Reviving America’s Mixed Economy: Lessons from U.S. , China

In American Amnesia: How the War on Government Led Us to Forget What Made America Prosper (2016), Jacob Hacker and Paul Pierson argue that beginning in the late 1970s, the United States experienced a powerful ideological shift. Conservative movements and corporate interests championed “market fundamentalism”—the belief that government intervention inevitably stifles growth and freedom. This anti-government narrative drove deregulation, deep tax cuts for the wealthy, and the erosion of labor rights and social protections. Hacker and Pierson show how this widespread “amnesia” about the public sector’s role has contributed to crumbling infrastructure, rising inequality, and a weakened social contract.[1] Ironically, the economic model that once underpinned U.S. prosperity—a pragmatic mix of public investment and market incentives—can today be seen in China’s system, which combines state planning, industrial policy, and market mechanisms to guide growth.

Reviving the Mixed Economy: Lessons from U.S. and China

The historic prosperity of the United States was built on a “mixed economy” — a careful balance between public power and private enterprise. From the New Deal through the mid-20th century, the U.S. government played a central role in ensuring economic stability, investing in science and infrastructure, regulating markets, and supporting broad-based growth. Public institutions were essential in channeling resources toward long-term development and in creating an environment in which private enterprise could thrive.

However, this model is now under threat. Since the late 1970s, a wave of anti-government ideology, driven by neoliberalism, market fundamentalism, and corporate lobbying, has undermined the very structures that sustained prosperity. Deregulation, cuts to social safety nets, and the retreat from active governance have weakened the nation’s capacity to address collective challenges. The erosion of regulatory frameworks — from environmental protections to consumer safety rules — alongside reductions in public investments in education, infrastructure, and health, has contributed to rising inequality, leaving wealth increasingly concentrated in the hands of a few.

Ironically, while the U.S. has moved away from its own successful formula, China has embraced a pragmatic “mixed economy” that mirrors the model the United States once exemplified. Beijing combines state-directed investment and industrial policy with vibrant private enterprise, channeling national resources toward long-term technological advancement through initiatives such as semiconductor subsidies and “Made in China 2025.” In doing so, China applies the very principles of public-private collaboration that historically underpinned U.S. innovation, from NASA and DARPA to Cold War-era research and development. The lesson is clear: markets alone do not ensure national strength — robust public institutions are essential.

The Role of Government in Innovation and Industrial Development

A mixed economy relies on both private enterprise and government intervention to drive economic growth and innovation. In the United States, markets dominate the production of goods, allocation of resources, and technological innovation, with companies like Apple exemplifying entrepreneurial ingenuity. Visionaries such as Steve Jobs harness existing knowledge and technology to create products that fulfill consumer demand while generating significant profits. Yet the success of such private enterprises cannot be fully understood without recognizing the foundational role of government. Far from being a passive actor, the government actively shapes the environment in which markets thrive, particularly through investments in research, infrastructure, and human capital.

Government-funded research has been critical to many technologies that underpin private-sector innovation. For example, the iPhone’s development relied heavily on publicly funded advancements in GPS, lithium-ion batteries, cellular technology, and internet infrastructure. These technologies are costly to develop and non-rivalrous, meaning that once created, multiple companies can utilize them without diminishing their utility. Additionally, government investments in education, healthcare, and social safety nets cultivate a skilled workforce capable of pursuing entrepreneurial ventures and technological breakthroughs.

China’s approach to industrial policy demonstrates a more centralized and strategic use of government intervention. Beginning in the mid-2000s, the Chinese government identified electric vehicles (EVs) and batteries as a strategic industry under its Made in China 2025 plan. By coordinating policy, subsidies, low-interest loans, local production mandates, and support for domestic champions such as CATL and BYD, China fostered a state-backed ecosystem that encouraged investment, research and development, and economies of scale. The government also secured control over upstream materials, including lithium, cobalt, and manganese, while building efficient infrastructure and logistics to lower production costs.

China’s advantages were further amplified by its massive domestic EV market, which allowed firms to scale rapidly, gather extensive operational data, and refine manufacturing processes. Through continuous innovation, Chinese companies have improved cost structures, developed new battery formats, and invested in next-generation technologies like solid-state and sodium-ion batteries. By contrast, the U.S. and Europe underinvested in domestic manufacturing capacity, fragmented policy support created uncertainty, and reliance on overseas supply chains eroded industrial know-how. Even American firms such as Tesla now rely heavily on Chinese suppliers, underscoring the strategic consequences of coordinated government action in shaping industrial leadership.

