Late 19th Century Closing of America's (Economic) Frontier

In the 19th century there were two strands in American political ideology: the statist-developmental and the laissez-faire-agrarian. In the Federalist period from 1788-1800 the conflict between Hamilton and Jefferson concerned in part the extent of government intervention, taxation, central banking and centralized planning in which the federal government should be engaged. The Federalists favored a high degree, Jefferson's Democratic Republicans a lesser degree. Due to the nature of American economic development, the influence of the French physiocrats who emphasized the importance of agriculture to wealth, and Jefferson's personal background in Virginia, he coupled his belief in reduced centralized power with a belief in the importance of agriculture. The Jeffersonian perspective defeated the Federalist one in 1800, and for two decades there was a single party. Differences reappeared over centralization by the 1820s. Henry Clay's Whigs, an offshoot of the Democratic Republicans, adopted some of the impulses of the Federalists coupled with Jeffersonian distrust of big cities. Clay's American System emphasized government investment in public works and canals, economic development, central banking, and high tariffs to support business, and in these ways shared some of Madison's Federalist impulses. Thus, the American System and the Whigs were more Madisonian than Jeffersonian. Madison had initially been a Federalist, and then rejected Hamilton's more aggressively statist ideas. The Whigs' basic orientation was derived from the country philosophy but may be said to be suburban as opposed to country. Clay and the Whigs believed in balance in government and opposed the spoils system. They favored a middle course between city and country and perhaps today's love of suburban life hearkens back to the Whigs. In contrast, Jackson is most famously associated with the spoils system and central banking. The opposition to central banking is a country position but the spoils system is a court position.

Neither the Whigs nor the Jacksonian democrats were fully associated with the court and country philosophies that characterized England under George III. Historians emphasize this distinction, but by the 1830s both sides had elements of the country philosophy and both sides had elements of the court philosophy. Jacksonians believed in the spoils system, which was characteristic of the elitist court philosophy but tended to favor agrarianism, states' rights, slavery, racism, dispossession of the Cherokees and other Native Americans, and the rights of plantation farmers, the closest American class to the English landed gentry who were associated with the English country philosophy.

In contrast, the Whigs favored central banking, the corporate form of economic development, government investment in the economy and linkages between government and business, which were court philosophies. On the biggest fight between the Jacksonian Democrats and the Whigs, the Whigs took the pro-bank court position and the Jacksonians took the anti-bank country position. Clay and his followers, including John Pendleton Kennedy, Daniel Webster, and evangelical leaders like Charles G. Finney began calling their party the "Whigs" in part because they saw Jackson as an excessively strong executive. With respect to his own power, Jackson adopted a court perspective.

The Whigs combined the religious views of evangelicals who were often Abolitionists with an opposition to slavery, opposition to "manifest destiny" and expansion through war, especially the Mexican War, and rights of Native Americans, which were all anti-elitist views. Also, they were less aggressively in favor of the spoils system than were Jackson's Democrats. But they favored economic development through statist, centralized means.

Jackson, a Democrat who was in many ways Jefferson's heir, believed in the country philosophy too, but the Democratic egalitarianism was reserved for white males. As president, Jackson ignored John Marshall's Supreme Court (Marshall was a Whig, not a Democrat) and allowed Georgia to force the Cherokees to leave their settlements that had previously been established by legal treaty to march in the famous "trail of tears". The nineteenth century attacks on the Indians and racism were in large measure partisan attitudes. The Whigs opposed them, the Jacksonian Democrats favored them.

Abraham Lincoln was a Whig who implemented many of Henry Clay's ideas. This was overshadowed by the Civil War and abolition. Although the nineteenth century is remembered as a laissez-faire period, it is important to keep in mind that key improvements such as the Erie Canal and high tariffs throughout the century protected American business. Thus, big business flourished not just because of laissez-faire but because of laissez-faire and government support. It is not clear that firms would have become so large without the government support.

In the post-Civil War period the Republicans, the successors of the Whigs, adopted a more laissez-faire economic philosophy than the ante-bellum Whigs held. The reason for this may be that business had grown to the point where public works, tariffs and other subsidies became less important than they had previously been because business, to include the railroads, oil and manufacturing, had begun to grow to a point where it was internationally competitive.

The ideological assertion of laissez-faire in the late nineteenth century via the ideas of Charles Graham Sumner, EL Godkin and other "Mugwumps" was short lived. One of the characteristics of the Whigs was their strong emphasis on morality, and these late 19th century Whigs (cum Republicans) shared the belief that the economy ought to be moral and ought to inculcate morality. Thus, the apparent conflict between the corruption associated with the growth of big business, urban government-business connections and the laissez-faire ideas of the late nineteenth century Republicans created considerable cognitive dissonance. Again, it was not the laissez-faire so much as the government support coupled with laissez-faire that caused the corruption in cities. You cannot have bribery unless politicians are bribed.

