With 2026 marking the 250th anniversary of both the American Revolution and Adam Smith’s Wealth of Nations, it is worth remembering the role the East India Company played in both. It was the Company’s monopoly on legal tea imports to the colonies that helped spark the Boston Tea Party, and much of Book IV of Smith’s work is devoted to a devastating critique of the Company, particularly the perverse incentives created by its structure as a public-private hybrid.
This is not merely a historical curiosity in this semiquincentennial year. Today, public-private hybrid companies are a favored tool of industrial policy on both the nationalist right and the progressive left. Proponents argue that public ownership stakes in strategically important firms can harness private enterprise for public purposes. Whether it is the Trump administration’s equity stakes in firms such as Intel or Senator Sanders’s proposal for a public sovereign wealth fund to acquire 50 percent ownership of leading AI companies, the intent is the same. Yet Smith’s warnings about the East India Company should remind us that this arrangement is bad for commerce, bad for government, and bad for constitutional accountability.
“Sharing the Gains”
What Trump and Sanders have in common is that neither is calling for outright nationalization in the public interest (although Ezra Klein has done so, proposing a “public option” large language model). Instead, they favor different mechanisms for embedding public power within private enterprise. Both cloak the idea in the language of “sharing the gains,” but both are equally clear about the importance of state direction. Intel’s own press release described the equity stake as an $8.9 billion government investment tied to “key national priorities.” Sanders says his public ownership model would “give the public a direct role in determining the future of this technology.”
Smith’s indictment of the East India Company focused heavily on its role as the governing power over large parts of India. The Company possessed territorial authority, military power, the ability to raise taxes, and political protection at home. At the same time, it distorted trade, prices, and capital allocation throughout Britain. In many respects, the Company’s vices stemmed from its position as an arm of the British state.
Obviously, neither Intel nor AI companies possess territorial power, but the underlying confusion of roles is similar. While the firm remains formally private, its fortunes become politically significant to the state, which simultaneously acts as regulator, funder, and investor.
“A Strange Absurdity”
It is worth considering how the East India Company came to occupy such a position. Initially, it was genuinely a trading company, operating under an exclusive British government charter. Owing to the realities of the time, its operations came under threat from local powers, and it took steps to defend itself.
In what may be the clearest example of the principal-agent problem in history, its agent Robert Clive not only defeated local forces in the field but also extracted from the weakened Mughal sovereign formal authority to raise revenue, despite having no mandate from the Company’s directors to do so. Having secured what may be the greatest prize ever won by rent-seekers, the Company seemingly accepted its new role without hesitation and folded it into its corporate operations. As Smith observed, “Trade… they still consider as their principal business, and by a strange absurdity regard the character of the sovereign as but an appendix to that of the merchant.”
The result was that the Company entangled Britain in the government of India. By the 1770s, it had become, in modern parlance, too big to fail. Its bailout by the government in 1773 included the infamous Tea Act, which sought to facilitate repayment of its £1.4 million government loan by granting the Company a monopoly on selling its vast stockpile of tea in the American colonies without paying duty in Britain. This undercut colonial merchants and helped provoke the Boston Tea Party and everything that followed.
Alongside the Tea Act, Parliament passed the Regulating Act, which attempted to address corporate mismanagement by appointing a Governor-General of Bengal, Warren Hastings, who was tasked with maximizing revenue to help repay the loan. But this did not create clear accountability. It merely drew Parliament more deeply into the Company’s governance of India, culminating in the Burke-led impeachment of Hastings over abuses committed in the name of revenue, order, and imperial necessity. While this is an extreme example, it vividly illustrates the dangers that arise when government becomes too closely intertwined with a company deemed both too important to fail and essential to national priorities.
The distortions to commerce are also important, as America’s tea merchants discovered. Commerce depends on competition, consumer preferences, and clear price signals. State-backed ownership replaces or distorts all three with political priorities and bureaucratic selection. Favored firms attract capital not simply because they are productive, but because they enjoy political support.
Rival companies are no longer competing solely against another firm, but against the Pentagon, the Treasury Department, the Department of Commerce, and all the tools at those agencies’ disposal — not to mention the incentives facing industry regulators. This encourages management at both favored firms and their competitors to become more political and less focused on consumers.
As Smith wrote, “Every derangement of the natural distribution of stock is necessarily hurtful to the society in which it takes place.” That concern applies directly to both the administration’s approach and Sanders’s proposal, each of which centers on government ownership stakes. When a company’s primary focus becomes satisfying its most important shareholder, it is necessarily less focused on serving its customers. The result is less innovation, weaker competition, and, in some cases, taxpayers ultimately footing the bill for failure. Where, one might ask, is the American tea industry today?
A Conflict of Interest
This arrangement is not just bad for the company and the consumer-citizen; it is also bad for government itself. The American constitutional system rests on the rule of law, separated powers, and laws of general applicability. Government is supposed to set the rules, not acquire a financial interest in particular market participants. Once it has a financial stake in the success of a company, its neutrality becomes suspect. A host of potential distortions emerge: favoritism, procurement bias, antitrust discretion, favorable export licensing, advantageous permitting, and selective enforcement.
That is not to say there is no case for these policies. China’s model creates real security risks that government has a duty to address. Semiconductors are strategically important, and domestic fabrication capacity does matter. The administration can also argue that it has taken only a passive stake, with no authority over Intel’s board.
However, the argument that the stake is passive rests on an illusion. Management generally wants to please shareholders, and it generally wants to please regulators. When the same institution serves as both shareholder and regulator, passivity becomes a legal fiction. The pressure does not have to be written into a stock agreement to be felt in the boardroom. Nor is there any guarantee that future governments will remain as passive. Elections have consequences.
The Perils of Nationalization
Sanders’s case is more direct. He argues that every citizen should benefit from the profits of AI companies, not just founders and investors — and especially not while workers bear the costs of job displacement. This is traditionally the argument advanced for outright nationalization, and Sanders’s proposal shares many of nationalization’s features. In many privatizations, governments retained special “golden shares” or large residual stakes, preserving political influence even after formal private ownership had begun. Over time, many such arrangements were curtailed, including in Europe, where they conflicted with the free movement of capital — an interesting example of the European Union’s liberalizing tendencies in its earlier years.
Otherwise, the same objections that apply to nationalization apply to Sanders’s proposal, and they are largely the ones outlined by Smith. The public-private firm suffers from distorted incentives, to the detriment of consumers, citizens, and innovation alike. Public ownership on that scale would make government both umpire and shareholder, with incumbents’ market positions treated as public assets.
Government is not without tools to secure its objectives even without owning part of a company. It generally possesses regulatory authority, can use procurement power to secure or stockpile critical supplies, and can fund research (preferably through prizes rather than grants, which share many of the problems associated with public ownership). Most importantly, it can establish general rules that foster competition while rewarding innovation.
Smith’s fundamental warning was that public power and private profit become dangerous when fused within the same corporate form. The East India Company began as a private corporation legitimately defending itself against predation by sovereign powers, but it ended as a sovereign power jealously defending its own privileges. Its officers could invoke the public interest while destroying rivals and exploiting the people of the American colonies to their breaking point.
America does not need its own version of the Company with better marketing.
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