Introduction
Economic growth is defined variously. It is viewed as the increase in the value of products associated with a given economy within a specific period of time. It is measured using an annual percentage of the rate at which actual gross domestic product (GDP) is changing. A growth which emanates from proper utilization of inputs is referred to as intensive augmentation (Naroff and Scherer 85).
On its part, a change brought about by a rise in inputs is referred to as extensive development. Generally, there are four key elements that determine the growth of a country’s GDP. They include natural resources, entrepreneurship, as well as human and goods capital (Gordon 63). In economics, escalation is considered as an increase in potential output. Any form of growth within a period of time has great impact on a state.
In this paper, the author will discuss the role played by economic and political institutions in the growth of the economy of the United States. It is noted that the U.S prospered, while so many other former colonies continue to struggle today. According to Sokoloff and Engerman, one reason behind this discrepancy in the growth of the former colonies is the strength of their institutions (220). There is a close link between institutions and economic growth. In this paper, the author will discuss the growth of the U.S economy in the context of this link. The institution of slavery and its relationship to economic growth in America will also be reviewed.
Analyzing the Growth of the U.S Economy
A Brief History of Colonial America
United States economic history is traced back to the European settlements during the 16th, 17th, and 18th centuries (Perkins 32). Colonial America was initially a pre-industrial state. The reason behind this is because the states concentrated on subsistence agricultural production. The market economy thrived by extracting and processing natural resources and agricultural yields. Industries had not taken root in the economy.
The products from the natural resources were used for local consumption purposes. Other activities supported by these processes included mining, sawmills, and exports. The major goods sold abroad included wheat, rice, tobacco, and bread (Perkins 58). Tobacco was widely cultivated and used in Chesapeake Bay. Slaves were used to provide labor in these plantations.
The American states recorded a significant growth in economy during the eighteenth century. However, in spite of this development, the economies remained pre-industrial. The states only moved towards industrialization in 1776. The move was influenced by the Declaration of Independence. In addition, it is during this period that the colonies merged to form the United States of America (Gordon 96).
By this time, the living standards of white American citizens were high. The major reason behind this was the fact that there was an abundance of agricultural products and land, which fully supported the population. In 1783, through the Treaty of Paris, the American colony was officially endorsed as an autonomous state (Wood 112). Consequently, the move resulted in the rise of the U.S global economy.
From 1787 to the 1850s, the U.S experienced dynamic economic augmentation. The first major initiative that saw this development involved the writing of the constitution. It provided a lease that formulated regulations to be followed by the Congress. In addition, it opened more borders and markets for products from the country. As a result, the state benefited from internal free flow of commodities and ideas.
Beginning from 1788, the young republic registered an annual productivity growth of 2% (Perkins 131). The significant rise was achieved with the help of the rigid institutional core acquired from the British. One major effect of the tremendous economic expansion was increase in population. It resulted from rise in birth and immigration rates. However, the increase did not impact negatively on the republic. The reason is because the nation was rapidly becoming self-sufficient.
Economic and Political Institutions in the U.S
In the field of economics, the term ‘economic institution’ has a broad meaning. Economists often apply it erratically based on the particular perspective they are using. In addition, some use it interchangeably with such terms as financial institutions. In spite of the implied relationship between the two, their meanings are different. Economic institutions refer to any aspect of the society that plays a key role in influencing economic growth (Gordon 72). They include tax policies, banking and financial organizations, trade, and property rights. Generally, they are economic elements that have a certain impact on the society.
Various authors in the world of economics have different definitions of economic institutions. For example, Greif defines them as systems of rules, beliefs, norms, and organizations that influence social behavior (31). They comprise of exogenous man-made and non-physical aspects that determine the actions of all individuals (Greif 31). In addition, the institutions spawn regulatory actions in a social setting. One such institution is slavery. It affected the way the slaves and the masters lived in the plantations.
North defines economic institutions as rules of the game in the society (34). They are the ‘constrictions’ or limitations formulated by man to shape human relations. They inform exchanges among individuals in relation to economic, social, and political affairs (North 57). Institutional change dictates the way through which societies develop over time. As a result, they play a central role in helping to understand historical change (Sokoloff and Engerman 230). Consequently, one may argue that such institutions have informed the growth of the American economy over the years.
Functional or “good” economic institutions are those that offer the broad society security of assets, rights, and equal access to profitable resources (Acemoglu, Johnson and Robinson 567). They distribute goods to the efficient markets in the economy. In addition, they ensure that trade benefits are exploited and maintained. The objective of this is to encourage development of human and physical resources.
