chapter  5
Federalism, Capitalism, and Economic Growth
Pages 18

Capitalism has been the engine of American prosperity and the source of the most basic political conflicts that changed the course of the nation. Government supervision is an essential part of any capitalist economy for two reasons. Government administers the laws, institutions, and policies that foster the expansion of free markets. Government also receives demands for policies that mitigate the damaging effects of free markets on citizens, such as unemployment, poverty, and pollution. Because government must nurture free markets at the same time that it must mitigate their effects, conflicts over the way government should supervise capitalist development are persistent and intense in all capitalist democracies like the United States. Federalism has helped make the American variety of capitalism different

from that in other nations by allowing these economic conflicts to spill onto two battlefields. Americans have fought about not only how government should supervise market-driven economic development, but also over which level of government-the Federal government or the states-should supervise it. Because the Constitution gave the states the power to govern most aspects of American markets, states drove early American economic development by constructing the basic rules for market expansion. Even though the Federal government played a greater role in setting basic rules for free markets between the Civil War and the 1930s, the states actively managed the transition of the United States to a predominantly urban industrial economy. Federalism in this period helped distinguish American capitalism from that in other nations by fostering the large corporation, the policing of business behavior, and the fragmentation of business’s political interests. Reformers in the New Deal, the 1960s, and the 1990s accepted corporate-driven, free market capitalism as an established fact, and policy-makers at both the national and state levels have worked to harness corporations as vehicles to cushion the impacts of dynamic markets on real people. Federalism generally has shored up the political influence of individual American businesses, while it also has contributed to confrontational regulations that foster exceptional antagonism between business

Federalism is by no means the sole cause of the uniquely American path for governing the economy. Many other factors have contributed. American society often demands less of government because it is so wealthy, opportunities to advance seem abundant, immigrants have diversified the nation, and class conflict has been subdued. American core values are traditionally liberal, emphasizing freedom, free markets, self-reliance, and limited government, leaving relatively little space for socialism or conservative authoritarianism. The separation of legislative, executive, and judicial power encourages the separation of taxes and spending, undermining support for government action.1 Federalism alone is not a sufficient explanation of American economic governance, but it is a pervasive factor that is necessary for understanding the path of economic governance in the United States.