Freedom and Prosperity: Some Comparative Historical Reflections on State Policies and Performance

In his 1982 book, The Rise and Decline of Nations, economist Mancur Olson argued that over time, stable societies accumulate “distributive coalitions,” narrow special-interest organizations that complexify social life and burden the economy with overregulation and opaque forms of wealth redistribution. The notion that distributive coalitions are more often bad than good for economic performance, at least when they are not sufficiently “encompassing” to internalize the costs of inefficient redistribution, is pretty well accepted, but Olson’s thesis that political stability and the passage of time are the most important determinants of the number and power of distributive coalitions has been more controversial. One of the chapters of his book is an empirical test of the hypothesis on the 50 states. Olson finds that states settled earlier have higher rates of unionization and lower growth rates (in the 1960s and 1970s), except the former Confederate states, which “benefit” from the disruptive legacies of the Civil War and Reconstruction.

I am skeptical of Olson’s explanation for the growth of distributive coalitions, but his research does contain a kernel of truth. States that industrialized (note) early often show up on the bottom of economic freedom indices and usually have lower-than-average growth rates even today. Why is that?

To answer the question, we have look back at the social context of 19th century industrialization. The U.S. started out as an overwhelmingly rural, farming country. Industrialization populated the cities. Industrialization advanced first in those parts of the country that were unfit for export agriculture, benefited from high tariff walls on manufactures, and had a policy of free labor: southern New England, New York, and New Jersey. However, resource discoveries in the West also brought urban growth to California.

In 1900, the most urbanized states, by far, were Rhode Island (88.3%) and Massachusetts (86.0%). Then came New York (72.9%), New Jersey (70.6%), and Connecticut (59.9%). Pennsylvania (54.7%), Illinois (54.3%), and California (52.3%) were not far behind Connecticut. All of these states, with the possible exception of Pennsylvania, are now recognized as “deep-blue,” solidly Democratic states. Most of these states were relatively free for industry in the early 20th century, but they also boasted the strongest labor unions and most severe class conflict. These highly urban states became “proletarianized,” leading today to a strong concentration of Democratic votes in their metropolitan centers, according to Jonathan Rodden and other scholars.

As late as 1957, New Jersey was an example of a low-tax business haven. State and local taxes from all sources as a percentage of personal income stood at just 6.3% in New Jersey that year. Delaware had the lowest tax collections in the country, at 4.6% of income. States at the high end included Vermont (9.1%), which pioneered the state income tax, North (9.7%) and South Dakota (9.0%), and Oregon (9.0%). These states remained rural for a long time in part because prairie populism and Yankee progressivism yielded fiscal and regulatory policies that deterred investment. The South’s repression of blacks through Jim Crow kept their institutions “extractive,” to use Acemoglu and Robinson’s term, and their comparative development level low.

Nowadays, urbanization does not tend to produce proletarianization. Not many Americans are employed in manufacturing any more, nor are many private-sector workers covered by collective bargaining agreements. Thus, economic freedom has lost its self-undermining character. In the 1800s and early 1900s, economic freedom fostered industrialization, which brought on proletarianization, which led to a pro-regulatory public ideology, which then led to reversals in economic freedom. Now, late industrializers are not necessarily becoming less economically free. Indeed, there is a slight, positive correlation between present-day state urbanization rate and the Ruger-Sorens measure of economic freedom, controlling for left-right ideology.

States like California and New York are living off the accumulated capital of past economic freedom. Now that the political tide has turned decisively against economic freedom in those states, they are shedding people and jobs and growing more slowly than the rest of the country. Places like the Dakotas, Carolinas, Oklahoma, and Texas, which have reversed their anti-market policies of the past, represent America’s dynamic economic future.

2 thoughts on “Freedom and Prosperity: Some Comparative Historical Reflections on State Policies and Performance

  1. Is power resources theory still a thing?

    When I think about the history of New Jersey from the perspective of political development, I think of the Constitutional convention of 1947 which rewrote the document in order to mostly professionalize the legislature, renounce the single-term limit for the governor, centralize and rationalize and consolidate the court system.

    Thinking broadly (and loosely!) about these various changes and how the effect they would have in the next half-century in greasing the skids for the accumulation and entrenchment of expanding bureaucracies, heavier regulatory burdens and escalating taxes, I am drawn back into the realm of daydreaming that “things didn’t have to be this way,” and that there was nothing preordained to make New Jersey the East Berlin of the United States.

    I apologize in advance for the naïveté. (Seriously, my argument needs a boat-load more of empirics.)

    1. It’s not the dominant approach to welfare state theorizing any longer. The work of Peter Swenson and others on cross-class alliances in the construction of the welfare state and labor market policies is far more widely accepted ( http://www.oup.com/us/catalog/general/subject/Politics/ComparativePolitics/?ci=9780195142976 ).

      My guess is NJ’s 1947 constitution reflected the ideological change that drove its later policies, rather than having much independent force. The literature on legislative professionalism and size of government now suggests there isn’t much of a link (Neil Malhotra has found this, for instance). However, I haven’t investigated it deeply, and on some margin it’s hard to imagine constitutions don’t have an effect of some kind.

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