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Then the Kansas-Nebraska Act of 1854 created the possibility that slavery would be extended throughout the country and provoked the formation of a northern antislavery party, the Republicans. When the Republicans elected their first president in 1860, the planters pulled the southern states out of the Union. The cotton South had long been an informal economic colony of Britain, even though it was part of the United States. Now the planters sought to make the Confederate States of America into an independent country that would specialize in commodity exports to Britain as part of Britain’s informal economic empire, like the postcolonial countries of Latin America in the nineteenth century. But the South’s bid for independence depended on British intervention and, when that did not occur, it was inevitable that the forces of the Union, strengthened by modern industry and modern finance, would conquer a renegade region that had boasted of its rejection of both.

THE SECOND AMERICAN REPUBLIC

The reign of cotton gave way to the rule of rail. The Second Republic of the United States, forged by Lincoln and Congress during the Civil War and Reconstruction between 1861 and 1877, ensured that the United States would be a continental nation-state with an industrial economy, not a decentralized federation with an agrarian economy. The Republicans implemented a version of the American System that Henry Clay had promoted between the 1820s and the 1850s. After decades in which southerners and their northern allies blocked federal aid for internal improvements, Congress, liberated by the withdrawal of its southern members, lavished subsidies in the form of land and money on railroads, including the first transcontinental lines. Andrew Jackson had destroyed the second Bank of the United States, plunging the United States into monetary chaos; Abraham Lincoln signed the bill creating a national banking system. The southern planters had prevented the use of high tariffs to protect infant industries. Under Lincoln and his successors, the United States had the highest tariffs of any major nation in the world until World War II.

But even as America was being adapted to the demands of the first industrial era, a second industrial revolution was taking place in the mid- and late nineteenth century. On the basis of scientific research carried out chiefly in Britain, Germany, and other European countries, Thomas Edison, Nikola Tesla, and others on both sides of the Atlantic developed electrical technologies to power everything from appliances to cities. German researchers invented the gasoline-powered and diesel-powered engines, which, put into bicycle-like frames, produced the earliest automobiles and airplanes. German researchers also led the world in pharmaceuticals and innovative chemistry, including chemical fertilizers that transformed world agriculture. In the second industrial revolution, as in the first, Americans mostly adopted and adapted the innovations of others.

By the 1900s, the second industrial revolution was transforming the economy. Electric motors replaced steam engines, making factories far more productive. Exploiting the economies of scale made possible by America’s continental protected market, giant manufacturing corporations like Ford and national retail chains like A&P emerged. Investment bankers, led by J. P. Morgan, specialized in corporate mergers and raising the vast amounts of capital needed by the behemoths that the mergers created.

Just as the first industrial-era economy strained and finally burst the First American Republic, so the second industrial economy grew increasingly misaligned with the Second American Republic that had been built during the Civil War and Reconstruction. A motor-age economy strained against steam-age government.

Two rival schools of reform emerged. Theodore Roosevelt and like-minded reformers who shared what Roosevelt called the New Nationalism thought that giant industrial and retail enterprises could be valuable if they were based on efficiency, but should be regulated by the federal government, not the states. The rival school of reform, led by the lawyer and later Supreme Court justice Louis Brandeis and called the New Freedom by Woodrow Wilson, was suspicious of big business and concentrated financial power. Their solution was to use antitrust policies to protect small and medium-size businesses, anti–chain-store laws to protect small stores, and anti–branch-banking laws to protect small banks.

THE THIRD AMERICAN REPUBLIC

The crisis of the Great Depression, followed by World War II, marked the collapse of the Second American Republic and the founding of the Third. Franklin Roosevelt’s New Deal established the basic outlines, which were ratified by the three “Modern Republican” presidents: Dwight D. Eisenhower, Richard M. Nixon, and Gerald R. Ford. Under Roosevelt, rural electrification completed the continental electric grid. Under Eisenhower, the road grid was completed with the interstate highway system.

The Third Republic of the United States was a blend of institutions inspired by the New Nationalism and the New Freedom. The New Nationalism gave rise to the attempt of the National Industry Recovery Act (NIRA) to organize industry into self-governing associations that stabilized sectoral markets and provided for minimum wages. The Supreme Court struck down the NIRA as unconstitutional in 1935, but the equivalents of NIRA-code authorities were created in many sectors of the economy, from aviation to coal and oil production, and lasted until the late 1970s and 1980s. The quite different logic of the New Freedom inspired financial reforms that prevented the emergence in the United States of a few large, universal banks by maintaining anti–branch-banking laws and separating investment banking from commercial banking. The result in the 1950s and 1960s was a uniquely American version of the postwar settlements in other industrial democracies, characterized by a small number of giant corporations and thousands of tiny banks.

Even as the foundations of the Third American Republic were being laid, however, research funded by the US Defense Department during World War II and the early Cold War was inventing the technologies of the next industrial revolution, of which the most important for the economy was computer technology. Combined with the global physical infrastructure made possible by another military invention, the jet, and the container ship, the computer made possible the emergence of industrial production on a global scale. New global corporations, most of them former national corporations like Toyota and Boeing that began by dominating their home markets, coalesced in one industry after another. By the end of the twentieth century, nearly half of all international trade consisted of transfers within global corporations from one production site to another. At the same time, computerization and satellite-based communications transformed the nature of commerce and finance.

While the third industrial economy was slowly taking shape, the older economy of the second industrial era, based on mass production by national corporations, was reaching its limits. By the 1970s, automobile manufacturers had wrung as much innovation as possible out of the mature technologies invented nearly a century earlier. The slowing of technological innovation in the older industrial sectors and the global gluts in the same sectors produced by direct or indirect government backing of their “national champions” may have contributed both to the sharp slowdown of growth in the industrial economies that took place between the 1970s and the 1990s and the rise of inflation.

