Unit 1: Industrialization and Theories of Economic Change
Capitalism, an economic system based on the private ownership of productive power, made the Industrial Revolution possible by creating demands for goods and incentives for entrepreneurs to invest in production. Capitalism had its origins in merchant activity, but by the 17th and 18th centuries, it began to penetrate traditional agricultural and industrial sectors. New crops from the Americas and new ideas about agricultural production led to an Agricultural Revolution in Europe, resulting in growing populations and the creation of new wealth among landowners.
Capitalism matured as an economic system in the Atlantic World. Investors used capital to buy land in the Americas and captive labor from Africa to produce consumer goods (with slave labor), such as tobacco, sugar, and cotton, to expand global markets. Throughout the period, capitalist merchants tapped existing handicraft producers of manufactured goods, using saved capital to finance industrial production on a growing scale.
In this unit, we will analyze the impact of the Agricultural Revolution on Europe and see how it encouraged the growth of capitalism in Europe, across the Atlantic, and around the world.
Completing this unit should take you approximately 9 hours.
Upon successful completion of this unit, you will be able to:
- describe what the Industrial Revolution was;
- explain why England was one of the first nations to industrialize;
- discuss the key pieces of technology driving England's industrialization;
- summarize key economic theorists' main ideas about economic growth;
- explain the historical forces that shaped the ideas of different economic theorists; and
- compare classical and contemporary theories of industrialization.
1.1: The Industrial Revolution in England
The Industrial Revolution developed first in England because it had many of the right preconditions. England had experienced an agricultural revolution where mechanized farming equipment was replacing farm labor, had requisite waterpower, had large reserves of iron and coal, and had a vast empire from which to draw the raw materials for industrial production, such as cotton from India, and new colonial markets to sell its finished products.
Watch this lecture to learn about the general course of the Industrial Revolution in Europe. The video also gives a good overview of changing attitudes about historical perspectives on the industrial revolution.
Watch this video about the origins of the Industrial Revolution in England. Specifically, it addresses how coal and steam power drove the Industrial Revolution and how England was uniquely situated to harness them at the critical historical moment.
Watch this short video for some added insight into England's Industrial Revolution. In particular, consider how the Agricultural and Scientific Revolutions helped drive what became the Industrial Revolution and how the Industrial Revolution, in turn, affected agriculture and science in its wake.
1.2: Mercantilism
The concept of mercantilism was the accepted economic theory before Adam Smith's seminal work The Wealth of Nations. The mercantile system was based on the premise that national wealth and power are best served when countries increase exports and collect precious metals, goods, and raw materials in return.
Read this article about the many components of mercantilism. Since mercantilism was less a school of thought than a collection of policies, this piece does an excellent job explaining the underlying economic thinking of the time and how it created those policies.
Watch this video about mercantilism at the beginning of the Age of Exploration (and shortly before it). Of particular interest are the four major trade routes of the time and how they impacted the growth of mercantilism-inspired trade.
1.3: Capitalism and the Invisible Hand: Adam Smith
Adam Smith, Max Weber, Karl Marx, and Friedrich Engels were four key theorists and philosophers who discussed industrialization and economic change.
Adam Smith (1723–1790), the Scottish economist who many consider the "father" of modern economics, coined the idea of the invisible hand, in which he described how changes in supply and demand for an item typically return to a state of economic equilibrium. When a shortage of a product occurs, businesses usually raise their prices to take advantage of the increased demand. The profit margin encourages other businesses to enter the market, increase production, and cure the shortage. When too many producers flood the market with increased supply, manufacturers are forced to lower the price of their products to get rid of their excess inventory and stay in business. Eventually, the competition among manufacturers achieves a market equilibrium or "natural price".
Read this biographical article about Adam Smith. It contains some key insights about how The Wealth of Nations essentially created the field of economics and how its focus on labor rather than land ownership revolutionized international trade.
Here is The Wealth of Nations in Smith's own words. Browse this work and read the first book to get a sense of the arguments Smith made in his writing.
1.4: A National System: Friedrich List
A German-American economist, Georg Frederich List (1789–1846), described a similar series of stages to what Adam Smith had listed, but he went a step further. He explained that countries might need to temporarily protect their infant industries through tariffs or quotas from foreign competition until these industries mature because "these transitions cannot take place automatically through the "natural course of things", such as through market forces".
Read this biographical article about Friedrich List. It offers some context for his refinements to Smith's ideas, based on List's wealth of experiences.
