Government and the American Economy: A New History / Edition 1

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The American economy has provided a level of well-being that has consistently ranked at or near the top of the international ladder. A key source of this success has been widespread participation in political and economic processes. In The Government and the American Economy, leading economic historians chronicle the significance of America’s open-access society and the roles played by government in its unrivaled success story.

America’s democratic experiment, the authors show, allowed individuals and interest groups to shape the structure and policies of government, which, in turn, have fostered economic success and innovation by emphasizing private property rights, the rule of law, and protections of individual freedom. In response to new demands for infrastructure, America’s federal structure hastened development by promoting the primacy of states, cities, and national governments. More recently, the economic reach of American government expanded dramatically as the populace accepted stronger limits on its economic freedoms in exchange for the increased security provided by regulation, an expanded welfare state, and a stronger national defense.

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Editorial Reviews

Robert W. Fogel
“This book is a penetrating analysis of the changing role of the government in the U.S. economy from colonial time to the present.  Each chapter is a cameo presentation of its topic or period.”—Robert W. Fogel, Charles R. Walgreen Distinguished Service Professor of American Institutions, University of Chicago, winner of the 1993 Nobel Prize in Economic Sciences
Barry R. Weingast
“This engaging and unique book tells the story of the evolution of the American economy from colonial times to the present – the journey of the United States from a peripheral state in the Atlantic economy to world leader. Along the way, it not only tells the economic story, but a political one, emphasizing the role of the government and interest groups in American economic development. The contributors represent a major portion of who's who in economic history.”—Barry R. Weingast, Senior Fellow at the Hoover Institution and the Ward C. Krebs Family Professor in the Department of Political Science, Stanford University
Paul Rhode
“This is an important contribution to understanding both continuities and changes in the dynamics of the American economy and the role of governments at the federal, state, and local levels. The highly stimulating essays on the evolving role of government in the American economy, contributed by world class scholars, will be of interest to economists, political scientists, economic historians, and historians of public policy, who will find much to learn and much to teach.”—Paul Rhode, University of Arizona
Jeffrey G. Williamson
“Ever since Adam Smith, our intuition has led us to believe that good government and good institutions are absolutely central to economic development. Modern economic theory and empirical analysis have now converted that intuition into concrete fact. Government and the American Economy is a superb example of this conversion. It is a must read for anyone interested in what makes for long run economic success.”—Jeffrey G. Williamson, Laird Bell Professor of Economics, Harvard University
"They say that history is written by the winners, but history might be even more interesting when it's written by the economists. . . . It's a fascinating journey."

"A series of stimulating cameos by a distinguished assemblage of economic historians. . . . [The volume] can be recommended with confidence to scholars, students and interested readers."

— Gavin Wright


"An invaluable resource for anyone who wishes to know more about public economies and economic history. The volume includes contributions from leading economic historians, and readers are sure to find the essays easy to understand and enjoyable to read. . . . Highly recommended."
Enterprise & Society

"This volume not only deftly investigates whether and to what extent these and other policies have augmented standards of living. It also recognizes that such policies produce unintended consequences, including a government--read military-industrial-congressional complex--on which we increasingly rely."

— Joseph M. Santos

Jeremy Atack
“Written for the general audience as well as the specialist, this is an ambitious, nuanced and thought-provoking critical evaluation of government’s role in the American economy—from its early history to the postwar era—by a distinguished cast of economic historians.”
EH.NET - Gavin Wright
"A series of stimulating cameos by a distinguished assemblage of economic historians. . . . [The volume] can be recommended with confidence to scholars, students and interested readers."
Enterprise & Society - Joseph M. Santos
"This volume not only deftly investigates whether and to what extent these and other policies have augmented standards of living. It also recognizes that such policies produce unintended consequences, including a government—read military-industrial-congressional complex—on which we increasingly rely."
"An invaluable resource for anyone who wishes to know more about public economies and economic history. The volume includes contributions from leading economic historians, and readers are sure to find the essays easy to understand and enjoyable to read. . . . Highly recommended."
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Product Details

  • ISBN-13: 9780226251288
  • Publisher: University of Chicago Press
  • Publication date: 5/15/2007
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 560
  • Sales rank: 1,061,775
  • Product dimensions: 6.00 (w) x 9.00 (h) x 1.50 (d)

Meet the Author

Price V. Fishback is the Frank and Clara Kramer Professor of Economics at the University of Arizona and a research associate of the National Bureau of Economic Research. He is the author of A Prelude to the Welfare State: The Origins of Workers' Compensation.

