How America Became Wealthy: Introductory Remarks




INTRODUCTION

This post and the next is on the topic of economic development and its contribution to economic growth.  Since the beginning of the Industrial Revolution more than 200 years ago, this is the central economic dynamic.  

The following are factors that led to American economic development, many in place before the beginning of the Industrial Revolution.  The United States, more than any other country, was positioned to take advantage of the new technology and ideas that were the basis of the Industrial Revolution.  The following is an outline of those factors.  For the full story of the early decades of America's Industrial Revolution, see Engines of Change and some of the excellent histories written about America after the Revolution.

FACTORS IN AMERICAN ECONOMIC DEVELOPMENT AND GROWTH

The usual narrative centers on the inventors and entrepreneurs who developed and commercialized new production and transportation technology and technological improvements.  They also invented new organizational structures to exploit the new technology, both on the supply and demand side.

This post looks at contributing factors that made the American experience rather exceptional.  The United States began innovation almost as quickly as England, the country that started the Industrial Revolution.  Innovation has continued up to the present.  Why?

RADICAL POLITICAL, CULTURAL AND SOCIAL CONDITIONS CONDUCIVE TO SUPPORTING THE INDUSTRIAL REVOLUTION

The United States had developed social, political and cultural institutions that were supportive of the market capitalism version of the Industrial Revolution before it began.  Because of the American Revolution, there was an aversion to a strong central government and its support of favored pre-industrial classes or groups, a position strongly advocated by Adam Smith.

  • No rent-seeking (parasitic) royalty or nobility.
  • No state-supported church.
  • Limits on government-supported monopolies. (By rulings of the Marshall Supreme Court)
  • No guilds to retard innovation and new forms of labor relations.
  • A Constitution giving the Federal government wide powers to support a national economy and limiting states’ ability to"restrain" trade among states.
  • A culture emphasizing individual responsibility and individual opportunity.
  • A radical political system, a democracy based on universal white male suffrage.
  • Wide dissemination of information among a literate public.
  • A mobile social system and open society that encouraged risk-taking.
ENGLISH LEGAL INSTITUTIONS, ESPECIALLY PROTECTION OF PRIVATE PORPERTY AND ENFORCEMENT OF CONTRACTS

Strong English tradition of protecting private property and enforcing contracts.
Underlying law and custom protecting the rights of individuals.
Patent law to protect innovations.

ACCESS TO ENGLISH INDUSTRIAL TECHNOLOGY AND APPLIED SCIENCE

England was the first country to industrialize.  Some important aspects:

  • Innovative methods to smelt iron, increasing quantity and lowering unit cost. 
  • The application of more efficient steam engines and water power to drive machinery.  Beginning of factories.  Large increases in quantity and reduction in unit cost. 
  • Steam engine power-driven textile mills and then railroads. 
  • More accurate machine tools to produce machinery and metal products.
  • Continuous invention and improvement; cumulative large increases in productivity  
Most of this technology, and the ideas behind them, were transferred quickly to America, changed to fit American conditions, and improved.  Some transmission channels:

English immigrants.
            An English immigrant named Samuel Slater built the first water-powered spinning
            mills.
Welsh ironmasters who knew how to use anthracite coal to smelt iron.

Contacts with England, both personal and scientific.      
Imitating or stealing English technology.
Francis Cabot Lowell and the integrated, power-driven textile mill.

Steam engines and locomotives.  Americans went to England to study the English development of locomotives and railroad technology even before the English built the first general-purpose railroad.
Within two years of the first English railroad, Americans were importing English locomotives, adapting them to American conditions, and manufacturing them.

Robert Fulton first learned about steamboats in England.

Access to English scientific and technical publications.
Establishment of American scientific societies to discuss new ideas and technologies, and disseminate the knowledge.

HUGE NATURAL RESOURCES

In early decades, vast quantities of wood, iron ore, anthracite coal, fast-flowing streams and rivers for water power.

The United States would continue to be the world’s leading producer of almost all key minerals and fossil fuels (coal, oil, natural gas) until after WWII.
           
Huge potential agriculture. 
Development of commercial agriculture, starting in colonial period.
                        Commercial production for market.
                        Surplus food for industrial workforce.
                        Main source of exports until 20th Century.

CONTINUING IMMIGRATION

In the colonial period and until 1860, slaves and indentured servants produced most of America’s exports that helped pay for the importation of European capital goods and technology.

Over the last 200 years, there have been as many as 75 million immigrants.  Immigrants have been an important factor in American economic development from the very beginning.

Free human capital.
Mostly young adults. Much of the cost of raising them to adults, their education and acquisition of knowledge and skills paid before they came to America.  Crucial “free lunch.”
                       
Like Sam Slater, many brought specialized skills and knowledge.

            Disproportionate number of innovators and entrepreneurs.
                        Created vast and growing internal market.

Early on, America’s democratic ethos and the existence of an open society created opportunity for advancement for lower-class mechanics and millwrights unavailable in England.  They could become part-owners of new business establishments based on their technical knowledge.  This was the beginning of what I call the “hustler and the nerd” model of economic innovation.  From Samuel Slater and Amos Brown (cotton spinning) to William Clark and Isaac Singer (Singer Sewing Machine) to Silicon Valley (scientific and computer nerds and venture capitalists).

CONCLUSIONS

In economics, Milton Friedman popularized the phrase “There ain’t no such thing as a free lunch.”  This may be true in a closed economy but not in an open society like the United States that allowed immigration, imported ideas and technology, and provided the resources and opportunity to develop new technologies and economic institutions.

A more formal phrase for a free lunch is “positive externalities.”   A positive externality occurs when someone benefits from someone else’s actions without paying for it.  For the American private sector as a whole over the last 200 years, there has been lots of free lunches.
            Tens of millions of young adult immigrants.
                        Brought labor, skills, education and knowledge.
            Access to knowledge of foreign technology.

This combination reduced the cost and increased the speed of industrial innovation.

Immigrants, shut out of traditional and high-status careers, look to new opportunities. They had to be innovative but had opportunities for advancement not available elsewhere.  A recent study concluded that immigrants are twice as likely to start new businesses than native-born Americans.

The point is that continual economic development depends on a country's political, cultural, and social institutions, not just on its economic institutions.
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After reading this post, you might want to see the related post on the first case study of a source of economic development, Adam Smith's Pin Factory.

For the economic dynamics within this wider environment, see A Stylized Model of Innovation:  The Dynamics of Capitalism. For a list of all posts and economic tutorials in Pages, see Guide to Posts and Pages. The economic tutorials analyze economic growth, development, and structure. They are equivalent to a course in economics.
Go back to the Guide for Pages and Posts.

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