A Brief History of American Capitalism
We’ve had several histories of American capitalism recently, but these book-length accounts are so caught up in details that they drown out key points. Why did Americans embrace an aggressive form of capitalism, and why did they continue with this approach despite a variety of challenges over time? For an article-length version of this blog, click here.
What Is Capitalism in America?
What is capitalism? The simple, and accurate definition is a political economy that favors the accumulation of resources to be applied for future improvements. That was essentially the definition used by Sven Beckert in his recent massive Capitalism: A Global History, and even Jonathan Levy’s Ages of American Capitalism had a similar starting point.
But that simple definition is too broad for the United States, which has an unusual culture. “State capitalism” as in China, for example, does not fit the American experience. American capitalism is more decentralized and open than in other countries; it promotes and depends more on individual initiative.
Second, and more important, this simple definition does not match what we want most from capitalism, which is achieving the high levels of affluence, material and social, to which we Americans (and eventually some others) have become accustomed since the late 20th century. What kind of capitalism can bring about that affluence?
As Carl Benedikt Frey has argued, to enable major innovation, only an aggressive version of capitalism engages the energies and risk-taking of many people with talent and resources. Authoritarian or state capitalism can help a country catch up economically, but it struggles at the innovation frontier.
Hence a better definition: a culture and politics that promoted the open accumulation and direction of resources for future rewards. It favors private entrepreneurs and investors (the capitalists), over other interests in the society, from workers to consumers.
Why did this capitalism develop and persist in the United States, despite many challenges? Three reasons. First, capitalism delivered remarkably broad affluence. Most people lived much better materially and socially, which is partly why many people from other countries emigrated here.
Second, capitalism unleashed voluntary energies more than other approaches. Instead of putting their energies into non-material paths, America encouraged many peasants to become entrepreneurs, or to otherwise serve the needs of society. Manorialism and socialism, perhaps the two great alternatives, discouraged this extra effort. Third, capitalism worked well with disruptive change. Self-selected by (mostly) voluntary immigration, Americans developed a culture of restlessness and individual responsibility.
American capitalism developed in two great stages. First, capitalism had to emerge and expand over a non-capitalist culture and politics. Then capitalism had to overcome challenges from approaches that promised to deliver a better life.
Overcoming the Non-Capitalist Status Quo
Change is always hard, even in a new country. European immigrants had to break out of the manorial or feudal structures they had grown up with. Manorialism operated on strict hierarchies that prevented most people from working toward a higher social station for themselves. Elites focused on preserving their high position, caring for the peasants under them, and preserving social order. In the nine-plus centuries of medieval life in Europe and elsewhere, manorialism had made some gains against poverty and insecurity. But for most people back then, life was still “nasty, brutish, and short.” Even mercantilism didn’t by itself change manorialism’s culture and politics.
European settlers shared territory with a great many Indian (or indigenous, native, Asiatic) peoples loosely organized in villages and tribes. But those peoples, while more egalitarian than the Europeans, were centuries behind in progressing toward affluence. They taught Europeans crucial lessons on farming, and perhaps democracy, but offered little in terms of capitalism.
For capitalism to emerge, settlers needed a way to open up the structures of manorial society. As it turned out, America had abundant land. Many of the Indians unfortunately died of European diseases, and the settlers used their superior technology to push away or kill most of those who survived. A frontier of seemingly endless land opened up.
Land was the key possession in manorialist society, and a scarcity of it did much to enforce hierarchical rule in Europe. Without a scarcity of land, the wealthiest early settlers -- the would-be elites – struggled to reproduce manorialism in America. In the southern colonies, wealthy planters switched to export crops of such high value that they could afford a different solution: enslaving people stolen from Africa. The northern colonies enslaved people too, but they lacked high-value export crops, and slavery faded away over time.
With independence, a majority of Americans eventually found slavery intolerable for the country as a whole, so the South’s quasi-manorialist society ended with the Civil War. The southern states had dared to secede, expecting only a mild response from the North. After all, slaves were still the biggest capital asset in the country in 1860. But the South was wrong, as the North fought strongly and eventually won.
So the United States developed full-fledged capitalism in a relatively open society, and a culture and politics that favored broad improvement, with many people diligently going to the trouble of saving resources and investing for future gains.
Besides manorialism, capitalism had to overcome the opposite challenge of egalitarianism. Would the emerging country favor the interests of ordinary people, or those who had succeeded in accumulating resources to invest in future gains?
Soon after gaining independence, the newly independent states looked to strengthen their confederation. At the constitutional convention, the delegates debated what to do about the pensions that state governments had granted to war veterans. Lacking the money to pay soldiers directly, most states had issued bonds. But most of those soldiers in turn had sold the bonds to speculative investors. The latter had the patience and optimism to believe that the states would eventually make good enough on the bonds to justify their investment.
