Economic lessons in American history: the bumbling--and brilliance--we see today is nothing new to the U.S.

• Author: Gordon, John Steele
• Position: Dollars & Sense

AMERICA STILL IS a young country. Only 405 years separate us from our ultimate origins at Jamestown, Va., while France and Britain are 1,000 years old; China, 3,000; and Egypt, 5,000--but what a 400 years it has been in the economic history of humankind.

When the Susan Constant, Discovery, and Godspeed dropped anchor in the James River in the spring of 1607, most human beings made their livings in agriculture and with the power of their own muscles. Life expectancy at birth was perhaps 30 years. Epidemics routinely swept through cities, carrying off old and young alike by the thousands. History tends to dwell on a small percent of the population at the top of the heap, but the vast mass of humanity endured lives that were, in the words of English philosopher Thomas Hobbes, "nasty, brutish, and short."

We now live in a world far beyond the imagination of those who were alive in 1607. The poorest family in America today enjoys a standard of living that would have been considered opulent 400 years ago and, for most of this time, it was the U.S. that was leading the world into the future, politically and economically.

This astonishing economic transformation provides rich lessons in examples of what to do--and not do. Let me suggest five:

Governments are terrible investors. When the Solyndra Corporation filed for bankruptcy in 2011, it left taxpayers on the hook for a loan of $535,000,000 that the government had guaranteed. In a half-billion-dollar example of how governments often throw good money after bad, the government even had agreed to subordinate the loan as the company's troubles worsened, putting taxpayers at the back of the line. In retrospect, it is clear that the motive behind the loan guarantee was political: to foster green energy, an obsession of the left. That is the problem with government investment: politicians make political decisions, not economic ones. They are playing with other people's money, after all.

History is littered with government investment disasters. Tennessee's Clinch River Breeder Reactor, for instance, authorized in 1971, was estimated to cost $400,000,000 to build. The project ran through $8,000,000,000 before it was canceled, unbuilt, in 1983. A half-century earlier, the Woodrow Wilson Administration thought it could produce armor plate for battleships cheaper than the steel companies. The plant the government built, millions over budget when completed, could not produce armor plate for less than twice what the steel companies charged. In the end, it produced one batch--later sold for scrap--and shut down.

Going back even further, to the dawn of the Industrial Age, consider the Erie Railway. In order to get political support for building the Erie Canal, Gov. DeWitt Clinton promised the New York counties that bordered Pennsylvania (known as the "Southern Tier") an "avenue" of their own once the canal was completed. The canal was an enormous success but, as such, it affected the state's politics. A group of politicians from along its pathway, the so-called Canal Ring, soon dominated state government. They were not keen on helping to build what necessarily would be competition.

A canal through the mountainous terrain of the Southern Tier was impossible and, by the 1830s, railroads were the hot new transportation technology, but only with the utmost effort did Southern Tier politicians induce the Legislature to grant a charter for a railroad to run from the Hudson River to Lake Erie through their counties. Moreover, the charter almost guaranteed economic failure: it required the railroad to run wholly within New York State. As a result, it could not have its eastern terminus in New Jersey, opposite New York City, but had to end instead in the town of Piermont, 20 miles to the north. It also was forbidden to run to Buffalo, where the Erie Canal entered Lake Erie, terminating instead in Dunkirk, a town 20 miles south. Thus, it would run 483 miles between two towns of no importance and through sparsely settled lauds in between--not unlike the current proposed California high-speed rail project, the first segment of which would run between Fresno and Bakersfield and cost $9,000,000,000.

The Erie Railway initially was estimated to cost $4,726,260 and take five years to build. In fact, it would take $23,500,000 and 17 years. With the depression that began in 1837, it soon became clear that only massive state aid would see the project through. So, New York State agreed to put up $200,000 for every $100,000 raised through stock sales. Even that was not enough, however, and the railroad issued a blizzard of first mortgage bonds, second mortgage bonds, convertible bonds, and subordinated debentures to...