Jeff Madrick, in the NYT (1-20-05):

What is the purpose of government in the American economy? To many people these days, it is axiomatic that less government is invariably better for the economy and the nation. In this way, tax cut after tax cut is justified despite a growing federal budget deficit. Such thinking also lies behind the efforts to privatize Social Security.

But it is hard to square this view that government is always an economic menace with the long history of capitalist development. Going back in time, every successful capitalist economy in the world has had an active partnership between government and business. Even when the United States government was small in the nineteenth century, it built the canals, subsidized the railroads, made private ownership of land accessible, and developed a widely envied public education system.

Consider how the role of government changed in America as the economy and society changed. The presidency of Thomas Jefferson is a good example. Jefferson is criticized today because he feared the encroachment of manufacturing on what he considered an American agricultural utopia. Jefferson fought against the establishment of American tariffs and promoted free trade, so farmers could easily sell their produce to Europe. He favored a small government and discouraged the public financing of internal improvements like roads.

It was Alexander Hamilton, the favorite founding father of business, who wanted to protect domestic manufacturing from foreign competition by imposing tariffs. Hamilton also wanted a powerful central federal government, which could sell its own bonds and build the roads the nation badly needed.

As the economy evolved, however, even Jefferson began to change his tune, accepting modest tariffs. More to the point, his followers became government activists. In the nation's early years, they began to support manufacturers and tariffs. In particular, the Jeffersonians in New York used government money to build the great public project of the day, the Erie Canal. Jeffersonians in other states followed suit.