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Read an Excerpt

By Price Fishback Robert Higgs Gary D. Libecap John Joseph Wallis Stanley L. Engerman Jeffrey Rogers Hummel Sumner J. La Croix Robert A. Margo Robert A. McGuire Richard Sylla Lee J. Alston Joseph P. Ferrie Mark Guglielmo E. C. Pasour Jr. Randal R. Rucker Werner Troesken
The University of Chicago Press Copyright © 2007 The University of Chicago
All right reserved.

ISBN: 978-0-226-25128-8

Chapter One Government and the Economy


Many dislike the impact of government on their lives. Others embrace it. Yet it is hard for societies and economies to function without it. Few enjoy the government's taking a significant part of their income via taxation, limiting their freedom of choice, or loading them down with paperwork done in compliance with arcane-seeming regulations. On the other hand, good governments provide invaluable services not easily provided by other entities, including defense against foreign predation, a stable rule of law, peaceful judgment of disputes, and protection of individual rights and property. Unfortunately, history is replete with governments that enriched a small number of powerful elites at the expense of the vast majority of the population. Such governments often hindered the economic activity of most of their people and failed to release the creativity and innovation of the human spirit in economic endeavors. Poor governments have been so common that at least one group of scholars recently referred to bad government as the "natural state." Yet a relatively small number of countries have succeeded in developing governments that allow nearly all their people enough economic freedom to promote rapid economic growth, and almost all have done so in the past 250 years.

This book is about the economic history of one of those governments, that of the United States of America. The nation has been an economic success from the beginning. In the late 1700s, American colonists had per capita incomes that were among the highest in the world. Today the United States continues to be among the richest nations in history, if not the richest. There was no guarantee at the outset, however, that, even with favorable conditions, the nation would maintain such a high relative economic position. The people of Argentina, for example, had one of the world's highest standards of living in the early 1900s, but Argentina now ranks below the world average in per capita gross domestic product (GDP), at about one-ninth of the level of the leading countries.

There are many reasons why the United States has been successful. The country has been blessed with an abundance of natural resources relative to the size of its population. The development of new technologies allowed the nation to overcome the Malthusian fear that population growth would outstrip the resource base. The populace has become increasingly well-educated, and people have developed a wide range of organizations and institutions that allow them to produce more while pursuing a large variety of leisure activities. A critical element of American success and of the development of the characteristics described above has been the relatively high quality of its government. The United States has largely avoided warfare on its own soil. Government at all levels has tended to protect individual economic and political freedoms to a greater extent than have nearly all other governments, past or present. Finally, the U.S. government has experienced orderly transfers of power, has adhered strongly to the rule of law, and has an independent judiciary to adjudicate disputes. This is well illustrated by the events surrounding the presidential election of 2000. The series of legal struggles over the vote-counting rules used in Florida was ultimately settled by a Supreme Court decision that ended the recounts and installed George W. Bush as president. Although many Democrats still questioned the final vote tallies, Al Gore's gracious concession speech asked the nation to accept the decision and follow Bush's leadership. Throughout the process the American people went on about their business expecting an orderly process. The outcome was unusual in that it was met with such calm. In many other countries there likely would have been riots and a violent struggle over succession.

Assessments of the role of government in America's success must start with the foundational documents. The Constitution and the Bill of Rights codified protection of many individual freedoms. Those that were important for economic success were the freedom for individuals to make voluntary contracts with others without government interference and protection of their right to hold property of all kinds. People and goods were allowed to move freely across state boundaries even as the Constitution reserved a limited set of powers for the national government. The Constitution established a system of checks and balances within government to protect these freedoms.

But a well-written constitution was not enough by itself. More important were the subsequent decisions by U.S. governments and courts at all levels to protect most economic freedoms. With regularity, the interests of the individual were protected against the demands of the majority. The initial relatively broad distribution of property ownership and income gave the people a stake in protecting these freedoms. The result was significant economic mobility, so that newcomers to the economy had a stake in the continuation of these protections. Indices of economic freedom created by the Heritage Foundation suggest that the United States is among the world leaders today in protecting fundamental economic freedoms. Countries with similar indices also often rank very highly on measures of economic performance.

The stability of government is a key feature of successful economies. Instability leads to uncertainty about the future that threatens individual decisions and retards investment. With the exception of a short invasion by the British during the War of 1812, America has managed to avoid invasions of its territory. Thus it managed to avoid the long periods of destruction of property, civilian deaths, and disruptions of the civil order that have struck many countries. The orderly and peaceful transfer of leadership has been just as important; the nation has had to deal with only one civil war.

