Lesson 4: Innovation, Education, and Information


1.  A key to understanding people’s behavior is figuring out the incentives they face.

2.  Economic freedom, rule of law, and well-defined property rights promote growth and prosperity.

5.   Entrepreneurship, business, and the pursuit of profit create opportunities and economic growth.

ECONOMIC CONCEPTS that support the historical analysis:


Expected benefit and expected cost

Supply and demand


Extensive versus intensive growth



History Standards (from National Standards for History by the National Center for History in the Schools)

Era 4 – 2:  The student understands how the industrial revolution, increasing immigration, the rapid expansion of slavery, and the westward movement changed the lives of Americans and led toward regional tensions

Era 6 – 1:  The student understands how the rise of corporations, heavy industry, and mechanized farming transformed the American people

Economics Standards (from Voluntary National Content Standards in Economics)

Standard 1: Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they must choose some things and give up others.

Standard 4: People respond predictably to positive and negative incentives.

Standard 6: When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.

Standard 7: Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

Standard 8: Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.

Standard 9: Competition among sellers lowers costs and prices, and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them.


  • Economic growth refers to increases in real GDP over time.  Growth can be extensive (a result of more land, labor, or physical capital) or intensive (a result of greater productivity).  Antebellum growth is believed to be largely extensive.  Postbellum growth owes more to productivity growth but is still largely a result of labor force growth.  In the 20th century, productivity growth accounts for nearly half of economic growth.
  • Increased land can be attributed to federal acquisitions of land and settlement.  Increased labor is due to a combination of natural population growth, immigration by choice, and until 1808 immigration by force.  Increased physical capital reflects investment in machinery in both agriculture and manufacturing.
  • Private property rights codified in the U.S. Constitution meant property ownership was perpetual, and could be sold or bequeathed.  Because the long-run benefits of property development therefore accrued to the owner, property owners had an incentive to improve their land.  One contrast is with postbellum sharecroppers.  Absent guarantees they would receive the benefits of land improvements, sharecroppers were less willing than property owners to incur the costs of improvement.
  • Relative supplies of land, labor, and physical capital, help explain the antebellum patterns of innovation and adoption of physical capital.  Capital for labor substitution increased productivity and produced economic growth. Development of transportation networks led to increased specialization and trade in both agriculture and manufacturing.
  • Relative labor scarcity on western farms led to development and use of agricultural implements, particularly in grain and corn farming in the 19th century, which generated big leaps in productivity growth in agriculture.  Relative labor abundance in the south in both the slave and postbellum eras meant cotton agriculture remained labor-intensive well into the 20th century and saw few gains in productivity.
  • Factories are established in New England in the early 1800s, but the United States remains an agricultural nation until after the Civil War.  Manufacturing wages rise in the mid-Atlantic and New England regions throughout the antebellum period but even by 1860 fewer than 15 percent of the labor force works in manufacturing.  Very little manufacturing was located in the South.
  • Late 19th century establishment of colleges and universities, and the high school movement of the early 20th century lead to increased productivity.  Productivity increased both due to investments in human capital and to beneficial university-based research.
  • GDP can be divided into production of goods, services, and structures.  After the 1950s, less than half of U.S. GDP was goods.  By 2010, under 30 percent of GDP was goods and over 60 percent was services.  Greater use of and higher productivity in information technology have increased productivity in recent decades.