外儒内法 is a simplified term.
Prior to the Emperor Hanwu (the one who adopted Confucianism as the official ideology and promoted 外儒内法), his father and grandfather all used 黄老之道 (the yellow elder’s way) to govern the Empire.
(This painting is trying to show how “relaxed” the society should be and how government should let go of everything like this 黄老/ old man on the left).
黄老之道 is quite similar to the classical point of view because they all prefer a small government and deregulation on economics as nature (market) would play as an invisible hand to work out the problems. In fact, Adam Smith, before he wrote the book the Wealth of Nations, was partly inspired by 黄老之道 in the early Han Dynasty translated and introduced by his friend who specialized in Chinese studies.
Anyway, since the Emperor Hanwu, it was well believed by historians that 外儒内法 had replaced 黄老之道. But is this true? Let me ask the people who believed in that way: How did the Ming Dynasty fall?
The answer is that the Ming Dynasty was bankrupted because of the low tax rate and commercialized farmland which replaced food production by goods production in Southeast China, imposed by the political leaders in the Imperial court. Wasn’t this precisely a practice of 黄老之道? (Similarly, Reaganomics and in a broader sense the neoliberalism all corresponded partly with 黄老之道).
(Emperor 崇祯/Chong Zhen was basically a poor man version Reagan. Of course, he had no choice because the imperial court had been hijacked by a bunch of “Republicans” who would let the country die than increasing the tax to take away their wealth).
Therefore, 外儒内法 wasn’t the dominant ideology in ancient China. The truth is, 儒(Confucianism, morality, regulation, big government, meritocracy), 法(legalism, rule, law, statecraft, centralized and authoritarian government), 道(deregulation, small government, loose control) all co-existed in ancient China and they in different periods could be marginalized, emphasized or mixed with others, with regard to the circumstances. They would create a lot of surprising combinations, such as 外道内法, 外法内道 and so on.
There is no perfect solution for which one is better as we observe today about the “democracy” in the West and the ongoing shutdown of the federal government of the US.
Now if we switch to modern China, it’s the same thing that 外儒内法 is an oversimplification:
1: In Deng’s period, it was more or less 道 in charge due to the need for social change and economic growth.
2: From 1989- 2010, it was more of less 外法内道 due to the political consequence of the 89 incident with however still the important need for economic development.
3: Since Xi Jinping, it starts to look more or less like 儒法道 兼之.
Firstly, the promotion of traditional values, morality, ideology became more and more apparent under his leadership, which means the return of 儒 in China.
Secondly, the “legalism” such as anti-corruption campaign, increasing censorship on the internet and medium, anti-terrorism and extremism campaign, restriction on religion reflect deeply the elements of 法 on the surface.
Thirdly, you gain more and more of “deregulation” in contrast with the West, such as the freedom of speech against the Western ideology (feminism, LGBTQ, Evangelicans) and Islam in public. Prior to 2012 and 2008 however, such opinions were definitely unattracted and unwelcomed and even oppressed in China by the government and the public due to the need for trades and the Western supremacy implanted in society, if anyone was familiar with internet and public opinion back then dominated by the 60s and 70s born. Nowadays people start to have the freedom to openly oppose Christianity, the Westernization, Islamists, feminism and so on. This freedom is clearly from 道.
So China in 2018 isn’t 外儒内法 but 儒法道 兼之(Three elements co-exist).