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. In this paper, we demonstrate how the advent of national identity helped modern states overcome internal conflicts 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 commoners identify with the nation, 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 larger is the national income and thus the return on national identification. Elites’ incentives to induce national identification, however, depend on the presence of restraints on the elite. We provide two pieces of evidence consistent with the theory. First, we revisit the development of the English state, identifying a central role for national identity therein. Second, we build a new time-varying measure of national identification for countries, establishing correlations that corroborate the theory.