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AMERICAN POLITICAL ECONOMY: BIG GOVERNMENT, SMALL GOVERNMENT

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In a Series on American Political Economy, this first Post outlines political Cycles between more and less central governance of the economy. The second Post (140208) will highlight the Political components of economic cycles. The third Post (140215) will focus on Financial institutions. The final Post (140222) will reprise this main issue Dimension of American politics.  _____________________________________________________________  

POLITICAL  ECONOMY HAS  BEEN THE MAIN  ISSUE  IN  AMERICAN  POLITICS 

“Political economy” means relationships between politics and economics, in both directions.  Both Americans and Chinese have many reasons – personal, business, and theoretical – to want to understand those relationships in the USA.  Fortunately, social scientists have recently made some progress toward such understanding.  

The recent progress results from the convergence of several approaches. One is “historical institutionalism”: realizing that American political-economic institutions are somewhat distinctive, for reasons that go far back in American history. Another approach is “cliometrics”: careful measurement of relevant phenomena throughout American history, from beginning to end, using the same concepts and data. A third approach is “interdisciplinarity”: getting political scientists and economists to talk to each other, and to other academic disciplines such as history, sociology, and cultural studies. (Actually, they still mostly DON’T talk to each other, but at least they increasingly address related issues.)

Remarkably, taking an historical view greatly clarifies CURRENT American politics. As it turns out, American politics has almost ALWAYS involved struggle over political-economy, particularly over the issue of whether the role of the national government in the economy should be large or small. USUALLY that has been the MAIN issue, sometimes supplemented by relatively minor disagreements over socio-cultural issues (particularly, the role and rights of African Americans). Only ONCE (from about 1854-1865) was government’s economic role NOT the main issue, overwhelmed by issues of slavery and – most fundamental – national unity (a military-political issue). (See Keith T. Poole and Howard Rosenthal 2007. Ideology & Congress, 2nd edition. New Brunswick NJ: Transaction Publishers, 344 pages.) 

Remarkably, political scientists are beginning to discover systematic relationships between the CONFIGURATION of  issues (one, two, or many dimensions), degree of POLARIZATION between political parties along the main dimension, and the policy PRODUCTIVITY of American politics. In the early 2000s, there is only one dimension, again the role of the national government in the economy. The two parties are highly polarized on that dimension: almost no politicians fall in the middle and there is no longer any overlap between parties. Given the decentralized nature of American political institutions (a compromise between impulses toward big and small government), the policy result is low productivity gridlock.

Remarkably, the basic terms of debate in the early 2000s remain quite similar to those in the late

1700s.  On the one hand are those who want to use the central state to help large national private interests build national and international wealth and power, for themselves and the nation. On the other hand are those who want to ground the nation on small local interests that remain largely independent of national elites, with their own local self-government. In the early 2000s, some commentators favor one side, some the other, and some say that both sides contribute – in both present and past. 

HISTORICAL ORIGINS:  UNITED PROVINCES, UNITED KINGDOM, UNITED STATES 

Let us begin by noting the historical origins of American political economy (greatly simplified). 

Back in Europe, by around 1600, the mostly Protestant Dutch in the decentralized Netherlands achieved much domestic prosperity and some global hegemony. In the process, they pioneered important modern financial instruments such as the issuance of  public bonds and the public trading of shares in private company shares. In most early-modern European states, centralizing monarchs dominated fiscal systems, but Dutch fiscal arrangements were part of stubborn Dutch resistance to Spanish attempts to centralize and control the decentralized United Provinces (UP). (See Jan de Vries and Ad van der Woude 1997. The first modern economy: Success, failure, and perseverance of the Dutch economy, 1500-1815. Cambridge UK: Cambridge University Press, 767 pages. Extensively summarized in the Wikipedia article on “Financial history of the Dutch Republic.”)  

In England by 1688, Protestants felt threatened by a potential alliance between Catholic France and England’s own increasingly Catholic royal family. Through a combination of invitation and invasion, a Protestant Dutch dynasty moved to England to become the new English royal family. They brought advanced Dutch fiscal and financial practices with them. In England these practices became a “fiscal-military state”: a set of arrangements for financing the Royal Navy, which gradually established England’s global maritime supremacy. Interestingly, these institutions remained somewhat decentralized: monarchy and parliament exercised separate powers, the British treasury was public but the Bank of England was private, and the United Kingdom (UK) was an agglomeration of originally separate monarchies. (See John Brewer 1989. The sinews of power: War, money, and the English state, 1688-1783. New York NY: Knopf, 289 pages.) 