This led to an odd step. Seeing the corruption in government associated with big business, Americans began to argue that the corruption could be solved by more government. This is an "infinite regress" argument that is a logical fallacy. But almost all of social democratic ideology (under the misappropriated rubrics "liberalism" and "progressivism") is based on this infinite regress. If government in the cities was corrupt and so failed to manage its relationships ethically, then the solution is to add additional layers of government. By the 1880s Charles Sumner in his book "What the Social Classes Owe to Each Other" was debating this logical fallacy, but it somehow was ignored by the advocates of social democracy. Hence, over the next 100 years, increasingly corrupt and ineffective government expanded for illogical reasons. The end products of social democracy, Enron, Worldcom, Bear Stearns and Fannie Mae are examples of corruption and incompetence on a scale that nineteenth century moralists could not have imagined.

Frederick Jackson Turner's thesis that the frontier had closed intensified a sense of scarcity as the rugged individualism of the late nineteenth century seemed to have lost its primary outlet. Moreover, in the late nineteenth century Americans increasingly looked to Germany for higher education because of the absence of research universities here. In the late nineteenth century more than 10,000 Americans obtained degrees in Germany at a time when fewer than five percent of the population had attended college. This coincided with the institution of Bismarck's social democracy, and it is natural that many of those educated in Germany would have imported social democratic impulses when they returned to the United States. This resulted in battles between the Mugwumps and advocates of the anti-laissez-faire historical school that Richard T. Ely and John R. Commons advocated in America in the late nineteenth and early twentieth century. Although institutionalist economics never became dominant in economics here, it had a strong effect on practical policy. Commons drafted the first workers' compensation laws, for example.

The laissez-faire philosophy of the late nineteenth century anticipated developments that were to occur in the twentieth century, but its advocates could not anticipate the developments theoretically and so lost the policy debate. First, the growth of corporations in large scale "trusts" and the employment of thousands of workers in a single firm or even in a single plant seemed to augur the end of individual entrepreneurship. Second, the belief of Abraham Lincoln and the Whigs that work as an employee was a temporary stop-off to self-employment was difficult to believe given the increasing scale of industry. Third, the spoils system in the cities between the 1830s and the early twentieth century had become associated with corruption and with support for the same large firms, so that the moralistic Whig impulses were violated by the growth of somewhat corrupt big businessmen like Jay Gould. Fourth, the opponents of laissez-faire emphasized the role of freedom in the growth of big business, ignoring the tariffs, land subsidies to railroads, public improvements and various other supports that government had provided to big business in order to facilitate its growth. Fifth, the advocates of dissolution of the trusts and then Progressivism ignored the fundamentally fluid nature of the economy which meant that the trusts were not permanent and were not necessarily economically viable unless grounded in efficiency. Over time, it turned out that some trusts, like Standard Oil, were efficient, but that others were not. Sixth, and most importantly, developments in the economy beginning in the 1930s began to render scale of considerably less significance in economic development. These developments included changes in the nature and rate of innovation, changes in manufacturing technology and changes in the importance of information flow to production processes. America (and the developed world) began to move from a mass scale economy where low costs were paramount to one where innovation was the most important variable. The supports to business that encouraged investment of capital in a single, large-scale firm with long production lines and large plant investments that would take a long time to recapture were no longer what was needed for economic development.

However, government policy did not change. The Progressives, failing to anticipate the coming emphasis on lean manufacturing, the transmission of information, flexibility, and the need to replace firms with new ones that were better attuned to change, emphasized policies that facilitated investment in large plants. These included regulatory regimes that deterred entrepreneurial start ups, central banking, diversion of capital to large firms and support for large firms' exports that favored large firms over small ones at the very time that fluidity and innovation were becoming more important in the economy than scale.

Sadly, the late nineteenth advocates of laissez-faire did not anticipate the importance of fluidity of the economy until the Austrian economists, Ludwig von Mises and Friderich A. Hayek discussed the impossibility of centralized economic planning. Thus, the Progressives, believing themselves to be pragmatists and to be coping with change and solving problems related to change instead developed regulatory and central banking that were forestalling economic development and change. The American frontier closed not physically but fiscally because of human inability to know the future direction of economic and technological innovation. The cognitive limits on information have been so severe, that eight decades past the point where these changes began to manifest, social democrats like Barack Obama and the New York Times continue to ritualistically harp on the importance of modernist regulation that is eight decades out of date.