Capitalism and the Economic History of the United States

by | May 25, 2021 | Economics

The development of all the institutional features of capitalism is well illustrated by the economic history of the United States.

An excerpt from Chapter 1 of Capitalism: A Treatise on Economics, Volume I.

The development of all the institutional features of capitalism is well illustrated by the economic history of the United States. Of course, the United States was by no means the perfect model of a capitalist country. Negro slavery existed, which denied all freedom to blacks and prevented them from pursuing their material self-interests. This was in total contradiction of the principles of capitalism. And other important contradictions existed as well, such as a policy of protective tariffs, public canal and turnpike building, the government’s claim to ownership of the western lands and its consequent ability to use land grants to subsidize uneconomic railroad building, and, very important, the government’s promotion of the use of debt as backing for paper money, which repeatedly resulted in financial panics and depressions when substantial debtors failed, as, in the nature of the case, they had to.37

Nevertheless, the history of the United States shows a government committed in principle to upholding the freedom of the individual and, for the white population, doing so in fact to a degree never achieved before or since. And thus, following the establishment of the United States, we observe a century-long process of the appropriation of land and establishment of private property and private ownership of the means of production, as people were made free to appropriate previously ownerless territory and moved west to do so. This period represents the most important historical example of the process of establishing private property and private ownership of the means of production described in the preceding section. By and large, the settlers simply moved into what was virtually an empty continent and made major portions of it into private property by direct appropriation from nature. The private property that exists today in the United States can generally be traced back, through intervening purchases and sales, to such original appropriations from nature.38

The history of the United States was also characterized by the rapid development of the division of labor and the growth of a monetary economy. The largely self-sufficient pioneers of colonial times were succeeded by farmers producing more and more for the market and buying goods in the market, including all manner of equipment and other aids that greatly increased their ability to produce. The result of the rising productivity of labor in agriculture was a steady shift in population away from farming and toward towns and cities, which sprang up in the wilderness and grew rapidly as centers of an ever more prosperous commerce and industry.

The growing concentration of farmers on producing for the market and the movement of more and more of their sons and daughters to the towns and cities to find employment constituted the actual building of a division-of-labor society. This was a process that was dictated by considerations of self-interest on the part of millions of individual people. Each individual farmer who devoted his labor to producing crops for the market did so because he judged that he would be better off with the products he could buy with the money he earned than he would be with the products he could produce for himself with the same labor. Each individual son or daughter of a farmer who moved to a town or city to find employment did so because he judged that he would be better off by doing so—that the income to be earned in a town or city exceeded the income to be made as a farmer and any allowance for the self-produced goods and other benefits associated with living on a farm. Thus, the self-interested actions of millions of individuals is what created a division-of-labor society in the United States and everywhere else that it exists.

The security of property made the American people both industrious and provident, because they knew that they could keep all that they earned and be able to benefit from all that they saved. (There was no income tax prior to 1913.) Not surprisingly, they were considered to be the hardest-working people in the world. And their consequent high rate of saving ensured that each year a substantial proportion of their production took the form of new and additional capital goods, which had the effect of increasing their ability to produce and consume in succeeding years.

The freedom of production in the United States led to an unprecedented outpouring of innovations—to the steady introduction of new and previously unheard of products and to the constant improvement of methods of production. This, along with the constant availability of an adequate supply of savings to implement the advances, produced the most rapid and sustained rate of economic progress in the history of the world.39

In the process, some individuals achieved enormous personal wealth and distinction. But their success was not the cause of anyone else’s impoverishment. It was, on the contrary, precisely the means whereby the general standard of living was raised and all were progressively enriched. For these individuals made the innovations and built the industries that were the source of the growing volume of goods enjoyed by all.

And, overall, guiding the entire process of production in the American economy were the profit motive and the price system. The “dollar-chasing Americans,” as they were called, were vitally concerned with earning money. Calculations of profit and loss governed every business decision and, therefore, practically every decision concerning the production of goods and services. Because of the freedom of competition, those business firms succeeded which found ways to reduce their costs of production and offer better goods at lower prices—earning high profits by virtue of low costs and large volume.

