Efficiency works best when the system is stable. The question is what happens when it is not.
For the last thirty years, Western economic policy has largely been built around a single idea: that efficiency is strength. If goods, capital, and labor move freely, markets allocate resources to their most productive uses. Production shifts to wherever costs are lowest, and supply chains are organized around just-in-time principles (originally developed in Japanese manufacturing) to minimize inventory and eliminate redundancy. Consumers benefit from lower prices.
That system delivered real gains. It lowered costs, increased corporate margins, and supported decades of global growth. It also rested on a set of assumptions that were rarely questioned: that energy would remain abundant and accessible, that trade routes would remain secure, and that the global system would continue to be underwritten by a stable geopolitical order.
Assumptions are now being tested as tensions between major powers rise and economic relationships are used as instruments of leverage.
Those assumptions are now being tested as tensions between major powers rise and economic relationships are used as instruments of leverage. Energy has already been weaponized. Semiconductors are treated as strategic assets. Trade is no longer primarily about cost efficiency. It increasingly reflects control over supply, production, and access.
In that environment, the logic that governed the last several decades begins to weaken. The question is no longer only where something can be produced most cheaply, but whether it can be produced under stress at all. This is not a reversal of globalization, but a reweighting of its priorities. The difference is not ideological. It reflects a change in the conditions under which the system operates.
Economics Is Conditional
The efficiency framework worked because the conditions supporting it held. Markets allocate resources effectively when supply chains function, trade routes remain open, and economic interdependence does not itself become a source of risk. Ludwig von Mises and Friedrich Hayek1 were right that prices contain information no central planner can replicate. But that insight describes how the world functions under stable conditions. It does not describe how the system behaves when those conditions break down.
A different set of ideas emerges when stability can no longer be assumed. That is the tradition of Alexander Hamilton and Dwight D. Eisenhower. Both operated in periods when disruption was not theoretical: shaped by war, scarcity, and strategic competition. Their focus was not only on efficiency but also on production, logistics, and a country’s ability to sustain itself under pressure.
They were operating under a different constraint: ensuring the system could function even in the face of disruption. This creates a tension that is often implicit but rarely stated. The market-based view of economics describes how the world functions in equilibrium: decentralized, efficient, and governed by price signals. The strategic view describes how it functions when those conditions break down: shaped by power, geography, and constraint. Understanding that distinction is not the same as endorsing it, but ignoring it leads to systematic errors.
Hamilton & Industrial Independence
Hamilton’s views were shaped by the Revolutionary War, in which the primary constraint was not strategy but supply. The Continental Army struggled with financing, equipment, and provisioning. The fight for independence was nearly lost, not because of battlefield failure, but because the system behind the army was fragile.
His response, outlined in the Report on Manufactures 2, was to reduce that fragility. Hamilton argued that reliance on foreign production created a form of vulnerability. A country that depends on others for essential goods cannot fully control its own outcomes in a crisis.
Economic structure places a practical limit on political sovereignty. A nation that cannot supply its own essentials operates with constraints that are not visible in normal conditions, but become binding under stress.
His solution was to build domestic manufacturing capacity, supported where necessary by tariffs and subsidies. Hamilton recognized that markets alone would not produce the level of strategic capability required for independence, and that tariffs and subsidies were necessary to fill that shortfall in domestic capacity.
Eisenhower & the Infrastructure of Power
World War II demonstrated that industrial capacity and logistics were as decisive as military strategy.
Eisenhower reached similar conclusions at a different scale. World War II demonstrated that industrial capacity and logistics were as decisive as military strategy. The ability to produce equipment, move it across continents, and sustain operations determined outcomes.
As president, Eisenhower applied that lesson domestically. The interstate highway system was justified not only on economic grounds, but on strategic ones. Infrastructure was part of national defense.
At the same time, he recognized the risks of expanding state interventionism. His warning about the military-industrial complex3 reflected a concern that systems built for security could distort incentives and accumulate power in ways that were difficult to unwind.
Where Market Logic Falls Short
Markets remain the most effective mechanism for allocating resources under normal conditions. But they optimize for efficiency, not resilience. They reward specialization, concentration, and cost minimization.
These characteristics create strength in stable systems, but also introduce fragility. Supply chains become dependent on a small number of nodes. Production concentrates in regions that offer cost advantages. Redundancy is eliminated because it is expensive.
These risks are not always reflected in prices, particularly when disruptions are rare. Price signals tend to capture frequent, observable conditions, but underweight low-probability disruptions until they materialize. By then, the cost of adaptation is far higher than the cost of prevention would have been. As a result, systems can appear robust until they are tested. Markets do adapt to changing conditions, but they do so after constraints become visible, not before. In principle, that adjustment process can restore equilibrium over time. The issue is not whether markets respond, but whether they do so on a timeline compatible with strategic and political constraints.
The last several years have exposed those limits.
Chokepoints & Fragility in the Global System
What is driving this change is a clearer understanding of how the global system is actually structured.
What appears to be a diversified network is, in practice, a series of tightly coupled dependencies built around a limited number of critical nodes.
What appears to be a diversified network is, in practice, a series of tightly coupled dependencies built around a limited number of critical nodes. Energy flows through narrow maritime corridors. Fertilizer production depends on a small number of facilities and inputs. Semiconductor manufacturing relies on highly specialized supply chains with little redundancy.
Efficiency has been achieved by removing slack and concentrating production. That same process has created a structure where disruptions do not remain local. They propagate through the system.
A disruption to energy supply feeds directly into fertilizer production, which in turn affects food supply. Rising input costs move through the system until they appear as higher food prices, fiscal pressure, and, in more exposed economies, social instability.
