The venture capitalist state and its contradictions

The Washington Examiner poses a tension that ought to trouble anyone who thinks carefully about how modern economies actually work: the Trump administration is, in its own telling, both the champion of dynamic private markets and the architect of aggressive state intervention — picking sectors, imposing tariffs, steering capital through political preference. The piece calls this a "venture capitalist state" wearing a MAGA hat over a central-planning suit. The metaphor is apt, and the problem it identifies is real.

Now, I want to be scrupulously fair to the case on the other side, because it is not a contemptible case. There is a long tradition — Hamilton in America, the developmental states of East Asia — of government deliberately tilting the playing field toward industries it wishes to cultivate. And there are market failures: agglomeration effects, externalities, strategic interdependencies, that no pure price signal will resolve unaided. I have never argued that the state should be passive. Quite the opposite: I argued that the state has a duty to act when private investment is insufficient to sustain full employment.

But — and this is the distinction I would press hard — supporting aggregate demand is a fundamentally different enterprise from directing which firms and sectors shall prosper. When a government runs a deficit to employ idle workers building roads and hospitals, it is filling a hole that private animal spirits have left vacant. When a government imposes a 25-percent tariff on a trading partner's steel to advantage a favoured domestic constituency, it is not filling a hole — it is digging one somewhere else and hoping no one notices. The consumer who pays more for a refrigerator, the exporter who loses a foreign market in retaliation, the firm that cannot source its inputs affordably: these are the invisible losers in every visible industrial triumph.

There is also the problem of what I might call political animal spirits. Private investors are swayed by confidence, narrative, and uncertainty in ways that defy purely rational models — I spent considerable effort establishing that point. But political actors are swayed by electoral animal spirits, which are even less tethered to long-run economic consequence. The venture capitalist who backs a losing firm loses money. The politician who backs a losing industry loses — perhaps — a future election, but not before the subsidies have flowed. The incentive structure is asymmetric in a way that should give even the most ardent interventionist pause.

The deeper question the Washington Examiner story raises — though it is inference on my part, since I am working only from the lead — is whether this administration has a coherent theory of what it wants the economy to produce, or whether the interventions are post-hoc rationalisations of political relationships. A state that truly wished to build industrial capacity would invest in workforce training, in public research, in infrastructure that raises productivity across the whole economy. That is fiscal policy in service of supply. What is being described sounds more like fiscal policy in service of narrative — of appearing to command outcomes that markets are being prevented from delivering naturally.

The lesson I would offer is this: the state has a legitimate, even necessary, role in sustaining demand and correcting market failures. But legitimacy requires discipline — a clear theory of the failure being corrected, a sunset on the intervention, and accountability for the result. A venture capitalist, even a bad one, eventually faces a reckoning when the portfolio is marked to market. The state, wearing that same title, must be held to no lesser standard. Otherwise what we have is not industrial policy; it is patronage dressed in the language of competitiveness. And patronage, history suggests, is rather better at distributing costs than at creating wealth.