On continental North America, by the mid-1700s, English settlers wanted the British Empire to protect them from the French and “Indians” but did not want to pay taxes to help cover the cost of that protection. Moreover, English settlers wanted the British Empire to make extensive new lands available to ordinary people for immediate settlement and eventual ownership, but did not want to accept government regulation of that process. Meanwhile, English settlers wanted to participate in trade and investment throughout the British Empire but, again, did not want to accept costs or regulation. Eventually, the thirteen English colonies declared their independence as the United States (US).      

In the late 1700s, fighting the  war for independence cost a lot of money, mostly borrowed. So the USA began its existence heavily in debt.  Coastal financial elites decided to appropriate interior land from Native Americans, give some of the land to soldiers and sell the rest to pay other debts. Frontier “masses” approved this, because they wanted to settle more Indian lands, under the protection of the Federal government. However, again the settlers did not want to pay taxes to the Federal government and they did not want the Federal government to regulate their settlements.      

In the 1790s, Alexander HAMILTON wished to construct a strong national  state promoting commerce and industry, on the British model. In opposition, Thomas JEFFERSON hoped to develop the USA as a collection of local democracies composed of independent small-scale farmers. Given their classic opposition, scholars often call “statist-developmental” impulses “Hamiltonian” and “localist-agrarian” impulses “Jeffersonian.”  

HISTORICAL  ALTERNATION  OF  BIG  AND  SMALL  GOVERNMENT 

A useful simplification of American political history is that it has involved an alternation in power between Hamiltonians and Jeffersonians. A particularly useful version adds that the alternations were propelled by successive wars and by successive waves of technological innovation. Technology changed, requiring the adjustment of politics. That adjustment occurred,   but only after a delay of several decades. (This resembles Marx’s dialectic of the forces and relations of production.) Oddly, in the course of American history, the two impulses switched parties. In the 1800s the Democratic party was Jeffersonian, but in the mid 1900s became Hamiltonian. In the 1800s the Republican party was Hamiltonian, but in the late 1900s became Jeffersonian.               

(See Michael Lind 2012 Empire of Promise. New York NY: HarperCollins, 586 pages. Also Lind 1995 The next American nation. In Lind’s account, the Hamiltonian impulse propels progresses while the Jeffersonian impulse impedes it. Lind considers the current USA to be in a Jeffersonian phase and advocates a switch to a Hamiltonian phase. As history, one does not have to agree with his judgements to find his account of alternation suggestive.  As social science, a shortcoming of Lind 2012 is that it provides much historical detail but does not model exactly HOW and WHY these transitions occur.) 

We can quote Lind’s own summary of his argument (2012, pages 453-454). 

When the United States won its independence and organized its Constitution, the world’s economy was still the preindustrial economy that had existed for millennia since the invention of agriculture – an economy in which human and animal muscle provided most of the power, supplemented where possible by the force of windmills and water mills, in which the burning of wood and other biomass provided heat and light, and in which passengers and freight were most efficiently moved by water.  Within decades of the Founding, America began to be transformed by the industrial revolution, which has radiated outward from workshops and laboratories in three waves – the first industrial revolution based on steam and telegraphy, the second industrial revolution based on electric and oil motors, and the third industrial revolution based on computers. Each wave of technological innovation has destabilized existing economic, social and political arrangements, forcing Americans to adapt by creating, in effect, a series of new republics while keeping, for the sake of continuity, the old name of the United States of America and the old federal Constitution of 1787, with formal and much more important informal amendments. 

American history shows a recurrent pattern: a thirty-to-forty-year time lag between technology-driven economic change and the modernization of political and legal structures to deal with its consequences. During this period of misalignment, such as the 1830s through the 1860s, the 1890s through the 1930s, and the 1970s through the 2000s, the institutions of the economy and the polity drift further and further apart. Nostalgic Jeffersonian politicians like Andrew Jackson, William Jennings Bryan, and Ronald Reagan who idealize a smaller-scale past often win wide support in these eras of draft and stagnation. Finally, after three or four decades of misalignment between economy and polity, there is a crisis – the Civil War, the Great Depression, the Great Recession. The crisis provides an opportunity for reformers to reconstruct the economy and political system in an attempt to realize perennial American democratic and liberal ideals in forms adapted to the new technological era. The Hamiltonian tradition enjoys a revival, in light of the urgent need for large-scale, ambitious programs of national development based on collaboration rather than conflict between government and private enterprise. 

(Alert readers of this Blog may notice that Lind’s three historical American “regimes” differ somewhat from Keller’s – what we call Elite Republic, Mass Democracy, and Populist Technocracy. The main difference is that Lind’s first regime lasts until the 1860s while Keller’s first regime lasts only until the 1820s. Arguably the difference is that Lind’s regimes are “political-economic,” tracing political responses to technological change, while Keller’s regimes are “socio-political,” noting what sort of people are running the country through what sort of linkage between state and society. In general, one can get quite different periodizations of American political history, depending on exactly what processes one traces.)

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