1. The Railroad in American Life The democratic capitalist system of the United States is unique because of the way that the British North American colonies were established and allowed to develop by the English crown. Representative democracy, plurality elections, geographic-based representation (the tradition of the representative living with those he represented), and private property rights were established from the beginning of the British colonies and shaped everything that was to follow.

2. From the very beginning private property rights in land were the norm and the colonies were pretty much unfettered in their internal development until the 1760s. Representative democracy and Capitalism evolved together in an environment of almost unlimited natural resources.

3. The British North American colonies used plurality elections (the person with the most vote wins) and for practical reasons, geographic-residency-based representation (the tradition of the representative living with those he represented). When mass based political parties emerged in the 1820s this system produced two major parties and embedded regional interests within the parties. This in turn made centralized control of local party members impossible.

4. The combination of private property rights (enshrined in the Common Law and enforced by the Courts), limited government, and isolation from Europe, led to tremendous rewards for creative entrepreneurs and inventors.

5. Consequently, during times of peace political institutions have been largely reactive. Given government enforced private property rights in which inventors and entrepreneurs can make money from their creations, these creations—the railroad, the telegraph, radio, automobiles, etc.—have unpredictable economic, social, and political effects. Government tends to act with a lag to these spill-over effects. Politicians—who typically have a short-run perspective—react to what people believe is true and often, with the best of intentions, over-regulate the targeted economic activity thereby distorting the flow of capital in the economy as a whole.

6. Political institutions are not simply reactive. Wars, depressions, and social movements can drastically change taxes and the extent of economic regulation. The causal arrow points in both directions. Not only do shocks in the form of new technologies in the economic system affect the political system, but shocks in the political system affect the economic system. The evolution of the railroad network illustrates how this two-way interaction operates over time and how this interaction is driven by creative entrepreneurs, inventors, scientists, and politicians.

7. Political System  -  Economic System The Unanticipated Political and Economic Effects of Inventions and Entrepreneurial Activity Can we even measure the effects? Consider the Price of Light

9. The Importance of the Price of Light Example 1. Real Income Growth Over Time is Almost Certainly Underestimated 2. Real Price Indexes Over Time are Almost Certainly Overestimated Because they Oftentimes do not Capture Qualitative Changes in Goods and Services 3. The Perennial Gale of Creative Destruction -- Unanticipated Economic Change due to Entrepreneurial Activity

10. More Examples (William Nordhaus, 1994, Table 7) Invention and Treatment in Price Indices Aeronautics, helicopter – Except for lower transportation of intermediate goods, lower prices not reflected in price indexes. Air Conditioning – Outside of refrigerated transportation and productivity increases in the work place, amenity and health effects are not captured in price indexes. Continuous casting of steel – A process innovation that would show up primarily in lower costs of intermediate goods and thus would be reflected in price indexes of final goods.

11. DDT and pesticides – Some of (now questionable) benefits probably included in higher yields in agriculture and therefore included in price indexes; health benefits largely excluded from price indexes. Diesel-Electric Railway Traction – A process innovation that would show up primarily in the price of goods and services. Insulin, Penicillin, Streptomycin – Improved health status not captured in price index. Internal Combustion Automobile – Except for lower transportation of intermediate goods, lower prices not reflected in price indexes.

12. Long Playing Record, Radio, Television – Major product inventions that are completely omitted from price indexes. Photo-Typesetting – Largely reflected in reducing printing costs. Radar – Wide variety of improvements. Some might show up in lower business costs and prices (such as lower transportation costs or improved weather forecasting). Rockets – Wide variety of implications. Major application in telecommunications would show up in consumer prices; improvements in television not captured in price indexes. Improved military technology and nuclear-war risk not reflected in prices.

13. Steam Locomotive – Reduced transportation costs of businesses are reflected in price indexes, while expansion of consumer services and non- business uses are not. Telegraph, Telephone – Largely unreflected in price indexes. Transistor, Electronic Digital Computer – As key inventions of the electronic age, impacts outside business costs largely omitted in price indexes. Xerography – Major process improvement. Some impact would show up in reduced clerical costs. Expansion of use of copied materials not captured in price index. Zipper – Convenience over buttons omitted from price indexes.

15. Size of Adjusted Gross Income All returns: 2011145,370,240100.0 No adjusted gross income2,450,9241.7 $1 under $5,00010,692,8387.4 $5,000 under $10,00012,386,7168.5 $10,000 under $15,00012,925,8318.9 $15,000 under $20,00011,880,0598.2 $20,000 under $25,00010,210,7067.0 $25,000 under $30,0008,987,6136.2 $30,000 under $40,00014,520,07910.0 $40,000 under $50,00010,983,9737.6 $50,000 under $75,00018,949,27813.0 $75,000 under $100,00011,926,4018.2 $100,000 under $200,00014,755,76610.2 $200,000 under $500,0003,801,6412.6 $500,000 under $1,000,000597,5250.4 $1,000,000 under $1,500,000134,9070.1 $1,500,000 under $2,000,00055,986[2] $2,000,000 under $5,000,00079,3630.1 $5,000,000 under $10,000,00019,189[2] $10,000,000 or more11,445[2]

16. 2011: Accumulated from Smallest Size of Adjusted Gross Income No adjusted gross income2,450,9241.7 $1 under $5,00010,692,8387.4 $1 under $10,00023,079,55515.9 $1 under $15,00036,005,38624.8 $1 under $20,00047,885,44432.9 $1 under $25,00058,096,15040.0 $1 under $30,00067,083,76346.1 $1 under $40,00081,603,84256.1 $1 under $50,00092,587,81563.7 $1 under $75,000111,537,09276.7 $1 under $100,000123,463,49384.9 $1 under $200,000138,219,25995.1 $1 under $500,000142,020,90097.7 $1 under $1,000,000142,618,42598.1 $1 under $1,500,000142,753,33298.2 $1 under $2,000,000142,809,31898.2 $1 under $5,000,000142,888,68198.3 $1 under $10,000,000142,907,87198.3 $1 or more142,919,31698.3 All returns145,370,240100.0