Capitalism: Myth and Reality, Part 1... The American Tradition
Market and state intervention
Free market activity, in the absence of government intervention, is often assumed to be the primary cause of success and prosperity of major developed countries. The reality is more complex. While it is true that the free market has had a largely positive effect in those societies, their prosperity is owed just as much if not more to state intervention. Beliefs to the contrary constitute some of the greatest economic myths of our time.
Capitalism and mercantilism in early America
The United States is typically believed to be the paragon of free market capitalism in the modern era. In reality it is, as economic historian Paul Bairoch has said, the “mother country and bastion of modern protectionism.” Contrary to popular belief, the US owed its fantastic growth in the 19th and early 20th centuries primarily to policies and initiatives originating with the government, not especially to the invisible hand.
It all started with the brilliant first Secretary of the Treasury, Alexander Hamilton, whose emphasis on protectionism, tariffs, infrastructural development and central banking laid the foundation of an industrial powerhouse. Hamilton’s contemporary intellectual opponent, Thomas Jefferson, supported instead a decentralized, noninterventionist model of weak state power. Jefferson is known to have looked askance at industry, big business and urban life in general, lionizing instead the romance of simple farm life in the country. History has shown us which of these two socio-economic models has led to American success.
Hamilton was also instrumental in the creation of a system of government debt, and the financial markets to go along with it. Central banking, in fits and starts, ultimately became a reality for the United States. It continues to be one of the most important and most obvious examples of central government intervention in the market.
State intervention in the US economy
The government construction or funding of railroads, highways and canals provided obvious benefits, not the least of which accrued to the private sector itself. And the state played a vital role in land grants and the construction of the transcontinental railroads. But often overlooked are the subsidies and protection lavished on American manufacturers and “infant industries” (a concept coined by none other than Alexander Hamilton).
Beginning early in the 19th century and continuing past the Civil War, American tariffs and duties on imported manufactured goods were very high (particularly from a modern perspective), typically between 20 and 50%, and sometimes as high as a whopping 60% on certain categories of goods*. Long story short, the US was the most heavily protected economy on earth for most of the 1800s and well into the 20th century. It is no coincidence that it grew to become the world's most important manufacturing power during this time.
Objections to these facts may center on the failure of many government initiatives during this period, or the unintended consequences they resulted in. Of course it would be ludicrous to argue that 100% of government actions had positive results. But the same could be said for the private sector. Not every private venture is a success, and many result in spectacular failures. More to the point, even the strictest libertarian knows that a purely laissez faire economy will experience cyclical downturns--in other words, declines in prosperity brought on by the free market.
The main point is that the state has not been an unmitigated failure for economic development. Indeed, quite the contrary is true: effective and well-managed state intervention has been not only a net positive, but has been universally vital for the process of economic development. This historical fact will become clearer as this series continues. In the next edition, we will take a look at the United Kingdom, another society for which myths abound.
*Source: Paul Bairoch. Economics and World History: Myths and Paradoxes. University of Chicago Press, 1993
More by this Author
Economic and fiscal arguments for progressive taxation.
Economic justifications for progressive taxation. The rich are not as affected by tax increases as other groups, the rich will always pay more in taxes, and high inequality and low interclass mobility are bad.
The rich should pay more in taxes than the middle class or poor. A moral argument for why tax rates should increase as income increases.