When I left for vacation 3 weeks ago, both sides of the aisle were racing to see who could give away the most “free” stuff to their base. (I will unpack the both sides of this below). These pricey promises were in the back of my mind as I began reading Bhu Srinivasan’s delightful book, Americana: A 400-Year History of American Capitalism.1 It turned out to be the perfect antidote to the battle between populism and socialism playing out on the campaign trail and TV every day.
Americana traces the history of American-style Capitalism, reminding us the political economy is far more complex than the simple labels we tend to use: Socialism, free-market economics, Capitalism, Laissez faire, Welfare State. These are more theoretical ideas than ways markets and economies actually work. Reality is far messier, filled with externalities, complications and comprises then is predicted by academic theories.
The great insight made by Srinivasan is this: American-style big government and a dominant private sector have a symbiotic relationship, each could do not exist without the other. The American narrative may center on liberty and freedoms, but Americana tells “the parallel story of money, ambition, brands, and consumerism as an equally guiding force.”
U.S. capitalism has benefited from each technological bonanza, careening from each “new thing” to the next, all with government being the great enabler, nearly every time. Across 35 distinct industries, from cotton to the internet, Srinivasan forces us to rethink our previous misunderstanding of American history.
The most shocking section of the book is on the slave trade. The “valuation” of African Slaves was directly correlated to U.S. agricultural prices. By the mid-1800s, top field hands were being sold for $2,000 each. The most astonishing data point in the entire book: In 1850, the “four million slaves in America were collectively worth $4 billion” (about $132 billion in 2020 dollars). The market for human bondage actually became so euphoric it created a bubble in slave prices.
But here is the even more shocking thing: Slavery was but one industry that co-developed as a joint venture between the private sector and the government. This disgrace is even enshrined in the US constitution: “three fifths of all other [unfree] Persons,” was a euphemism for slaves. Its inclusion was driven by the economics of the south, against not the moral base of the rest of the nation.
There are other (less shameful) examples of the joint venture between Government and Business:
• The Mayflower was venture capital funded; the returns were unimpressive. At the time, VC was known as “Adventure Capital.”
• U.S. protection of patents encouraged numerous innovations in the 18 and 19th centuries; at the time, the patent process in England was slow and corrupt.2
• Eli Whitney’s patented cotton gin improved efficiency so much the American South went from nothing to producing 70% of the world’s cotton. “King Cotton” became the largest sector in the American economy.
• New York State offered a 14-year monopoly to the first person who created a working steam engine to power a boat. If you could move 20 tons at an average speed of 4 mph up the Hudson river, that monopoly would be extended to a 20-years.
• New York also floated the first municipal bonds to fund the building of the Erie Canal. It was so successful commercially and financially, it set off a boom in state financed canals.
• Railroads, crisscrossing the United States and opening up the West, were mostly feasible due to eminent domain: the Federal Government’s ability to expropriate private property for public use (with payment of compensation). If each railroad had to negotiate with each individual landowner to buy their property (or easement), it might have cost multiples more, and taken decades longer.
• The Telegraph not only received patent-protection, it was funded by an act of Congress.
• Radio, an unregulated hobbyist technology, had only limited local usefulness due to overlapping broadcasts which interfered with each other. A wartime government declaration led to the airwaves being taken over by the government. Post war, spectrums were auctioned off. A similar system operates today for over the air cellular, data and satellite communications.
• Massive Semiconductor demand came from one place: Department of Defense, whose contracts were so huge it created the entire industry. Private sector demand could not justify the R&D or the giant fabs needed to manufacture semis. A similar development path took place for computers.
• The predecessor to the Internet was developed by DARPA to ensure counter-strike capability in the event of a nuclear attack.
From television to flight, film, booze, highways and suburbia, each major economic innovation was the result of the genius of both private sector innovation and government support.
The political results yesterday — VP Biden now has a nearly insurmountable lead over Senator Sanders — means this year’s presidential election will be between an establishment Democrat and an anti-establishment Republican. We almost had a battle of “Populist socialist” candidates, both promising more and more “free stuff” to their base.3
Candidates want to get elected, and care little about historical accuracy in their rhetoric. But the rest of us are not so constrained. Rewriting history the way we wish it unfolded, instead of as it actually has, is our latest error.
If we want to make America great again, we need to understand the role government has played working with the private sector. The ideologues who insist government needs to be so small it can be strangled in a bathtub are surrendering our future to those who have studied our past. Don’t let them.
1. My vacation reading while in Puerto Rico February 2020.
2. The English patent system was complicated and expensive. The UK seems to have been late to recognize the intellectual property rights inherent in patents. Letters of patent created local monopolies, a process that was abused by the Crown to create a source of revenue.
Competition from the United States forced the UK to amend their Patent Law – “the first major adjustment of the system in two centuries. The new patent statutes incorporated features that drew on testimonials to the superior functioning of the American patent regime” including lower fees and costs, and the application procedures were rationalized into a single “Great Seal Patent Office.”
3. What some people call socialism might be more accurately titled “Crony Capitalism,” a corrupt hybrid of the two.