In sum, both the U.S. and China illustrate that while private enterprise drives innovation, the government’s role—through research funding, strategic planning, industrial policy, and infrastructure development—is essential in creating the conditions for technological and industrial success. The contrast between U.S. invention and Chinese industrialization highlights how government strategy can determine whether innovation translates into global market dominance.

Infrastructure and Economic Stability

The role of government in economic development extends far beyond direct support for research, education, or welfare. It is central to providing the physical and economic infrastructure upon which businesses depend. Monetary policy, managed by institutions such as the Federal Reserve, stabilizes the economy by regulating money supply, interest rates, and financial conditions. Without such stability, businesses face unpredictable inflation or deflation, undermining long-term investment and growth. Similarly, physical infrastructure—roads, bridges, airports, ports, and utilities—serves as a public good critical for commerce. Firms like Apple rely on government-built infrastructure to bring products to market, highlighting that markets, while powerful, cannot function effectively in a vacuum. Government intervention ensures the provision of essential public goods, a stable financial system, and a skilled workforce—resources that private markets cannot supply alone.

The contrast between the U.S. and China illustrates the impact of differing economic models. China’s pragmatic “mixed economy,” which blends state planning, industrial policy, and market incentives, has proven resilient in times of crisis. During the 2008 Global Financial Crisis, the U.S. struggled with a fragile, market-driven recovery, while China launched one of the largest stimulus packages in history—approximately 4 trillion yuan ($586 billion)—focused on infrastructure, construction, and industrial expansion. This approach rapidly stabilized domestic demand, expanded industrial capacity, and strategically positioned China in key sectors such as 5G, electric vehicles, and green technologies. Meanwhile, the U.S., adhering to a laissez-faire, finance-centered model, saw Wall Street recover but Main Street remain weakened, revealing vulnerabilities in its industrial base and economic resilience.

The disparity is further evident in global infrastructure initiatives. China’s Belt and Road Initiative (BRI) leverages state-owned enterprises and state-backed banks to undertake high-risk, large-scale projects, accepting lower financial returns in pursuit of strategic influence. By contrast, U.S.-led efforts such as the Build Back Better World (B3W) or the Partnership for Global Infrastructure and Investment (PGII) have struggled due to private-sector risk aversion and the absence of robust federal machinery for direct investment. Since the 1980s, the U.S. has shifted from industrial capitalism to financial capitalism, emphasizing efficiency, services, and innovation over heavy infrastructure investment. Decentralized governance, eroded industrial capacity, and political polarization have further weakened the nation’s ability to execute large-scale infrastructure projects comparable to the Eisenhower-era Interstate Highway System or postwar Marshall Plan.

China’s model challenges conventional neoliberal orthodoxy by demonstrating that long-term economic stability, social cohesion, and strategic positioning may require active state involvement alongside market mechanisms. Its multi-track economy—combining state enterprises, private firms, local government interventions, and market speculation—illustrates the limits of uniform, textbook-style market regulation. For policymakers in the West, China’s experience underscores the importance of tailoring economic governance to sector-specific realities rather than prioritizing short-term efficiency and consumption. In sum, the comparative evidence suggests that effective government intervention, industrial strategy, and infrastructure investment are critical not only for domestic economic stability but also for sustaining global competitiveness.

The Limits of Markets: When the Invisible Hand Fails

Markets, while remarkably effective at responding to individual preferences, are not perfect and often fail to produce socially optimal outcomes. As Adam Smith, the economist who famously described the “invisible hand,” acknowledged, markets can falter in critical areas where private incentives diverge from societal needs. One major limitation is the underinvestment in public goods such as education, infrastructure, and scientific research. These goods are essential for long-term prosperity but are often inadequately provided by private markets, as firms cannot capture all the benefits of their provision. For instance, basic scientific research, which underpins technological innovation, is typically publicly funded due to its high costs and inherent risks.

Markets also struggle to account for externalities—spillover effects that impact society beyond the immediate transaction. Negative externalities, such as pollution, impose costs on society that firms often ignore, necessitating government intervention through regulation or taxation to internalize these costs. Conversely, positive externalities, including education and basic research, generate widespread societal benefits that markets alone may fail to encourage. Government support in these areas ensures broader social gains that exceed the incentives driving private actors. Additionally, markets require oversight to protect consumers and investors from fraud, monopolistic practices, and short-sighted decision-making. Policies such as smoking bans or retirement savings programs help mitigate myopic behaviors, while social insurance programs—including healthcare, unemployment benefits, and pensions—provide economic security that allows individuals to navigate financial risks without falling into poverty.

