An economy driven by competition

Many economists agree that an understanding of the American economy begins with Adam Smith’s concept of the “invisible hand.” Smith, considered the father of economics, wrote in his 1776 book The Wealth of Nations that an economy performs best when buyers and sellers seek the best outcome for themselves, as if guided by an unseen hand. The sum of their many independent transactions is the most efficient use of a nation’s resources, he reasoned. In freely operating markets, prices are determined by the interactions of buyers and sellers. Competition results in better products and wider prosperity on average than a government-run economy could deliver, market economists say.

An American version evolved from Smith’s doctrine and other features of Britain’s merchant economy. Its centerpiece remains a matrix of laws, institutions, and traditions that have shaped the American economy. The framers of America’s 1776 Declaration of Independence from Britain and 1789 U.S. Constitution had given the new United States the basic political freedoms and restraints on governmental power that Americans have prized—and debated—since the country’s founding.

But even the strongest supporters of market capitalism acknowledge that it does not provide all the answers. A manufacturer won’t pay the environmental and health costs of the pollution emitting from its smokestacks unless government requires that it do so. A monopolist or group of dominant companies can charge higher prices than a competitive market would allow.

Every generation of Americans has produced critics of the nation’s economic arrangements. Historian Henry Steele Commager said that “whatever promised to increase wealth was automatically regarded as good, and the American was tolerant, therefore, of speculation, advertising, deforestation, and the exploitation of natural resources, and more patient with the worst manifestations of industrialism.”

Others have pointed to numerous contradictions both seeming and real in the American economic formula: a consumer-led society long on materialism but short on saving for the future; a nation of abundant natural resources that has at times abused this bounty; a political system grounded in civic equality but reliant on income inequality to motivate citizens to work hard and invest in learning; a nation with astonishing wealth at the top and more relative poverty than in many of the world’s rich countries.

But the large majority of Americans subscribes to the idea of a dynamic economy that embraces competition, invites striving and invention, heaps rewards on winners, and gives second chances to those who fail. With all its contradictions, the United States has achieved a highly flexible economic system that arguably offers more choices and opportunities than any other, and one that has displayed repeatedly its capacity to repair mistakes and adapt to recessions, wars, and financial panics, gaining strength from its trials. The United States “continues to surprise,” Secretary Rice said, following Obama’s election. “It continues to renew itself.”