The delegates largely agreed that the federal government should take on the states’ debts. But should it pay off those bonds at face value, giving the investors a substantial gain on their payments to the soldiers? Alexander Hamilton, the future head of the federal treasury (and hero of the Broadway musical), argued forcefully for redeeming the bonds at face value. He believed the country, with such abundant land, badly needed investment in order to realize its potential, and he wanted it to favor capitalist in order to attract that investment.
Most of the soldiers in the war had been poor, non-landholding privates who often lacked shoes to wear. The country owed them a great deal for their terrible sacrifices. Yet should their interests determine the country’s political economy?
Hamilton won over his fellow delegates, and most people in the new federal union went along. Because the society continued to favor investors, capitalism had withstood the challenge from egalitarianism.
Likewise at the local or state level, the many ordinary farmers resisted the efforts of wealthy merchants and other capitalists to control government. They wanted their government to keep taxes low and leave them alone, rather than raise revenue for the supposed improvements that leaders such as Hamilton championed. In some states, they even succeeded in printing inflationary paper money to help them out of debt to capitalists.
But it turned out that the most successful farmers wanted to get ahead of their fellows. They favored investments that could raise the value of their farms. They didn’t want the merchants to control improvements, but some of those improvements, such as government-subsidized roads and schools, were ok.
Most of this controversy played out in the 1790s and 1800s, but an echo played out two decades later in the Jacksonian revolution. Majorities fought against the “American system” of improvements sought by Henry Clay and other centralizing political leaders. The problem wasn’t capitalism per se, with those disproportionate rewards, but the tendency of wealthy merchants and political leaders to use government power for their own personal benefit. As Luigi Zingales has pointed out, most people wanted an open society, free of governmental favoritism.
Overcoming Alternatives to Capitalism
By 1870, American culture and politics were deeply committed to capitalism, resulting in what’s called the Second Industrial Revolution of the late 19th century. After the success of textile mills and other early factories, entrepreneurs saw opportunities in building large-scale factories for steel and other capital-intensive goods. Their success led to continued development, and capitalism has continued in the United States since.
Along the way, capitalism had to overcome challenges from several fronts. The first came from the skilled workers who still made up much of the workforce. They wanted to keep factories small, dominated by themselves. They believed their skills mattered at least as much as the capital for setting up and running a factory. Not only did they organize unions, but they launched a great many cooperatives, where they raised capital in their own communities for their workshops.
Both approaches took root, but capitalists attracted enough outside investment to build some giant factories, initially staffed by skilled workers who couldn’t find cooperatives. In order to pay high dividends to attract that investment, however, they needed to become highly efficient. A big way they did this was through capital deepening, where workers got additional equipment to make production easier.
That extra equipment, however, undermined the expertise that skilled workers had built up over time. Capitalists could instead largely employ the cheaper unskilled workers, now abundant with the waves of immigration. Andrew Carnegie, the great innovator in steel-making, took this approach to the extreme.
Matters came to a head in the great strike at his Homestead factory in 1892, where aggrieved skilled workers found support from their local communities. But the state and federal governments, and public opinion, came down squarely on the side of Carnegie, preventing the strikers from interfering with replacement workers and shutting down operations.
The strikers hurt their cause with violence and the presence of anarchists, but they likely would have lost out anyway. That abundant skilled labor, along with land still plentiful, meant capital investment continued to be the scarce resource. To soften the blow, many companies embraced the employee benefit programs of “welfare capitalism.” Another challenge came from people with higher education, still unusual in the early 20th century. Engineers and other “managerialists” accepted the bounty of 19th century capitalism, but believed they could bring about progress faster with smarter policies. They wanted to replace investors and entrepreneurs with professionals paid a simple salary to decide on investment provided by government. They believed educated people would avoid the seemingly chaotic, wasteful, and cruel ways of capitalists, while still delivering the great material gains that capitalists had achieved.
Their arguments had enormous influence, but in companies, directors and executives were not impressed; they did not embrace professionalism except as a public relations move. In politics, Theodore Roosevelt’s “New Nationalism” lost out to Woodrow Wilson’s “New Freedom,” which called for antitrust and smallness rather than government control over the economy. Managerialism didn’t die out, and it got revived interest after World War II, but it never penetrated much in companies.
The third big challenge came in the Great Depression of the 1930s. Capitalism had succeeded in bringing broad prosperity, but what happens when the economy shrinks severely? By 1933, a quarter of able-bodied American men lacked jobs – at a time when far fewer people than earlier could fall back on farms for necessities.
For capitalism, the threat was two-fold. First, the federal government might nationalize some industries from telephones to steel, while intensely regulating others – putting much of the economy under the control of bureaucrats. A nationalizing government would emphasize stability and restoring employment, not the dynamic innovation and improvement needed for affluence.
Second, the federal and state governments might greatly expand welfare benefits, to the point where people would have little incentive to take risks to innovate for future affluence. In order to promote equality, political leaders might dampen capitalist rewards with heavy taxes to pay for extensive supports.
This challenge got worse with World War II. That intense, broad, and long-lasting conflict demanded a strong government response, and the federal government exerted control over much of the civilian as well as military economy.
