An Outline of the
American Economy

Part 1
Introduction

PART 1

Introduction

The American economy is a dynamic, free-market system that is constantly evolving out of the choices and decisions made by millions of citizens who play multiple, often overlapping roles as consumers, producers, investors and voters. The United States is generally described as a mixed economy, which is to say that even though the great majority of productive resources are privately owned, the federal government does play an important part in the marketplace.

By any standard, the American economy that has evolved over less than 250 years has been immensely successful. With less than 5 percent of the world's population, the United States in the early 1990s produced about 25 percent of the world's output. The U.S. economy is more than twice as large as the next largest economy, that of Japan. By conventional measures, U.S. productivity and standard of living remain among the highest in the industrial world -- although other nations have experienced higher rates of growth in recent decades.

Although the American economy has transformed itself over the years, certain issues have persisted since the early days of the republic. One is the continuing debate over the proper role for government in what is basically a marketplace economy. An economy based on free enterprise is generally characterized by private ownership and initiative, with a relative absence of government involvement. However, government intervention has been found necessary from time to time to ensure that economic opportunities are fair and accessible to the people, to prevent flagrant abuses, to dampen inflation and to stimulate growth.

Ever since colonial times, the government has been involved, to some extent, in economic decision-making. The federal government, for example, has made huge investments in infrastructure -- from canals and post roads in the 19th century, to interstate highways and orbiting Earth satellites in the 20th century. The government has provided social welfare programs that the private sector was unable or unwilling to provide. In a myriad of ways and over many decades, it has supported and promoted the development of agriculture.

The "New Deal" programs of the 1930s brought the greatest expansion of the government's role. New laws were passed regulating many economic activities -- from sales of stock to the right of workers to form unions. Moreover, the government began to provide workers with a measure of economic security in their old age. The Social Security program, enacted in 1935, still ensures that retired people have a regular income each month, and has been expanded to help them meet their medical costs.

But the pendulum has also swung the other way. In the 1970s and 1980s, with taxes steadily rising and the U.S. economy stagnating, new national leaders spearheaded a drive to cut government spending and levels of taxation, and in other ways to reduce government influence over the private sector. Their goal was to stimulate the private-sector initiative and investment which is the engine that drives free-market economies.

Another recurrent theme has been the transformation of the U.S. economy by emerging technologies. Once a nation of farmers, the United States was changed dramatically by successful adaptation of the machinery and production processes of the Industrial Revolution -- and then transformed again by what amounts to a "second" Industrial Revolution.

Beginning in 1870 and lasting for around a century, the United States became the world's manufacturing powerhouse -- leading the world in the production of steel, automobiles and other products. Since the 1960s, another transformation has been taking place, as new service-based and information-processing industries gradually replace some of the old stalwarts of the traditional industrial base. By the 1990s, advances made in such fields as chemistry, electronics and biotechnology were producing goods and services ranging from semiconductor circuits to laser surgery. Similarly, new farming technology has transformed the American agricultural sector, allowing more food and fiber to be produced by a constantly dwindling number of farmers.

A third theme has been the continuous debate over international trade policy and, thus, over the degree of integration of the United States into the world economy. Trade was in many ways the linchpin of the colonial system; the export of American commodities made possible the import of capital and machines for expansion. But support for protectionist measures, such as those advocated by statesman Alexander Hamilton just after the American Revolution, has often been strong. Until the end of World War II, the United States conducted international trade under the shield of high or modified tariffs. But protectionism contributed to the Great Depression of the 1930s, and after World War II the United States became an advocate of freer trade. Although the nation's policy has remained generally pro-free trade, by the 1970s and 1980s many U.S. manufacturing industries felt increasingly beleaguered by powerful new competition from abroad. Moreover, as U.S. trade deficits mounted, concerns that other countries indulged in unfair trade practices also increased.

Each of these themes underscores certain fundamental characteristics of the American economy. First, the economy is changing continuously, as citizens freely express their economic preferences directly in the marketplace and indirectly in the voting booth. At the same time, the persistence of these themes over time reveals threads of continuity in the dynamic U.S. economy.

In any event, Americans have often been described as pragmatists. The pragmatic test is that in addition to everything else, an acceptable theory must actually work. Clear evidence of the American people's pragmatism is demonstrated by their actions: to establish and maintain an economy soundly based on the principles of free enterprise. At the same time, Americans accept an important role for government to help create an environment with the widest possible opportunities for individual opportunity, and economic growth and progress.

An Outline of the American Economy