A look inside the political economy of early America

The modern U.S. economy is a complex machine, made up of imports and exports, gross domestic product and tariffs, interest rates and manufacturing, AI and unemployment, construction and chips. But it grew from basic roots, based in farms and cities scattered around a small series of British settlements on the East Coast of what would grow into a new country.

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To learn more about the early American economy, Penn Today spoke with Fernando Arteaga, academic director of the Penn Initiative for the Study of Markets and a senior fellow in the Department of Economics, who is teaching the course The Political Economy of Early America this semester.

“Whatever we learn in economics can and should be applied to understanding the real world,” Arteaga says. “Understanding the origins of the U.S. economy is relevant, because the country's later development can only be properly explained in light of its underlying foundations.”

Here are Arteaga’s top five takeaways on the political economy of early America:

Native Americans remained the dominant population and crucial economic partners well into the colonial period.

“Their nomadic nature played a big role in their future relations with the Europeans, making them easier to displace as settlements expanded,” Arteaga says. Intertribal competition also shaped these dynamics, as rivalries led many Native American nations to seek European partnerships as a counterweight against Indigenous rivals. “That dynamic made the French and Indian War, and the road to independence, inseparable from the Native American story,” he says.

There was no unified, national economy in the way we think of it today. Instead, it was a series of regional economies.

“If you were to live in the 17th century in either New England or Virginia, you would never think that this set of colonies would someday be considered a country,” Arteaga says. “In fact, if there was something tying the colonies together, it was their relationship with the Caribbean—Barbados, Jamaica. Virginia was a tobacco-based economy, increasingly dependent on enslaved African labor, and New England had fishing, a little bit of lumber, and that would lead to the incentive to create cities and ports.”

The economic push for independence was driven by Virginia and New England.

“The clash was not simply about taxes or trade but about where legitimate authority resided—in London or in Virginia,” Arteaga explains. “New England was competing for manufactures with England, and the Virginia planter class had grown accustomed to governing itself through the colonial assemblies.”

By contrast, Pennsylvania and New York were more hesitant. “New York in particular had more to lose from breaking with Britain. It aligned with the independence movement but not without significant internal debate,” Arteaga says.

After the Revolution, the new government under the Articles of Confederation was fairly weak. 

“This created a classic free-rider problem: Each state could benefit from the existence of a central government without contributing to it, since their individual contribution made little difference to the collective outcome,” Arteaga says. “The central government remained starved of resources and authority.” There was also both inflation and deflation: inflation of Continental dollars, because they were worth nothing, and deflation because of the shortage of physical silver and gold, Arteaga says.

The Constitution created institutions that were critical to strengthening the new nation’s economy—and growing it to the largest in the world.

Under the new Constitutional government, the legitimizing presence of George Washington and the principle of judicial review from the Supreme Court helped stabilize the country, says Arteaga. “What matters in long-term economic growth is that you grow steadily, without disturbance,” he says. “What makes a society wealthy is the ability to cooperate and set correct incentives towards human development. That’s why institutions are so important; they create cooperation among peoples that are very different.”