The economic history of the United States can be understood on the basis of a single fundamental principle: people were free and they used their freedom to benefit themselves. Each individual was free to benefit himself, and the necessity of respecting the freedom of others necessitated that he benefit them as well if he was to have them as workers, suppliers, or customers. Because people had the freedom and the desire to benefit themselves, they went ahead and virtually all of them actually succeeded in benefitting themselves.

In 1776 the present territory of the United States was an almost empty continent, whose cities either did not exist or were little more than coastal villages. Its population consisted of approximately half a million Indians, who lived on the edge of starvation, and three million settlers, most of whom were semi-self-sufficient farmers living in extreme poverty. In less than two centuries, it was transformed into a continent containing the two hundred million richest people in the history of the world; a continent crisscrossed with highways, railways, telephone and telegraph lines; a continent filled with prosperous farms and dotted with innumerable towns and cities that were the sites of factories using methods of production and producing all manner of goods that probably could not even have been imagined in 1776.

One should ask how the United States’ economy got from where it was then to where it is even now. One should ask how Pittsburgh, Cleveland, Detroit, Chicago, St. Louis, San Francisco, Los Angeles, Houston, and Dallas came to be the great cities they all were, not very long ago, and, for the most part, still are. One should ask how New York City grew from a population of twenty thousand to eight million, and how Boston and Philadelphia could increase in size thirty-five and one hundred times over. One should ask where all the means of transportation and communication, all the farms and factories, houses and stores, and all the incredible goods that fill them came from.

The answer, as I say, is astoundingly simple. What was achieved in the United States was the cumulative, aggregate result of tens of millions of people, generation after generation, each pursuing his individual self-interest—in the process, necessarily helping others to achieve their self-interests. And what made this possible was individual freedom.

Thus, eastern farmers realized that the land in the Midwest and West was better for many purposes than the land in the East, and that a higher income was to be made by moving there. And so they moved. Merchants realized that these farmers needed supplies and that money was to be made in supplying them. And so they opened clusters of stores and built their houses at supply points in proximity to the farmers, thus laying the base of towns and cities. They made money and expanded their operations. Others perceived the growing trade and the money to be made in improving transportation to the new regions. They built barge lines and stagecoach lines, then steamship companies and railroads, and made money.

Businessmen and inventors, often one and the same, were constantly on the lookout for the new and the better. They discovered and introduced thousands upon thousands of improvements both in products and in methods of production, with each new advance serving as the base for something still newer and still better. These businessmen and inventors built the factories and the industries that made the cities and towns. The rest of the population, always on the lookout for better jobs, recognized the advantages of employment in the new industries and the new cities and so took the ever improving, ever better-paying jobs they offered.

All this happened because it was to the rational self-interest of individuals to make it happen and because no one could use force to stop them from making it happen. The British had tried to prevent the development of the territory west of the Appalachian Mountains—to set it aside as a kind of gigantic wildlife preserve, so to speak—but the American Revolution overthrew their rule and cleared the way for the unprecedented economic progress I have described.

The rising prosperity of each generation brought about a continual doubling and redoubling of the population, as a higher and higher proportion of children survived to adulthood, and as an ever-growing flood of immigrants bought, borrowed, and sometimes stole their way to the shores of what—in their awe and admiration for the United States and its freedom—they called “God’s country.”

* * *

In recent years, it is true, the economic glow of the United States has lost much of its luster. While advances continue in some fields, such as computerization, major areas of economic life, and the economic conditions confronting large numbers of people, have clearly fallen into a state of decline. Major industries, such as automobiles and steel, and entire industrial regions—the Northeast and the Midwest, once the backbone of the American economy—are in decline. What was once the industrial heartland of the United States is now known as the rust belt—a dreadful, but accurate description of its condition. Detroit, once the home of the American automobile industry and the leading industrial city in the world is now on the verge of losing its last automobile factory, and growing portions of it are becoming uninhabited. The housing stock, industry, and downtown shopping districts of many other large cities are also in a state of profound decay. For some years, homeownership has been beyond the reach of most people, and a sharp rise in the price of electricity, heating oil, and gasoline has made the operation of homes and automobiles far more costly and has undercut people’s ability to afford other goods. The supply of power plants is becoming inadequate. A growing number of bridges, highways, and commercial aircraft are in need of major overhaul or replacement. Large-scale unemployment persists.