Another key to the quality of U.S. governments has been their flexibility. Despite forces that lead to inertia, American governments have shown the capacity to correct mistakes. Governing is a messy process of trial and error. Voters often disagree about the best policy, and competing theories of government held by the experts often lead to conflicting answers. Policies that seemed useful at one time become inappropriate following technological and social change. In a setting of diverse resources and people spread across a large country, the federal structure established in the Constitution gave governments a high degree of latitude to experiment with different policies. State and local governments were left with a significant degree of autonomy. Decisions about state policies have been constrained by the mobility of people and resources, which creates a healthy competition between states. Successful policies are often imitated, whereas unsuccessful ones are not. The ability of the national government to respond to socioeconomic change is also important.

American governments have also made mistakes. Yet at all levels they constantly tinker with policies, sometimes taking backward steps, but at other times rectifying errors. The right to vote has been extended over time. Explicit segregation of government-run schools by race has been abandoned. Federal price controls and regulation of the number of firms have been tried and then abandoned. Many northern state governments chose to eliminate slavery early in their history, although slavery's ultimate demise across the country required a terrible civil war. Given the worldwide shift away from slavery, U.S. governments were flexible enough to have brokered a peaceful solution within a few decades although the practice remained economically viable to slave owners.

In a complex world the government will continue to make mistakes. Part of the problem in identifying the mistakes is that people legitimately disagree about the appropriateness of various policies. Classical liberals deplore many decisions that have promoted the good of the majority, and sometimes that of a minority of well-placed groups, at the expense of limiting individual economic freedom and limiting property rights. Modern liberals argue that the policies fall well short of their desired aim of protecting people against the uncertainties of an impersonal world. These disagreements, when combined with the natural inertia of government in a democracy, imply that corrections may be slow and that some errors are never fully eliminated.

The Economics of Government

Government is unique among economic institutions because it has the coercive power to force people to take actions. This power can be used to promote the economic welfare of the many or of the few. Unfortunately, world history is filled with countless examples of governments that promoted the interests of the few: predatory states whose leaders took control of governments by force and then sought to extract wealth and power for their own ends. Recent examples include Iraq under Saddam Hussein and North Korea; historical examples include large numbers of monarchies. The lack of security for most of the populace in these countries limited people's incentives to work and save. This chilling effect on the economy was compounded by the dissipation of resources by excessive expenditures on military and self-protection costs by elites whose position required the continued use of force. At the other extreme, a few states developed institutions that limited governmental power by means of a set of internal checks and enabled the government to write and enforce a set of rules (including rules about its own behavior) that allowed the society to run more effectively. The United States is a leading example of this type of contractual state. In market-oriented societies such as the United States, government plays several roles in the economy.

Property Rights

A key role played by governments is the definition and enforcement of property rights. The term property rights refers to more than simply rights to land. They include control over one's own person and decisions, control over such personal property as automobiles and clothing, control over equipment and capital, and control over such intangibles as ideas, inventions, music, and writings. Governments have adopted property rights regimes ranging from common property to communal rights to private property. The U.S. system is largely a system of private property in which people have the exclusive right to use the property, the exclusive right to derive income from use, and the exclusive right to sell the property.

To appreciate the importance of these rights, consider how you would act in their absence. Begin with the property right of exclusive use. How much would you value an automobile that other people could also drive at will? Its value to you would be considerably reduced although the physical aspects of the car had not changed. Moreover, the lack of exclusive rights to use would lead you to develop costly methods, such as more complex locks, to limit access to the car. You would certainly cut back on maintenance because you would incur the costs but would be less likely to obtain the full benefits. The combination of reduced value and increased costs of ownership would lower the price you are willing to pay for the car. Lower prices ultimately would lead to the production of fewer cars.

Now consider a case where you have the exclusive right to use your car, but cars cannot be sold to someone else. This limit on your right to "alienate" the car will make you less likely to buy a car in the first place. The type of car you want to buy will change. Durable cars will become more valuable than cars that do not last because it is impossible to sell your car to someone else. Thus the physical characteristics of cars would change. Equally important, you are prevented from transferring your car to another who would get more benefits from using it. Both these limits on the property rights associated with owning a car demonstrate that economic value is a function of more than simply the physical attributes of the car. By creating better defined and tradable property rights, it is possible to create real economic value.

