Five Factors of Production and the Evolution of the American Economy
All economic value
comes from some combination of land, capital, labor, culture,
and entrepreneurship.
Let’s break it
down with a simple example:
- Land: You find, claim, or buy a forest filled with timber.
The forest itself, in its raw and natural state, is an example of land, of
natural resources.
- Capital: You need tools to harvest the
timber. You invest in saws and axes, which don’t directly produce lumber
but are essential for the process. This is capital - an investment to
enable production.
- Labor: You hire lumberjacks to use the saws
and axes to fell the trees and transport the timber out of the forest.
Their effort is labor.
- Culture: information and knowledge that
drives the actions and interactions of the people in this endeavor. Here,
it is less about the information and knowledge that defines a career or a
piece of capital than it is the emergent processes that arise from the interaction
of the pieces in the endeavor. This is not generally included in the list
of factors of production, but the information economy has made this more
obvious and its influence more important. It would include everything from
techniques the lumberjacks know for felling trees and coordinating their
work through agreed upon processes to knowledge about which supplier offers
the best saws for the best price.
- Entrepreneurship: You define and manage the process.
You buy the land, hire the workers, acquire the tools, shape the culture
with a flow of information, skills, and leadership, and you negotiate with
sawmills to turn timber into lumber. You take the risks and coordinate all
the elements, turning an idea into a viable business. You may make a huge
profit. You may take a huge loss. The difference between what society will
pay you for lumber and what it costs you to produce it is your profit (or
loss).
Entrepreneurs, as
distinct from managers, are the initiators. They create new businesses, while
managers sustain and optimize them. While the line between the two often blurs,
entrepreneurship is typically about creating new systems and companies,
and management is about maintaining and improving existing ones.
These elements -
land, capital, labor, culture, and entrepreneurship - define all economies.
However, different periods of American history – and American politics - have
emphasized one factor more than the others. An agricultural economy is most
defined by land, an industrial economy most defined by capital, and so on.
As economies
become more complex and advanced, so does the factor of production that defines
them, the factor that limits progress. These very different economies require
very different governments and policies, which gets to the heart of New
Politics for the Next Economy. The differences in an economy limited by
land vs. one limited by labor is at least as stark as the difference between
parenting an infant and a teenager. The policies and politics of these very
different economies are so different that we’ve essentially created four
separate Americas since Jefferson wrote the Declaration of Independence, each
defined to address and overcome the limit of its time.
Summary of Five
Americas (Four Past and One Future)
|
Period |
Economy |
Limit to Progress |
Transitional President |
|
1801 - 1861 |
Agricultural |
Land |
Jefferson |
Jefferson and the Limit of Land
Jefferson’s America was an agricultural economy, and its constraint was land.
Ninety percent of Americans lived on farms when he took office. His policies
and philosophy focused squarely on securing territory so that a growing
population of Yeoman farmers could remain independent, virtuous, and free. The
Louisiana Purchase alone doubled the nation’s landmass, removing the most
obvious bottleneck to expanding the economy and giving Jefferson’s
contemporaries a vision of an “empire for liberty.” It is no stretch to say
that Jefferson was the president who most clearly defined and pursued policies
to overcome the limit of land.
From Jefferson
to Lincoln (Land → Capital)
Jefferson’s agrarian republic thrived so long as fertile land could absorb
restless ambition. But by the mid-19th century, the frontier was not enough. Or
more specifically, the frontier had reached the Pacific Ocean. Railroads,
factories, and finance required new ways to mobilize capital, not just settle
acreage. Lincoln’s task was to channel private investment and public authority
into an industrial system that could unite farms, factories, and markets into a
single national economy, transitioning the economy from the zero-sum dynamics
of land to the abundance of capital.
|
Period |
Economy |
Limit to Progress |
Transitional President |
|
1861 - 1933 |
Industrial |
Capital |
Lincoln |
Lincoln and the
Limit of Capital
Lincoln inherited a divided nation and an economy still largely local,
fragmented, and cash-poor. The Civil War forced him to tackle the problem of
capital head-on: how to finance a war, unify markets, and build a modern
industrial nation. His administration created national banks and a uniform
currency, issued bonds to mobilize savings, and authorized the first income
tax. The Pacific Railway Acts and land-grant colleges tied capital formation to
expansion and innovation. In doing so, Lincoln confronted the limit to progress
of his era: capital. By making money, credit, and investment more abundant and
more reliable, he unleashed a wave of industrial growth that transformed
America, shifting the focus of economic growth from more farms to more
factories.