This book makes clear that the cause of such problems is the progressive abandonment of capitalism and the undermining of its institutions over a period of several generations. This is a process that has finally assumed dimensions so great as to jeopardize the continued functioning of the economic system.

There has been a steady increase in government spending for alleged social welfare, which has been financed by a system of progressive income and inheritance taxation and by budget deficits and inflation of the money supply. These policies, in turn, destroy incentives to produce and the ability to save and accumulate capital. They have been coupled with a steadily increasing burden of government regulations restricting or prohibiting economically necessary activities and encouraging or compelling unnecessary, wasteful, and even absurd activities. For example, the production of fuel has been restricted or even prohibited by price controls and so-called environmental legislation, while the hiring and promotion of unqualified employees has been encouraged and even compelled under systems of government-imposed racial and sexual quotas.

The consequence of all of this has been growing economic stagnation, if not outright economic decline, a situation punctuated by rapidly rising prices, growing unemployment, and sporadic shortages.

In recent years, it appears that there has been some recognition of the nature of our problems. Unfortunately, the recognition does not yet go deep enough nor is it yet nearly widespread enough. Thus its benefits are likely to prove elusive or at least extremely short-lived. For example, a major undermining of the OPEC cartel and partial retracement of the price of oil took place in the 1980s, mainly as a result of the repeal of price controls on oil and the easing of “environmental” regulations early in the decade. But now this improvement is in the process of being reversed, through the reimposition and further extension of “environmental” regulations. At the same time, other forms of government interference and government spending continue to grow, and federal budget deficits continue at an alarming level, which makes it likely that the government will turn either to destructive tax increases or to a no less destructive acceleration of inflation. Even the sudden collapse of socialism in Eastern Europe and the former Soviet Union provide little cause for long-term optimism about the economic system of the United States. This is because, as will be explained later, all the essentials of socialism live on in the ecology movement, and are enjoying growing influence in the United States even while socialism in the form of Marxism is in decline in most of the world. 40

Excerpted from Chapter 1 of Capitalism: A Treatise on Economics, Volume I. Copyright 2020 George Reisman. All rights reserved. The encyclopedic Capitalism: A Treatise on Economics is a required reference for every Capitalist’s library. Reisman’s treatise is now available in two volumes: Volume I (focuses on microeconomic issues) and Volume II (focuses on macroeconomic issues).

References

37. See below, pp. 938-941.
38. In most of the world, unfortunately, the history of private property is not so simple. Again and again, owners were forcibly dispossessed by foreign invaders, by civil wars and revolutions, and by other expropriations carried out by governments. Nevertheless, one of the things that later discussion will show is that even where holdings of private property can be traced back to acts of force, the operations of a capitalist society steadily wash away these stains. Once a few generations have gone by, during which private property no longer passes by force, but by purchase, the result is virtually the same as if it had never passed by force. For a discussion of this point and also of the alleged injustices committed specifically against the American Indians in the process of appropriating land in North America, see below, pp. 317-319. See also Ludwig von Mises, Socialism, p. 504.
39. In the last generation, Japan, Taiwan, and South Korea have achieved even more rapid rates of economic progress than the United States did in its era of greatest progress. But the rapidity of their advance is largely the result of being able to take advantage of the enormous heritage of innovations pioneered by and bequeathed to them by the United States.
40. See below, pp. 99-106.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. See his Amazon.com author's page for additional titles by him. Visit his website capitalism.net and his blog atGeorgeReismansBlog.blogspot.com. Watch his YouTube videos and follow @GGReisman on Twitter.

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