The move also enables the society to advance technologically over time. On their part, ‘bad’ institutions hinder economic growth. They do so by interfering with economic operations in the country. In spite of these broad definitions, economists still face the challenge of determining if a given institution qualifies to be considered as economic (Acemoglu et al. 555).
The Institution of Slavery and its Impacts on Economic Growth in the U.S
One major factor that facilitated the unprecedented economic growth in the U.S is slavery. The institution started in 1619. It came to life when the first twenty African slaves were shipped to the North American colony of Jamestown, Virginia (Wood 71).
The major reason for their capture was to provide labor. They were used in large plantations in the states. In the 1800s and 1900s, slavery became popular in the country. It was used across all the American colonies. In the 18th century alone, between 6 and 7 million slaves were shipped to the Americas (Wood 125). Due to the widespread use of their labor, the nation was able to establish firm economic foundations.
In 1793, the institution became an important institution in the country. It was especially a critical aspect of the Southern economy. The reason behind this was the introduction of the cotton gin. It was easy to use an automated device to process the farm produce. The machine separated raw cotton from seeds. Consequently, the gadget gained popularity in many American colonies. One region that made proper use of the new technology was the Southern territory.
It transformed itself from a large-scale producer of tobacco to a cotton powerhouse (Perkins 112). In the plantations, Americans considered African slaves to be a source of cheap labor. In addition, they were more productive compared to the poor European servants. At the time, the demand for American cotton in England was high. The demand was driven mainly by the automation of the textile industry. The business expanded rapidly within a short duration of time. Consequently, slavery was highly depended on to support economic growth (Perkins 112).
In spite of the extensive use of slavery and the associated economic gains, the practice was abolished towards the end of 1865 (Perkins 132). The move was made during the 13th Amendment. However, this did not impact negatively on the growth of the U.S economy. In the 19th century, a number of new inventions were made (Gordon 95). As a result, the economy of the nation continued to thrive. Within this period, gold was also discovered. In addition, transportation greatly improved. The use of steamboats and railroads led to continuous opening up of new markets for investment (Gordon 95).
Economic Growth in the 21st Century
The U.S economy has been shaped by important developments and institutions dating back to the colonial era (Acemoglu et al. 566). Slavery and indentured servitude was one of the key drivers of this growth in the early days. Over the years, the country has expanded to become the most powerful in the world. Currently, the country’s GPD stands at $17.711trillion (Naroff and Scherer 101). In addition, its currency is the most widely used mode of exchange in the world. Various countries have adopted it as the official legal tender. In other economies, it is considered as the default medium of exchange (Naroff and Scherer 100).
For decades, the United States has managed to maintain a stable growth and capital investment rate. On part, this development has been supported by the country’s endowment with natural resources. It also has a highly developed infrastructure (Gordon 123). It is ranked second as far as trade and manufacture are concerned (Gordon 123). All these positive attributes can be traced back to functional institutions, including slavery. The agencies have supported economic development in the country.
Conclusion
In spite of the significant economic growth in the country, the U.S has the largest gap between the rich and the poor. The inequalities can be attributed to the primary foundations of the economy, which involved slavery. The country recorded a major economic setback during the 2007-2008 crisis. However, the economy has recovered well from these setbacks. Strong institutions, which replaced slavery as the major economic driver, are credited with the resilient nature of this nation.
Works Cited
Acemoglu, Daron, Simon Johnson, and James Robinson. “The Rise of Europe: Atlantic Trade, Instutional Change, and Economic Growth.” American Economic Review 95.3 (2005): 546-579. Print.
Gordon, John. The Business of America, New York: Walker, 2001. Print.
Greif, Avner. Institutions and the Path to the Modern Economy: Lessons from Medieval Trade, Cambridge: Cambridge UP, 2006. Print.
Naroff, Joel, and Ron Scherer. Big Picture Economics: How to Navigate the New Global Economy, Hoboken: Wiley, 2014. Print.
North, Douglass. Institutions, Institutional Change, and Economic Performance, Cambridge: Cambridge UP, 1990. Print.
Perkins, Edwin. The Economy of Colonial America. 2nd ed. New York: Columbia UP, 1988. Print.
Sokoloff, Kenneth, and Stanley Engerman. “History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World.” Journal of Economic Perspectives 14.3 (2000): 217-232. Print.
Wood, Betty. Slavery in Colonial America, 1619-1776, Lanham.: Rowman & Littlefield, 2005. Print.