From Lincoln to
FDR (Capital → Labor)
Lincoln’s industrial America unleashed unprecedented growth, but also new
dangers: monopolies, financial crashes, regular recessions, and a workforce
treated as disposable tools. By the 1930s, the problem was no longer how to
build capital, but how to fully employ labor in ways that spread dignity and
security. FDR’s New Deal recast government as guarantor of full employment and
wages, building institutions to balance the raw power of capital with the needs
of millions of workers.
|
Period |
Economy |
Limit to Progress |
Transitional President |
|
1933 - 1981 |
Balanced |
Labor |
FDR |
FDR and the
Limit of Labor
When Franklin Roosevelt took office, the most pressing problem was not land or
capital but labor. One in four workers was unemployed; millions more were
underpaid, under protected, or excluded from opportunity. FDR’s genius was
pragmatic experimentation: public works programs to create jobs, Social
Security to provide security in old age, labor laws to guarantee rights and
safety, and public investment to raise productivity. The result was not just a
recovery from the Great Depression but the creation of a balanced economy in
which labor was fully employed and broadly empowered. By treating labor as the
central constraint - and investing in its development, protection, and dignity -
Roosevelt helped to create the broad middle class that defined mid-20th-century
America and economic growth even more stunning than the transformation
following from Lincoln’s capitalism.
From FDR to
Reagan (Labor → Culture)
FDR’s balanced economy created the broadest middle class in history, but once
mass employment was secured, the next questions became cultural: what to do
with rising prosperity, and how to live amid accelerating possibilities. By the
late 20th century, knowledge workers and new technologies defined economic
winners and losers, while debates over family, sexuality, faith, and freedom
defined politics. Reagan embodied this shift, liberating markets on the how
to frontier while rallying tradition on the what to frontier —
setting the stage for an America divided not just by wealth, but by culture
itself.
|
Period |
Economy |
Limit to Progress |
Transitional President |
|
1981 - 2029 |
Information |
Culture |
Reagan |
Reagan and the
Limit of Culture
By the late 20th century, America was no longer constrained by land, capital,
or even labor. What had become decisive was culture: knowledge and norms, the
twin questions of how to and what to. Christian Smith articulates
this definition of culture. “Culture provides descriptive ‘models of’ reality
and prescriptive ‘models for’ living in that reality. Culture’s ‘models of’
supply representations of the way things are. Culture’s ‘models for’ prescribe
how one should act within those realities. In short, ‘culture’ is learned
knowledge about reality and how to live in it.”[1]
The information
economy elevated a new meritocracy of engineers, scientists, managers, and
lawyers - people whose highly specialized “how to” knowledge commanded soaring
incomes and reshaped markets. Knowledge workers. But alongside this economic
transformation came a political one, as Americans clashed over the “what to” of
life: family structure, gender roles, sexuality, religion, and lifestyle.
Reagan embodied this hinge moment. He championed deregulation and tax cuts to
liberate individuals and businesses in their pursuit of wealth - a vote of
confidence in the how to power of markets. At the same time, he drew on
the rising religious right to reinforce traditional answers to the what to
of morality and identity.
In this way,
Reagan presided over a double divide: an emerging economic split between those
who thrived in the new knowledge economy and those left behind, and a cultural
split between urban and rural, secular and religious, those with or without a
college degree, blue and red, those focused on the how to of culture and
those focused on the what to of culture. Politics increasingly became a
culture war, fought not only over material interests but over the very
definition of the good life. The result was the emergence of two Americas - not
born of geography alone, but of diverging models of reality and prescriptions
for how one should live within it.
From Reagan to
the Entrepreneurial Economy (Culture →
Institutions)
Reagan’s market individualism and the culture wars it fueled left America
wealthier, but also more fractured. Information multiplied, lifestyles
diversified, and politics hardened into battles over identity and values. Amid
this abundance of choice and conflict, trust in institutions collapsed. The
information economy had shown us how to do more and what we might
do, but not how to live together. That breakdown is the real limit we
face now.
