During the 18th and 19th centuries, the American economy transformed from an export and agriculture-based collection of regional economies into a rising industrial economy with an established national market of small shops, farms, and factories. The transition was influenced by the political events of that time, as well as the changes in the economic factors: natural resources, labor, capital, entrepreneurship, consumer demand, and government action. The purpose of this paper is to explore the six factors that influenced the American economy in the 18th and 19th centuries and analyze their contribution to the economic changes.
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Natural resources include naturally occurring goods like land, water, air, soil, minerals, flora, fauna, and climate that are used in the creation of products. Economic activities lead to the transformation of natural resources into consumable goods and services. Natural resources have limited direct economic use in satisfying human needs but transforming them into goods and services enhances their economic value. Natural resources have a double-edged effect on economic growth in that the intensity of their use raises output but increases the depletion rate.
The United States possesses vast natural resources, including thousands of acres of fertile land, abundant fresh water, oil, and coal. At the early stages of its history, it was the natural resources that made the continent attractive to immigrants and provided a significant competitive advantage in building its economy. However, initially, the population was too small to use them efficiently. As the number of colonists grew and they expanded into the territory, the development of natural resources started to play an increasingly important role.
Throughout the colonization period, the continent’s economy was primarily based on farming, extracting and processing natural resources, and the export of agricultural products. Natural resource abundance raised labor productivity, especially in agriculture, contributing to the colonists’ high standard of living and facilitating population growth. In the 19th century, the westward expansion into the highly productive heartland, aided by the new railroads, led to an increase in grain production and the development of mineral resources. It accelerated the expansion of technological capabilities and boosted industrialization, fundamentally altering the country’s economy. Overall, natural resources were the main factor of economic change during the colonial period that also facilitated the fast transition to the industrial economy.
Labor is human effort used in production, which also includes technical and marketing expertise. The early American economy was characterized by an abundance of natural resources but scarce labor due to the difficulties in the initial colonization of the continent. The economic growth of later decades was primarily caused by the growth of the population, as cheap land and abundant natural resources attracted new settlers to the continent. In the 18th century, most Americans lived in self-sustaining rural communities and were employed in agriculture or performed some kind of skilled trade (Dublin 89). The productivity of farm labor was low and witnessed very little change over the years.
The advent of industrial production at the end of the 18th century witnessed the evolution of large urban centers, such as Boston and New York City, spurred a massive internal migration of workers, and led to the rise of unskilled labor. Factory jobs tended to offer wages that were several times higher than farm rates, and workers eagerly moved from low-paying hard labor in the sun to relatively high-paying, hard labor in industrial factories (Dublin 77). The transition from manual and farm labor to urbanized, mass-producing industrial labor marked the shift towards industrialization.
Capital refers to human-made goods, such as manufacturing plants, machinery, tools, or any equipment used in the production process. Fixed capital includes one-time investments, like machines and tools, and working capital consist of liquid cash and raw material. During the 17th century, the land served as the capital of the American colonies. It was a basis of commercial society and thus of great economic value, and obtaining title to western lands was an important source of wealth. Throughout the 18th century, as the economy developed, landowners have gradually accumulated capital. Agriculture and export were the primary sources of income at that time, with slavery being a major factor contributing to the capital accumulation of the free residents of the southern colonies. The capital was distributed unequally throughout the country, with most wealth being concentrated in the southern slaveholding states.
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As the means of production developed, wealthy landowners started to invest their capital in emerging industrial enterprises. Contributing to the development of new buildings, machines, and new means of production, investors facilitated the transition to industrialization. The gradually increasing productivity of factories and growth of workers’ wages translated into higher standards of living for the general population, higher demand for goods, and increased capital investment. The geographic spread and increasing density of banks and other financial intermediaries were both causes and consequences of the growth of domestic commerce, industry, and agriculture (Atack 108). Overall, capital played an important role in the economy’s transition to industrialization, contributing both to technological progress and the process of the reallocation of labor from agriculture.
