Subsidizing the Visible Hand: California’s Departure from 1776
As the United States celebrates the semiquincentennial of its founding in 1776, it is worth reflecting on a remarkable historical coincidence: the birth of our nation occurred the same year Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations.
Smith’s seminal work articulated the concept of the invisible hand, positing that individuals acting in their own self-interest within a free market generate far greater societal prosperity than any central government planning could achieve. Published months before the Declaration of Independence, Smith’s argument against mercantilism was absorbed by founders like Jefferson, who called it the best book extant on political economy. The framers later embedded its free market-logic in the Constitution by forbidding states from taxing interstate commerce.
For generations, these ideas formed the bedrock of American exceptionalism and propelled California into becoming an unparalleled economic powerhouse.
Unfortunately, Sacramento policymakers have spent recent decades aggressively rejecting these foundational ideas, treating market forces as an enemy to be managed rather than an engine to be cultivated. State leaders have increasingly replaced free enterprise with suffocating regulations, endless mandates, and confiscatory taxation.
California lawmakers have abandoned the free market-principles that made the state successful. While top-down central planning is severely damaging the state’s fiscal and demographic health, California is currently being saved from total collapse only by the sheer volume of private venture capital in the technology sector and the public companies created by the Silicon Valley VC ecosystem.
The results of this ideological shift away from the invisible hand are increasingly difficult to ignore. Despite enjoying a historic $100 billion surplus just a few years ago, the insatiable appetite for spending in Sacramento has created a severe fiscal crisis. The nonpartisan Legislative Analyst’s Office recently projected that California faces an ongoing structural deficit that could reach $35 billion by the 2027 to 2028 fiscal year.
When demand for their product or service declines, private organizations react by downsizing or closing. But public sector entities often fight for survival by floating bonds and raising taxes. They are often far less willing to reduce their footprint when demand shrinks. Consider Los Angeles Unified School District, which has lost more than 300,000 students since its enrollment peak yet cut its number of operating schools by less than 5 percent, keeping half-empty campuses open at considerable cost to taxpayers.
Consequently, productive residents are voting with their feet. The U.S. Census Bureau estimates the state population dropped to 39.35 million in 2025, marking a net loss of over 200,000 residents since the 2020 census. Middle class families and legacy businesses are fleeing an environment where the cost of living and the cost of compliance have become unbearable.
Despite these self-inflicted wounds, California continues to be buoyed by the gravitational pull of private capital. While state bureaucrats attempt to micromanage the economy, free-market dynamics in the technology sector are single-handedly preventing a total fiscal collapse. Venture capital continues to pour into Silicon Valley at record rates, driven by a massive boom in artificial intelligence.
In 2025, California companies captured $191.2 billion in venture capital, roughly 60 percent of the national total, with much of that concentrated in foundational AI platforms like OpenAI and Anthropic. This influx of private investment ultimately generates the immense capital gains tax revenues that state lawmakers eagerly redistribute to mask their own administrative failures.
The invisible hand is working overtime to subsidize the visible hand of the state.
If California is to remain competitive for the next 250 years, policymakers must acknowledge that government planning cannot endlessly ride the coattails of private sector innovation. Rather than seeking out new avenues for wealth taxation or bureaucratic expansion, Sacramento needs to embrace the fundamental lessons of 1776 by reducing regulatory burdens, cutting taxes, and letting market forces work.
Unless the legislature makes a hard pivot back toward fiscal restraint, the next inevitable dip in the venture capital cycle will expose a massive revenue shortfall, forcing a painful reckoning that artificial intelligence wealth will no longer be able to conceal.
Marc Joffe is a Visiting Fellow at California Policy Center.