The exclusive right to derive income from use is best illustrated by patents on new inventions. Patents give inventors a greater incentive to invent because they are the only ones who can receive income from the use of their inventions. Inventive activity generally is greater in countries with established patent laws. Patents also illustrate one of the potential trade-offs for private property rights. The patent owner obtains a monopoly that allows him or her to limit access to the invention and demand a high price for its use. The diffusion of the invention is then slowed by the patent monopoly. The U.S. government's solution to this problem has been a compromise: U.S. patent law imposes a time limit so that the invention is eventually available to everybody when the patent expires.

In general, private property rights systems work best when many people own property. Broad dispersion of resource ownership generally leads to more competition in the production and sale of goods and services. In addition, more people consider the property rights system to be legitimate because they have a stake in the continuation of the system. The legitimacy of such schemes is buttressed by another empirical finding: Private property rights and protection of freedom to write contracts often have been and continue to be strongly correlated with the protection of individuals' political and social freedoms.

Property rights in the United States have been curtailed in three ways. First, owners of certain types of property are required to pay the taxes levied on their property or forfeit the property to the government. The payment of taxes contributes to covering the costs of defending the individual's rights to property. It is important, however, that the checks and balances in government prevent tax rates from rising to levels at which they damage incentives to use the property productively. Second, governments at all levels have imposed regulations on land use by means of local zoning laws and state and federal regulations. Recent examples include the limits on development of property imposed by the laws protecting endangered species. Third, the Constitution gave American governments the right of eminent domain, which allows governments to take property as long as there is a public purpose, the taking meets due process, and the owner is fully compensated. Full compensation has typically meant "the market value of the property." In the past hundred years the protection of property against an eminent domain taking has eroded as courts have expanded the definition of "public purpose" to include urban renewal in blighted areas, the breakup of land oligopolies, and the promotion of economic development that would lead to new jobs and higher tax revenues.

One key feature of private property is that it requires people who damage another's property to pay compensation for that damage. In the United States disputes about damages are handled ultimately in the civil courts, although most claims are handled by private settlements with the alternative of going to court in the background. Problems develop when the rights to resources are poorly defined. In some cases it is difficult to effectively define rights to a resource, as in the cases of air and large bodies of water. In those cases pollution often arises because polluters are not required to pay damages to an owner of the resource. Many societies have resolved this issue by treating the resource as held in common but subjecting its use to a system of rules and customs. Thus it is rare to find resources that are truly common property that everybody can use unilaterally. Usually there is some type of management process wherein groups within the society restrict resource use, while the society as a whole protects the resource from outside invaders.


Excerpted from GOVERNMENT & THE AMERICAN ECONOMY by Price Fishback Robert Higgs Gary D. Libecap John Joseph Wallis Stanley L. Engerman Jeffrey Rogers Hummel Sumner J. La Croix Robert A. Margo Robert A. McGuire Richard Sylla Lee J. Alston Joseph P. Ferrie Mark Guglielmo E. C. Pasour Jr. Randal R. Rucker Werner Troesken Copyright © 2007 by The University of Chicago. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
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Table of Contents

Dedication   v
   Price Fishback

List of Tables and Figures  xiii

About the Authors   xv

Foreword xvii
   Douglass C. North

1. Government and the Economy
   Price Fishback

2. Goverment in Colonial America
   Stanley L. Engerman

3. The Founding Era, 1774-1791
   Robert A. McGuire

4. Property Rights and Federal Land Policy
   Gary D. Libecap

5. Reversing Financial Reversals: Government and the Financial System since 1789
   Richard Sylla

6. The National Era
   John Joseph Wallis

7. The Civil War and Reconstruction
   Jeffrey Rogers Hummel

8. Government and the American Dilemma
   Robert A. Margo

9. The Gilded Age
   Mark Guglielmo and Werner Troesken

10. The Progressive Era
   Price Fishback

11. Government and the People: Labor, Education, and Health
   Sumner J. La Croix

12. The Federal Bureaucracy: From Patronage to Civil Service
   Gary D. Libecap

13. The New Deal
   Price Fishback

14. The World Wars
   Robert Higgs

15. The Growth of U.S. Farm Programs
   Randal R. Rucker and E. C. Pasour Jr.

16. Shaping Welfare Policy: The Role of the South
   Lee J. Alston and Joseph P. Ferrie

17. Seeking Security in the Postwar Era
   Price Fishback

Appendix A. Key Indicators of Economic and Government Activity
  John Joseph Wallis and Price Fishback
Appendix B. The Articles of the Confederation
Appendix C. The Constitution of the United States
Appendix D. The Bill of Rights

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