The interplay between markets and government can be likened to a hand: the market functions like nimble fingers, responsive to immediate consumer demands, while the government acts as the thumb, providing strength, direction, and counterbalance to ensure systemic stability and equitable outcomes. This metaphor underscores the necessity of collaboration, where government guidance complements market efficiency to achieve socially beneficial results.

Moreover, there is no single “correct” model of a market economy. Different countries have developed distinctive approaches tailored to their historical, cultural, and institutional contexts. For example, the Anglo-American model emphasizes entrepreneurship and finance; the German-Japanese model focuses on industrial policy and coordinated networks; the Nordic model prioritizes social welfare and human capital; and the Israel-Singapore model combines strategic state intervention with high innovation intensity. China exemplifies a selective synthesis of these models, integrating elements such as state-owned enterprises under the supervision of SASAC, while learning from Singapore’s Temasek Holdings approach. This flexible, adaptive strategy enables China to avoid the pitfalls of market fundamentalism, leverage international experience, and respond dynamically to evolving domestic and global conditions.

The Deteriorating Performance of the U.S.

Over the past several decades, the United States has seen a marked decline in areas that were once its hallmarks of global leadership. In human health, the nation now grapples with rising obesity, chronic illness, and stagnating life expectancy, despite its historic dominance in medical innovation. Education, once a strong driver of social mobility, has stagnated, with increasing inequality limiting access to high-quality learning opportunities. Economic opportunity is waning as younger generations, particularly from lower-income backgrounds, struggle to achieve upward mobility, while income inequality continues to widen, and the middle class—the traditional backbone of American prosperity—shrinks. Many of the country’s apparent successes, such as certain health outcomes, reflect past investments rather than ongoing improvements, masking the deteriorating trajectory facing younger Americans, who confront stagnant wages, soaring student debt, and declining standards of living.

This decline is closely tied to the erosion of the mixed economy model that fueled American exceptionalism in the 20th century. Historically, capitalism drove innovation and growth, while government investments in infrastructure, education, public health, and regulation ensured that prosperity was broadly shared. Initiatives such as the GI Bill, Social Security, and major public research programs strengthened the middle class and positioned the U.S. as a global leader in science, medicine, and social policy. Yet in recent decades, political polarization, corporate influence, deregulation, and privatization have weakened the government’s capacity to provide essential services and coordinate long-term investments, undermining both economic performance and social cohesion.

The failure to adapt governance structures to contemporary challenges—ranging from climate change and health disparities to global technological competition—represents not an inevitable decline but a lapse in strategic vision. America’s historical strengths rested on a synergistic partnership between public institutions and private markets; without reinvigorating these institutions, the nation risks forfeiting its competitive edge. Technological leadership, rising global competition, and societal resilience are no longer simply market outcomes—they are civic projects that require competent government, coordinated investment, and public trust. Rebuilding public capacity through strategic industrial policy, investment in research and development, education, infrastructure, and social programs is, therefore, not only an economic imperative but a core element of national security. In the ongoing U.S.-China competition, the critical question is which political economy can better integrate state and market capacity to sustain long-term innovation and national strength.

Conclusion

Markets are powerful drivers of innovation and prosperity, but they are not infallible. Government intervention is essential to mitigate market failures, ensure fairness, provide public goods, and protect consumers. The American economy flourished not through unfettered markets, but through a robust partnership between democratic government and private enterprise—a mixed economy that balances public authority and private initiative. However, beginning in the late 1970s, economic crises, ideological shifts, and organized political efforts began to delegitimize government’s role in the U.S. economy, eroding the very foundations of this partnership.

Today, the U.S.–China tech rivalry illustrates that economic competition is not merely geopolitical but also ideological and institutional. China’s “mixed economy” reflects a state-market synthesis that historically enabled American prosperity. If the United States fails to rebuild public capacity, strategic coherence, and confidence in government, it risks decline—not merely because China has risen, but because America has forgotten the principles that once fueled its own success.

References

[1] American Amnesia: How the War on Government Led Us to Forget What Made America Prosper, Jacob Hacker and Paul Pierson, 2016

Reviving America’s Mixed Economy: Lessons from U.S. and China