Entrepreneurship is considered to be one of the drivers of economic development that combines the other factors of production, land, labor, and capital to make a profit. Entrepreneurs are seen as innovators standing behind the production process, developing new manufacturing technologies and new products, and allocating resources from less to more profitable fields. The spirit of entrepreneurship has been characteristic of the American economy from the very beginning of colonization, when the first settlers had to take risks and produce innovations to adapt to the new way of life.
The American Revolution brought changes to the economy along with a dedication to an individual’s basic rights, which emphasized individual liberty and entrepreneurship. The development of the manufacturing sector made heavy use of entrepreneurship, and the spirit was also strong in large cities where economic opportunities were abundant. Individual entrepreneurs launched their own businesses, believing that “when an energetic, determined man goes at [business] as if it were his life’s work, with the determination to succeed, the results which he can secure are little short of astounding” (Taylor 150). On the national level, westward expansion and the creation of the railroad prompted governmental incentives and subsidies for industries, such as railroad and banking, which led to tremendous opportunities for profit. However, these tendencies have become particularly apparent later, in the second half of the 19th century, after the American Civil War. It was the time when the rapid growth of the communication and transportation industries and the expansion of mining and production allowed entrepreneurs to easily find success.
Demand refers to a consumer’s desire to purchase goods and services supported by an ability to pay for them in a given period of time. Consumer demand is the dominant market force, without which there can be no sales and no profit. The greater the demand, the greater the incentive for entrepreneurs to enter a market, and the higher the probability that a market will form.
The changes in consumer demand in the 18th-century American economy were characterized as a consumer revolution. The development of the Atlantic economy of that time allowed American colonists access to more British goods than ever before. The gentry, a wealthy colonial class, was formed that relied on indentured servitude and slavery to meet the demand for colonial labor. They modeled themselves on the English aristocracy and set themselves apart from others through their purchase, consumption, and display of goods. The consumer revolution was associated with an increased supply of consumer goods from England in the 18th century and marked a departure from the traditional mode of life to one of increasingly mass consumption. The American Revolution and the weakening of the economic ties with Britain led to the increased demand for locally produced goods, facilitating economic development and resulting in the emergence of a national market of small shops and factories.
Government activities affect the economy of a country in four ways. First, the government produces goods and services, such as infrastructure, education, and national defense. Second, it transfers income, both vertically across income levels and horizontally among groups with similar incomes and different characteristics. Third, it imposes taxes; and fourth, it regulates economic activity. Government interventions can increase economic efficiency, and unsuccessful government actions can lead to a crisis.
In the colonial period, local governments were much less powerful and intrusive than the national governments in Europe. They raised minimum taxes and had practically no influence on the economy. The situation changed after the American Revolution, when the Constitution was adopted, and a new government was established. The British Empire imposed various restrictions on the colonial economies, including limiting trade and manufacturing, and the Revolution opened new markets and new opportunities in trade and manufacturing. It was now the responsibility of the government to influence and stimulate the economy. It started to raise taxes, pursue economic growth through the support of manufacturing, banking, and merchant entrepreneurship. The government’s actions helped significantly to transform the economy and achieve economic prosperity in the newly established state.
All six factors of economic change: natural resources, labor, capital, entrepreneurship, consumer demand, and government action, had a significant influence on the American economy of the 18th and 19th centuries. Prior to the American Revolution, natural resources and labor were the most important factors that facilitated the territorial expansion and the establishment of the agricultural economy of the colonies. With the development of new means of production and the changes in consumer demand after the Revolution, capital and government action became the primary factors of economic change. Having accumulated wealth through export and agriculture, landowners started to invest capital in the industry, supported by the government’s incentives and subsidies. The consumer revolution increased the demand for locally produced goods and gradually led to the establishment of a national network of small shops and factories. Entrepreneurship has always been characteristic of the American economy, but its significance became more apparent later, after the American Civil War.
Atack, Jeremy. A New Economic View of American History: From Colonial Times to 1940. 2nd ed., W. W. Norton, 1979.
Dublin, Thomas. Transforming Women’s Work: New England Lives in the Industrial Revolution. Cornell University Press, 1994.
Taylor, Frederick Winslow. Shop Management. Harper & Brothers Publishers, 1903.