This information
economy made two things possible: the generation, storage and dispersal of more
valuable knowledge and information than ever before and the generation and
dispersal of more damaging mis- and disinformation than ever before. In an
agricultural economy, communities fought land wars; in this information
economy, communities fight information wars.
The next economy will turn on entrepreneurship not just in markets, but in the
public sphere - the invention and reinvention of institutions that deserve
trust, enable belonging, and translate possibility into progress. We’re
currently amid an institutional recession, trust in our major institutions
having fallen from about half of Americans having a good or great deal of trust
in our most defining institutions about the time Reagan came into office to
just one quarter of Americans now. Just as Jefferson, Lincoln, and FDR reshaped
America to overcome the limits of land, capital, and labor, our task is to
overcome the limit of exhausted institutions and polarized culture by creating
new frameworks for cooperation and flourishing.
|
Period |
Economy |
Limit to Progress |
Transitional President |
|
2029 – ? |
Entrepreneurial |
Entrepreneurship |
You? |
You and the
Limit of Entrepreneurship
By 2025, cultural
war had escalated to the point that the US president who had been put into
power by votes from red states was sending military troops into the major
cities of blue states. The same president who – in his last weeks in office in
2021 – instigated a literal attack on democracy, the storming of the capitol
even as the 2020 election was being finalized by Congress. During that attack,
for the first time in history, the confederate flag was carried in the halls of
Congress. As Trump’s biographer Michael Wolff points out, Donald Trump’s
superpower in a world of limitless information is his ability to seize and hold
attention. In our world of abundance, attention is still zero-sum. Trump has contempt for democratic leaders
within the US and around the globe and great admiration for dictators like
Putin, Kim, Xi, and Mohammed bin Salman (to whom Trump professed love on a
state visit early in his second term). A
vote for a man like Trump who has such strong affection for dictators and so
little tolerance for democratic norms is a vote against institutions and two
things have happened to put the US into such a precarious position. One, the
information economy has made it easier than ever to generate and spread
misinformation and disinformation, eroding trust in our institutions. Two,
private sector entrepreneurship is rewarded more than it has been at any time
in history while public sector entrepreneurship is largely prohibited. Public
sector institutions have not kept pace with the private sector. An entrepreneur
is to institutions what an inventor is to products or technologies: creating or
improving the institutions that define a business or school, government agency
or nonprofit. Distrust in our institutions is not all the product of
misinformation; public sector institutions are not as responsive to public
opinion and desires as are private businesses. We have no tradition of public
sector entrepreneurship. What is now needed are public sector leaders who
undertake the project of reviving and creating public sector institutions that
restore trust in democracy and markets and update Smith and Jefferson’s world
defined by ordinary people through market transactions and the ballot box.
Progress now is not nearly as much about more resources, more capital, a more
educated workforce or more information. It is about more of us developing more
ability to create, revive and update institutions so that they become better,
evolving tools for us to create value for others and to realize our potential,
to find flow and create meaning in a way that revives Jefferson’s promise of
this as a country with politics designed for the pursuit of happiness rather
than the provocation of anger.
We already know
how to turn public science into private products - the iPhone rides on layers
of DARPA, NSF, and NIH research. The next economy asks a harder question: can
we create public-sector institutions that solve problems or realize potential
with the same dynamic venture capital brings to startups? Imagine government as
a first customer, small teams funded in stages, real outcome metrics, and the judgement
to scale what works and sunset what doesn’t. This book argues we can - and
shows how.
The constant
through the history of these United States is each generation and community
finding their own balance between the interplay of Jefferson’s democracy and
Smith’s markets. The point of disruption, the element that changes with each
economy and ripples into so much about us, is the factor of production that
limits progress. That change has triggered revolution, civil war, and a great
depression and now a threat to democratic institutions.
[1]
Smith, Christian. Why Religion Went Obsolete: The Demise of Traditional Faith
in America (pp. 7-8). Oxford University Press. Kindle Edition.
No comments:
Post a Comment