Yet capitalism continued even after this great test. Observers were impressed, if taken back, at how many Americans blamed themselves for their struggles. Most people did not fault capitalism, but did welcome short-term governmental interventions to shore up their situation.
It helped that the most charismatic leader in the country, President Franklin Roosevelt (FDR), was no ideologue, and skillfully outmaneuvered radical opponents such as Huey Long and Father Coughlin. His pragmatic approach was to try many policies and see which stuck, and decentralized politics in the United States moderated the New Deal.
Right after the war, the U.S. domestic economy regained strength largely on its own. The rising threat of communism in the Cold War also discouraged voters and leaders from adopting approaches seen as contrary to American values. But new president Harry Truman’s Fair Deal sought to make the federal government responsible for full employment -- investing to make up for any shortfall in the private economy. Businesspeople, allied with racist Southerners in Congress worried about losing Jim Crow, watered down the legislation to preserve private, market-based control over investment. Separately, despite New Deal support for unions, executives at companies preserved the “right to manage.”
The fourth big challenge came again from American society generally. In the post-World War II golden age, with foreign competitors badly damaged, companies paid high wages and increasingly generous benefits along with stable employment. The descendants of peasants now owned homes in suburbia. Those gains created a familiar problem of capitalism: expectations rising faster than output. Then in the early 1970s, those war-damaged economies had largely recovered, and were now undercutting American producers.
At this near utopian state of affluence, at least for white men, people could have given up on capitalism and embraced a mixed economy, where high tariff barriers and government stimulus spending prevented a crisis. Instead, the country adopted “neoliberalism,” a series of deregulatory moves, welfare cuts, and other free-market moves that led to a burst in home-grown innovation.
It helped that the postwar baby boom had given the country young, eager recruits open to new approaches. In telecommunications, trucking, and airlines, prices fell while quality and access rose, and industries dependent on military spending shifted to the consumer sector with astounding innovations. Instead of watching other countries catch up, Americans regained the lead in electronics, telephony, and computers. A blizzard of startups turned the internet from a largely academic network to a consumer bonanza. Widespread financialization meanwhile helped the economy shifted from medium-wage manufacturing to high-wage services.
Even in the manufacturing that continued, companies sought competitive advantage through efficiency. They took advantage of new technologies to create impressive new avenues for profitable growth. Investors saw higher returns, even if workers did not.
While global inequality gradually fell, this neoliberal revival did little directly for the “Rustbelt” factory towns that had prospered in the golden age. But unlike libertarians who scorned any government support, pragmatic neoliberal political leaders kept government involved in various ways -- enough to win several electoral majorities. With the fall of Soviet communism making capitalism seem triumphant, some observers even saw the end of history.
Neoliberalism’s success led to renewed calls for doing better than capitalism. The next challenge came from “progressives” who wanted to move faster to the future. They impatiently called for “ESG,” with greater equity (especially for women and people of color), sustainability (environmental), and governance (companies favoring a broad group of stakeholders, not just investors).
Yet capitalism persisted with only minor changes, as many Americans soon saw ESG as a luxury the economy could not afford. The ESG movement also overplayed its hand, provoking a backlash against aggressive critiques of companies. Capitalist leaders, and the American system of political economy generally, again proved pragmatic enough to tolerate some changes while preserving the essential points.
In 2026, capitalism now faces two new challenges. Buoyed by calls for affordability and equality, democratic socialists seek a mixed economy with strong social supports and extensive governmental regulation, even ownership of some industries. Employees are joining unions and otherwise seeking leverage to gain more of the economic pie. Workers’ share had fallen steadily since the triumph of neoliberalism in the 1970s and the population boom in the workforce. And maybe capital and entrepreneurial risk-taking are not as scarce as we think.
The second big challenge comes from America’s fiscal and demographic squeezes. Since 2001, federal and state governments have been borrowing heavily for spending even in the absence of wars or depression. That stimulus has kept social peace and enabled the flourishing of capitalism along with many non-capitalist activities. But interest rates have now risen steadily. As a result, federal and state administrations will likely have to raise taxes, cut spending, or both.
Meanwhile low birth rates and declining immigration won’t just put the country’s population in decline, for the first time ever, but the workforce will shrink and we’ll have fewer young people who provide most of the dynamism and innovation in a society.
It’s possible that artificial intelligence will boost productivity so much that we can grow out of the fiscal and the demographic squeezes. But that’s a risky bet.
The current state of American capitalism
Having overcome major challenges over its history, American capitalism is surprisingly robust. It has delivered impressive and broadly shared affluence. Those who bet against capitalism must think something fundamental has changed. Even critics who oppose it acknowledge the absence of alternatives. Unlike critics a century ago, they don’t see socialism as viable.
Like democracy, capitalism may be the worst political economy, except for all the others. It has given most people a pretty good life, and the alternatives are so problematic, that they would rather just smooth the jagged edges than lose the dynamism it brings.