The United States entered the 21st century with an economy that was bigger, and by many measures more successful, than ever. Not only had it endured two world wars and a global depression in the first half of the 20th century, but it had surmounted challenges ranging from a 40-year Cold War with the Soviet Union to extended bouts of sharp inflation, high unemployment, and enormous government budget deficits in the second half of the century. The nation finally enjoyed a period of economic calm in the 1990s: prices were stable, unemployment dropped to its lowest level in almost 30 years, the government posted a budget surplus, and the stock market experienced an unprecedented boom.

In 1998, America's gross domestic product -- the total output of goods and services -- exceeded $8.5 trillion. Though the United States held less than 5 percent of the world's population, it accounted for more than 25 percent of the world's economic output. Japan, the world's second largest economy, produced about half as much. And while Japan and many of the world's other economies grappled with slow growth and other problems in the 1990s, the American economy recorded the longest uninterrupted period of expansion in its history.

As in earlier periods, however, the United States had been undergoing profound economic change at the beginning of the 21st century. A wave of technological innovations in computing, telecommunications, and the biological sciences were profoundly affecting how Americans work and play. At the same time, the collapse of communism in the Soviet Union and Eastern Europe, the growing economic strength of Western Europe, the emergence of powerful economies in Asia, expanding economic opportunities in Latin America and Africa, and the increased global integration of business and finance posed new opportunities as well as risks. All of these changes were leading Americans to re-examine everything from how they organize their workplaces to the role of government. Perhaps as a result, many workers, while content with their current status, looked to the future with uncertainty.

The economy also faced some continuing long-term challenges. Although many Americans had achieved economic security and some had accumulated great wealth, significant numbers -- especially unmarried mothers and their children -- continued to live in poverty. Disparities in wealth, while not as great as in some other countries, were larger than in many. Environmental quality remained a major concern. Substantial numbers of Americans lacked health insurance. The aging of the large post-World War II baby-boom generation promised to tax the nation's pension and health-care systems early in the 21st century. And global economic integration had brought some dislocation along with many advantages. In particular, traditional manufacturing industries had suffered setbacks, and the nation had a large and seemingly irreversible deficit in its trade with other countries.

Throughout the continuing upheaval, the nation has adhered to some bedrock principles in its approach to economic affairs. First, and most important, the United States remains a "market economy." Americans continue to believe that an economy generally operates best when decisions about what to produce and what prices to charge for goods are made through the give-and-take of millions of independent buyers and sellers, not by government or by powerful private interests. In a free market system, Americans believe, prices are most likely to reflect the true value of things, and thus can best guide the economy to produce what is most needed.

Besides believing that free markets promote economic efficiency, Americans see them as a way of promoting their political values as well -- especially, their commitment to individual freedom and political pluralism and their opposition to undue concentrations of power. Indeed, government leaders showed a renewed commitment to market forces in the 1970s, 1980s, and 1990s by dismantling regulations that had sheltered airlines, railroads, trucking companies, banks, telephone monopolies, and even electric utilities from market competition. And they pressed vigorously for other countries to reform their economies to operate more on market principles too.

The American belief in "free enterprise" has not precluded a major role for government, however. Americans at times have looked to government to break up or regulate companies that appeared to be developing so much power that they could defy market forces. They have relied on government to address matters the private economy overlooks, from education to protecting the environment. And despite their advocacy of market principles, they have used government at times to nurture new industries, and at times even to protect American companies from competition.

As the sometimes inconsistent approach to regulation demonstrates, Americans often disagree about the appropriate role of government in the economy. In general, government grew larger and intervened more aggressively in the economy from the 1930s until the 1970s. But economic hardships in the 1960s and 1970s left Americans skeptical about the ability of government to address many social and economic issues. Major social programs -- including Social Security and Medicare, which, respectively, provide retirement income and health insurance for the elderly -- survived this period of reconsideration. But the growth of the federal government slowed in the 1980s.

The pragmatism and flexibility of Americans has resulted in an unusually dynamic economy. Change -- whether produced by growing affluence, technological innovation, or growing trade with other nations --- has been a constant in American economic history. As a result, the once agrarian country is far more urban -- and suburban -- today than it was 100, or even 50, years ago. Services have become increasingly important relative to traditional manufacturing. In some industries, mass production has given way to more specialized production that emphasizes product diversity and customization. Large corporations have merged, split up, and reorganized in numerous ways. New industries and companies that did not exist at the midpoint of the 20th century now play a major role in the nation's economic life. Employers are becoming less paternalistic, and employees are expected to be more self-reliant. And increasingly, government and business leaders emphasize the importance of developing a highly skilled and flexible work force in order to ensure the country's future economic success.

This book examines how the American economy works, and explores how it evolved. It begins by providing a broad overview in chapters 1 and 2 and a description of the historical development of the modern American economy in chapter 3. Next, chapter 4 discusses different forms of business enterprise, from small businesses to the modern corporation. Chapter 5 explains the role of the stock market and other financial markets in the economy. The two subsequent sections describe the role of government in the economy -- chapter 6 by explaining the many ways government shapes and regulates free enterprise, and chapter 7 by looking at how the government seeks to manage the overall pace of economic activity in order to achieve price stability, growth, and low unemployment. Chapter 8 examines the agricultural sector and the evolution of American farm policy. Chapter 9 looks at the changing role of labor in the American economy. Finally, chapter 10 describes the development of current American policies concerning trade and international economic affairs.

As these chapters should make clear, the American commitment to free markets endured at the dawn of the 21st century, even as its economy remained a work in progress. Next Chapter >