The same logic runs through industrial systems. Constraints on specialized semiconductor components can delay both weapons production and data center buildouts, because the underlying inputs are shared. When slack is removed and production is concentrated, a single point of failure can affect multiple critical systems simultaneously. The point is to recognize the structure: disruptions do not stay local.
These dependencies were manageable as long as the system remained predictable. They are far less so once that predictability is in question. As those assumptions of stability weaken, the consequences become more pronounced. It is this structure, rather than ideology, that is driving the return of industrial policy.
The Return of Industrial Policy
Policy is now adjusting in response.
In the United States, the focus has turned toward rebuilding domestic capacity in sectors tied to national security and long-term competitiveness.
In the United States, the focus has turned toward rebuilding domestic capacity in sectors tied to national security and long-term competitiveness. Semiconductors, energy systems, and critical minerals are no longer treated as ordinary industries. Capital is being directed toward them through subsidies, tax incentives, regulatory pressure, and, in some cases, direct government participation.
Recent trade and tariff actions have gone further, using access to the U.S. market as leverage to secure investment commitments from both domestic and foreign firms. In certain cases, the government has taken equity stakes or attached conditions to financing, blurring the line between industrial policy and direct state involvement.
Europe has moved in the same direction. Germany has transitioned toward higher public spending after decades of restraint, alongside expanded defense commitments. Across Europe, governments are increasing investment in military production, energy security, and domestic manufacturing capacity, reflecting the same effort to rebuild industrial depth and reduce external dependence.
These policies are beginning to directly shape market outcomes. Investment decisions, supply chains, and capital flows are increasingly influenced by political priorities rather than solely by economic costs or returns. They are often framed as political or ideological shifts. In practice, they reflect a response to structural constraints rather than a shift in underlying beliefs. That response is not guaranteed to be efficient, but it follows from the constraints policymakers face.
The urgency behind these shifts reflects a more specific reality. The United States remains dependent on China and China-linked supply chains for critical inputs tied to military production, grid expansion, semiconductor manufacturing, and broader industrial continuity.
In some cases, those dependencies sit at upstream points in the system, where substitution is slow and domestic capacity is limited. Constraints in areas such as electrical equipment, rare earth materials, and specialized components do not remain isolated. They propagate into defense production, data center buildouts, and energy infrastructure.
When those dependencies exist within a geopolitical rivalry, they take on a different meaning. Market mechanisms no longer guarantee access to inputs. It can be constrained, redirected, or withheld. In that context, supply chains become potential points of leverage over the systems that sustain economic and military capacity.
This is what is advancing the shift from efficiency to sovereignty today. The objective of reshoring and similar efforts is not only to improve competitiveness, but to reduce the risk that critical dependencies harden into structural constraints over time.
From Molecules to Systems
The evolution underway is not only about where production takes place, but about what actually matters. The last phase of globalization was built around molecules. Oil, gas, and bulk industrial inputs defined economic and geopolitical power. Control over those resources, and the routes through which they moved, shaped global dynamics. That layer still matters, but it is no longer sufficient on its own.
Economic and military capability increasingly depends on systems built around energy infrastructure, semiconductors, and computing. These systems introduce a different set of dependencies, centered on advanced manufacturing, specialized materials, and technical concentration.
Policy is beginning to reflect this shift. The focus is not only on securing access to raw materials, but on controlling the infrastructure that processes energy, manufactures chips, and enables advanced technologies.
Implications for Capital
The investment implications follow directly from this shift in priorities. If the efficiency-first framework is being displaced by one that prioritizes control, resilience, and domestic capacity, then the sectors that were systematically underweighted during the globalization era (energy, industrials, and critical materials) are no longer peripheral. They are central.
That reallocation is not a trade. It is a structural repositioning that reflects a change in what the system values. Within that shift, the focus moves toward infrastructure, specialized industrial capacity, and upstream inputs where substitution is limited and geopolitical risk is highest, particularly in areas tied to energy systems, advanced manufacturing, and defense supply chains.
Investors do not allocate capital based on how they would prefer the world to function. Portfolios reflect the system as it exists, not as it should exist.
There is also a practical constraint. Investors do not allocate capital based on how they would prefer the world to function. In a stable system, open markets and secure trade can be taken for granted. But portfolios reflect the system as it exists, not as it should exist. When those diverge, the difference shows up in returns.
Concluding Thoughts
The shift underway is not a rejection of market economics, but an adjustment to new conditions.
Markets remain effective at allocating resources in predictable systems. But when predictability cannot be assumed, additional constraints come into play. Production capacity, supply chain control, and the ability to operate under disruption become more important.
Hamilton and Eisenhower approached economic policy from that perspective because they operated in environments where those constraints were binding. Their focus on logistics, production, and capacity reflected the conditions they faced.
Today, similar conditions are re-emerging.
A country that cannot produce essential goods, secure key inputs, or direct capital toward strategic priorities is limited in its ability to act independently. That limitation may not be apparent in stable periods, but it becomes clear when systems are tested.
The efficiency era did not end because markets failed. It ended because the conditions that made efficiency the right objective changed. Sovereignty reframes the objective without abandoning the underlying logic. That shift is not linear, and it does not eliminate the role of markets or global trade. It changes the balance between them, and with it, what portfolios must reflect.
The question is not which system is more appealing, but which one governs outcomes.
1 Ludwig von Mises, Economic Calculation in the Socialist Commonwealth (1920); Friedrich Hayek, “The Use of Knowledge in Society” (1945). Friedrich Hayek, The Road to Serfdom (1944).
2 Alexander Hamilton, Report on Manufactures (1791).
3 Dwight D. Eisenhower, Farewell Address (1961).
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Hill. No part of Mr. Hill’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. © Silvercrest Asset Management Group LLC
