An Outline of the American Economy (1991)

2/12 How the United States economy works

2/7 Basic ingredients of the US economy

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Every economic system tries to anticipate and then meet human needs through the production and distribution of goods and services. The economic system is the mechanism that brings together natural resources, the labor supply, technology, and the necessary entrepreneurial and managerial talents. Although the type of economic system used by a nation is the result of political decision, it is also in even larger part the result of a historical experience that, over time, becomes a national culture.

The first ingredient of an economic system is the natural resources from which goods are produced. The United States is a land rich in mineral resources and fertile farm soil, together with a moderate climate.

Second, the amount of available labor helps determine the health of an economy. Generally, the United States has been fortunate in having enough people to provide the labor necessary for a constantly expanding economy. Until shortly after World War I, most of these workers were either immigrants (or their immediate descendants) who came to America from Europe, or African Americans whose forebears were brought to the Americas as slaves. When too many laborers arrived to be absorbed on the East Coast, they could usually move on to farmland in the interior and be productively absorbed in that part of the economy.

In the early years of the 20th century, large numbers of Asian (Chinese, Japanese, Filipino) immigrants came to the United States, while large numbers of Latin American immigrants came in the later years. Economic opportunity also attracted black Americans from Southern farms to Northern cities in the first half of the 20th century.

Although the United States has sometimes experienced periods of acute unemployment or the reverse, labor shortages, on the whole, immigrants came when work was plentiful. The U.S. economy usually grew fast enough to absorb the newcomers, provided they were willing to work productively at slightly less than the wage rates paid to acculturated workers. Overall, immigrants prospered, earning far more than they would have in their native lands, and the economy of the nation prospered as well.

Another factor in any economic system is the quality of available labor -- how hard people are willing to work and how skilled they are. In the United States, the frontier demanded hard work, and the Protestant work ethic supported that demand. The strong emphasis placed on education, including technical and vocational education, also contributed to America's economic success. Likewise the willingness to experiment, to change and to invest in technology was significant in a land that had prided itself on being a new experiment in freedom.

But the existence of abundant natural resources and a skillful and willing labor force accounts for only part of the structure of an economic system. The resources must be directed as efficiently as possible into the areas where they will be most productive. In the American economy, managers of enterprises responding to signals from markets perform this function.

Large blocks of resources must be available for major investments. In America, entrepreneurs accumulate money and then invest in projects -- buy supplies, hire workers and sell products -- that seem likely to give a high return on the original investment. This is determined on the basis of an assessment of the wants and needs of those who buy goods and services -- what is known as consumer demand.

In the United States, the corporation has proved to be an effective device for accumulating funds for investment. This is a voluntary association of owners, known as stockholders, who form a business enterprise that is marked by limited liability. Once the first entrepreneurial investment of capital has been made, someone must be hired to manage the new business, factory or other endeavor. Modern America has developed a chain of managerial command, from the foreman at the loading dock to the chief executive in the boardroom, whose job is to see that the business runs smoothly and efficiently. Good management often can make the difference between a successful or unsuccessful operation. In early 20th-century America, management was said to be based heavily on systematic analysis; "scientific management" became a veritable movement. But later in the century, views on management became more diverse.

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