The New Deal in the United States and social democracy in Europe were erroneously accused of causing the slowdown by conservatives and libertarians, who came to power in one democracy after another, beginning in 1979 with Margaret Thatcher in Britain and in 1981 with Ronald Reagan—who followed Jimmy Carter, a conservative Democrat elected in 1976. Their program of checking inflation by crushing organized labor and radical deregulation failed to ignite a return to the high levels of productivity-driven economic growth. Instead, without intending to do so, the conservative reformers who came to be known as neoliberals triggered a series of debt-driven asset bubbles, causing ever bigger crashes, from the stock market crash of 1987 to the tech-bubble crash of 2001, ending in the catastrophic crash of 2008. The global economic collapse that began with the demise of Lehman Brothers in September 2008 brought to an end the Third Republic of the United States and inaugurated what in time may be seen as a prolonged and turbulent transition to a yet-undefined Fourth Republic.

“OPPOSED IN DEATH AS IN LIFE”: HAMILTONIANS VERSUS JEFFERSONIANS

“Opposed in death as in life.” With those words Thomas Jefferson explained why he placed a bust of his lifelong rival Alexander Hamilton opposite his own in his home, Monticello.
¹⁷
In the generations since, Americans in the Hamiltonian tradition, of right, left, and center, have continued to debate their Jeffersonian opponents, who come in liberal, centrist, and conservative versions as well.

The debates in America have been family squabbles. At issue was not the validity of the Lockean liberal ideals of the American Revolution—nearly everyone agreed on those—but rather the question of whether the United States would be a New Britain or an Anti-Britain.

Those who thought of America as a New Britain, like Hamilton, drew on the tradition of mercantilism, which dominated British practice before its unilateral adoption of free trade in the 1840s, when its industrial supremacy was secure. Beginning with Adam Smith, mercantilism has received a hostile press, although John Maynard Keynes tried to rehabilitate the reputation of mercantilist thinkers in
The General Theory of Employment, Interest, and Money
(1936).
¹⁸
Instead of being dismissed as a delusion of early-modern monarchs trying to maximize their gold supplies, mercantilism is properly viewed as an early-modern European variant of developmentalism, an approach to economics that continues to flourish not only in the industrial nations of East Asia and Europe but also to some degree in the contemporary United States.
¹⁹

Developmental economics holds that the basic unit of the world economy is not the individual or the firm, but the polity—typically an empire or city-state in premodern times and a nation-state today. Competition or collaboration among countries, rather than among households or companies, is considered to be the central fact of economics. Developmental states, whether democratic or authoritarian, have usually encouraged private property and private enterprise. But they have viewed the private and public sectors as collaborators in a single national project of maximizing the military security and well-being of the community by means of technological modernization, while minimizing dependence on other political communities. The market is good to the extent that it helps necessary national industries and bad to the extent that it hurts them. The government is not the enemy of the private economy, but its sponsor and partner. Developmental capitalism looks at the economy from the point of view of the manufacturer and the engineer, rather than that of the merchant or banker.

A version of the developmental vision of economic growth as the result of a creative partnership among government, business, the nonprofit sector, and labor was set forth by Andrew Carnegie. In his 1889 essay “Wealth,” Carnegie, without naming names, described an iron and steel magnate (himself), a railroad magnate (the Vanderbilts), a mining magnate (William Clark of Montana), and a meatpacking magnate (Gustavus Swift or Philip Armour).
²⁰
Observing how they benefited from the creation of prosperous consumers in national and global markets made possible by railroads, Carnegie declared: “In the work and its profits the Nation was an essential partner and equally entitled with the individual to share in the dividends.” Even the wealth of inventors—Carnegie mentioned “Graham Bell of the telephone, Edison of numerous inventions, Westinghouse of the air-brake”—was always “in great part dependent upon the community which uses his productions.”
²¹

THE PRODUCERIST VISION

The alternative in America to the Hamiltonian version of the developmental state is the antistatist tradition associated with Thomas Jefferson and his philosophical descendants. The term “liberal” is misleading, because developmental economics comes in liberal forms as well, so I will use a term that many historians use for the political economy of Jefferson and Smith: “producerism.”

In this tradition, the implications of economic power for military power, which are central to developmental economics, are ignored. In the utopia of producerism, competition in free markets among great numbers of producers who lack the power to manipulate prices to their own benefit is assumed to minimize the cost of goods and services. The central role of government-sponsored technological innovation in reducing prices over time, even in monopolistic and oligopolistic markets, is ignored in producerist thought and its offspring, the academic school of neoclassical economics. Market-driven price reduction is equated with the interests of individuals as consumers. Other than a government with minimal defense and police functions, there is no public good or national interest distinct from the short-term interest of consumers in the lowest possible prices.

This vision of the economy translates into an adversarial vision of relations among governments and businesses. The purpose of the state is to remove barriers to free exchange among individuals and firms, and then, once those barriers have been removed, to limit its activities to enforcing the rules of competition, as a “nightwatchman” or “umpire.” Cooperation by firms or their merger into large entities is viewed with suspicion and seen as a proper object of antitrust prosecutions. Producerist economics is hostile as well to collaboration between business and government.

Producerists have often been willing to sacrifice free markets, if by doing so they can protect small producers. In a producerist republic, government may protect small farms, small manufacturers, small retailers and distributors, and small banks from larger competitors, whose size, producerists suspect, is based on political favoritism and other forms of corruption rather than on legitimate efficiencies resulting from economies of scale.