporate laboratories that laid the groundwork for the digital revolution. We can begin by increasing the federal research and development budgets for agencies like DARPA, so our scientists and engineers can get to work on technology that our military will field decades hence. We must also begin the laborious process of pulling our supply chains out of China for medicine, semiconductors, and other essential goods and making them here at home, using all the tools available to policymakers. Such investments pave the way for widespread prosperity and security, when combined with the dynamic capitalism that our communist adversaries cannot hope to emulate.
This strategy, combining strategic investment and private enterprise, is not an innovation of technocracy or the Cold War. Rather, it has always been the American system of innovation, which in its earliest years funded national arsenals that made innovators like Colt and Remington household names—and led to breakthroughs that made American manufacturing the envy of the world.
Our country built its way to preeminence despite being encircled and ensnared by hostile foreign powers. We can take solace in the fact that our situation is far less dire than it was back then. But there is still a great deal of work to be done to strengthen our nation.
Essays like the ones in this series can help us better understand our nation, shorn of the self-serving myths and pieties so common in Washington. More important, groups like American Compass can equip us with the policy to win our independence in a dangerous world, a task that cannot be outsourced to anyone else. We must do it for ourselves.
A long-standing intellectual tradition offers not only a comprehensive critique of market fundamentalism and consumerism, but also a constructive path forward.
America’s ability to meet the challenges of tomorrow rests on our conviction to turn a new economic page today.
The American system of innovation, combining strategic investment and private enterprise, made our nation’s industry the envy of the world. It can pave the way for widespread prosperity and security again today.