National identity, public goods, and modern economic development

Since the Industrial Revolution, large-scale economic development has coincided with the rise of the modern nation-state. We argue that this is not a coincidence. We show how the advent of national identity helped modern states overcome internal conflicts over the distribution of economic benefits to provide public goods and grow. Using a model with elites and commoners, characterized initially by distinct group identities (e.g., ethnicity, class), we show that elites have an incentive to induce commoners to identify with the nation. The more widespread is national identification, the less is conflict between elites and commoners, and the more revenues can be collected and public goods broadly provided. This effect is self-reinforcing: the greater is public goods provision, the greater is the economic status of the nation and thus the psychological return on national identification. Elites’ incentives to induce national identification, however, depend on the presence of political restraints on the elite. We reexamine the historical cases of England (1600–1920) and the United States (1865–present), identifying support for our framework therein.