We Grope Together
The exception to pure authoritarian control through most of the eighteenth century was the English system, which was evolving into a decentralized political economy governed by a marginally representative government. Economic and political matters were governed by a monarchy, a parliament that included representatives of the aristocracy and commoners, law, and a far-flung civil service managed by expatriates and local loyalists. Decision makers increasingly relied on rule by law rather than royal degree.
With England setting the course for the second epoch of liberalization, competition among countries for geo-political dominance fired interest in more extensive change. Public and private discourse thickened with liberal ideas, and laws were passed that created the potential for broader political and economic participation.9 This opening provided the opportunity to experiment with a historically novel approach to political economy proposed by Adam Smith in 1776. A moralist by training, Smith took exception to mercantilism, arguing that sustained growth would only be achieved if governments allowed individuals the freedom to act in their own best interest.
Resting on a detailed analysis of the vagaries and necessities of human nature, Smith's model of political economy has five features that are the mainstays of liberal political economy: a commitment to reason, private ownership of property and the returns on investment, free and open trade, self-regulation, and limited government that protects private rights, provides goods and services that facilitate trade, and enforces contracts.10
Smith's intuition about how his system of political economy would work was simple but powerful. He reasoned that if individuals had the right to pursue their own economic interests through trade and could keep their profits, they would invest in producing things that others want, creating new opportunities for trade. People would specialize in areas of comparative advantage, economies of scale would emerge, and the "invisible hand" of trading activity would guide resources to their most productive use. Increases in productivity would produce growth, which would expand opportunities for individuals, stimulate further innovation, and lead to a virtuous circle of human progress and development.
Taking liberal ideas to heart, the American insurgents constructed an exceptionally daring experiment in economic and political participation. Brashly declaring independence from England in 1776, Americans committed themselves to three ideals: life, liberty, and the pursuit of happiness. They hoped to achieve these ideals by designing rules of the game that protected individual liberty, granted extensive human rights based on natural law, and created many centers of self-governing authority subject to the will of citizens and the rule of law. Central controls were quite limited both by necessity and design, and any attempt to assert authority was deeply suspect. Eschewing colonialism and other forms of imperial prerogative, the newly United States focused on protecting its interests and building mutually agreeable relations abroad, reducing the necessity for trade by meeting more of its needs at home, and improving its competitiveness in tradable goods and services.
Western countries on the European continent made more modest commitments to liberalism, clinging to hierarchical forms of economic and political organization. Monarchies, social class, paternal authority and other centralized forms of government continued to reign; however, they encouraged policies that favored individual effort, technical progress, and financial and organizational innovations that made it possible to use technology, accumulate physical and human capital, and more efficiently allocate resources. Sources of wealth expanded and diversified—gains from trade and real property were leveraged to create new engines of growth in manufacturing, industry, and related goods and services such as equipment, materials, information, engineering and construction, financial services, and transport.
Gradually opening participation in political economies was associated with increased growth. Maddison estimates that per capita GDP increased four times faster in the period 1820–1870 than it did in the entire eighteenth century, increasing average income 15 times.11 Annual growth in GDP averaged 1.7% in Europe and 4.2% in the United States, which translated into per capita growth of .9% in Europe and 1.3% in the United States.
But things really began to take off in the late nineteenth century, as accumulated technical progress pushed the western countries ahead of the rest of the world, making them the largest contributors to world GDP. A massive and systematic research and development effort in the United States helped it operate more productively and nearer the technical frontier than other countries. By 1890, the U.S. economy was larger and growing faster than any economy in the world. Over the period 1870–1913, GDP grew at an average annual rate of 2.2% in Europe and 3.9% in the United States, which translated into annual per capita growth of 1.3% and 1.8%, respectively.
However, the course of liberalization was not smooth. The second epoch of change presented a number of challenges. Maddison describes the period extending from 1870–1913 as a stable period of expanding but relatively subdued participation. Suffrage was limited, there were no major international or social conflicts, trade unions and other democratic political activists were weak, labor and capital were flexible, taxes were low, social spending was confined to elementary education and public health, and governments pursued relatively sound fiscal and monetary policies.
Competing for access to resources, investment opportunities, and trade, the European countries expanded internationally by colonizing populations in every region of the world. With lesser means and a deep commitment to the principle of self-determination, the U.S. government adopted a laissez-faire approach to foreign policy, even if some of its citizens did not. Where Europeans expressed their imperial beliefs through statecraft, Americans who held the same beliefs expressed them through privately funded "missions" abroad that were intended to return African slaves to Africa, convert others to particular forms of Christianity, implement religious doctrines such as Restorationism and Zionism, and save or persuade others through health care or education.
But imperial American citizens who ventured abroad were counter-balanced by others who were pragmatic rather than messianic. These Americans believed that they had something to learn from others and hoped that they could benefit from developing mutually beneficial relationships. Internationalists pursued scientific and technical exchanges, joint ventures involving commercial and social entrepreneurship, investment rights, and access to resources, trade prerogatives, jobs, artistic and literary inspiration, and adventure. A timely illustration of how individual Americans' forays abroad influence and often contradict American foreign policy is Michael Oren's fascinating account of the history of American involvement in the Middle East.12
But let's get back to our story. Growth and liberalization created structural changes in domestic economies that created numerous dislocations and inequalities. Wealth, incomes, and political decision making were concentrated among those with property and social connections. Participation rights were controlled by small cliques of insiders. For those who were not in the club, poverty was rampant, services were limited, health pandemics were frequent, the environment was squalid, and violence and rude behavior were common. Social safety nets were non-existent so that economic downturns produced ruin from which it was often impossible to recover.