Read this short excerpt from List's work. In particular, note how his ideas about a "national system of political economy" would come to shape economic policy.
1.5: The Communist Manifesto: Karl Marx
While Adam Smith made a case for what economists would call laissez-faire capitalism, Karl Marx (1818–1883) and Friedrich Engels (1820–1895) were highly critical of the exploitative nature of industrial capitalism. Smith tended to ignore these social byproducts, which were still in their infancy when he wrote his Wealth of Nations.
Known for their views on social and class conflict within society, Marx and Engles witnessed and protested against the extreme poverty and horrendous living conditions that capitalist practices created in many newly-industrialized cities. They predicted a class struggle would occur between the lower and upper classes over controlling the means of production. Marx and Engels advocated for the proletariat (the working class) to rise up in revolt against the bourgeoisie (the upper classes and wealthy elite) to demand better working conditions. They predicted society would become more stable and equal once capitalism fails.
We will explore Karl Marx's views on alienation, conflict theory, and class struggle in more detail in Unit 5.
Read this biographical article about Karl Marx. It also explains a number of his views and gives context to the birth of his ideas about the social impacts of capitalism.
Read The Communist Manifesto. While we have come to think of the term "manifesto" as referring to a large tome, this one is rather concise, particularly considering its volume of philosophical explanations. This page also contains several prefaces to the various published versions of the work and other related documents.
1.6: The Protestant Work Ethic: Max Weber
Max Weber (1864–1920), a German sociologist, believed that traditional hierarchical societies based on honor, prestige, and religion tended to discourage ownership of capital and modern industrial and commercial enterprises. The rise of Protestantism, particularly Calvinist theology (a major branch of Protestantism), influenced the rise of modern capitalism by reducing the importance of these societal hierarchies in favor of individual freedoms and the entrepreneurial spirit. He wrote, "the Protestants of Germany are today absorbed in worldly economic life, and their upper ranks are most indifferent to religion". He describes "materialistic joy" and an "intimate relationship" with "capitalistic acquisition".
Read this biographical article about Max Weber. Weber's specific interest in the intersection of economics, social class, and religion also gives context to Weber's other works through the same lens.
Watch this video about Weber's Protestant Ethic. It is an interesting contextualization of Weber's thinking about economic theory, particularly as affected by religious affiliation. In particular, it covers contemporary viewpoints about various distinctions between Protestant and Catholic ethics.
1.7: Creative Destruction: Joseph Schumpeter
Joseph Schumpeter (1883–1950), an Austrian political economist, coined the concept of "creative destruction" to describe how the new constantly replaces the old. He compared the economy to a living organism, constantly growing and changing to maintain its health. Entrepreneurs periodically disrupt existing industries, including the workers, businesses, and entire sectors that go along with it. This is part of the normal business cycle, which supports and promotes innovation and productivity. Many of today's economists look to Schumpeter's work to explain how technology and automation processes have disrupted the manufacturing industry in the current economy.
By social value, Schumpeter refers to the value society places on certain goods, depending on the wants or needs of the entire community. Social value influences that of the individual and the exchange value. For example, I may not like to eat avocados, but I may value them and even become an avocado farmer because the rest of society values them and will buy them from me. I receive something in exchange for the avocados I sell, i.e., money.
Although Schumpeter promoted the benefits of a free market, capitalist innovation, and entrepreneurial growth, he also believed that elements of socialism would eventually replace capitalism due to capitalism's tendency to promote human greed, monopoly, and social inequalities.
Read this biographical article about Joseph Schumpeter. It gives some interesting context to his innovations in economic thought, which were largely eclipsed by the rise of Keynesian economics.
Read Schumpeter's article and note his argument about the connection between individualistic economic desire and the community at large. Take note of how "methodological individualism" influences economic value.
1.8: Import Substitution Industrialization
Popularized from the 1950s into the 1980s (especially in Latin America), Import Substitution (ISI) is the idea of replacing imports with domestic production as a good way to help developing economies reduce foreign dependence. For example, India and Latin America promoted import substitution industrialization to promote domestic production with mixed results. Domestic industries were established, but production levels and product quality suffered due to a lack of foreign competition. Nevertheless, the state-sponsored support system provided an economic foundation that allowed businesses to eventually integrate into the global economy. This support arguably helped cultivate the robust economic growth many countries are experiencing today.
Read this article to learn about the theory and application of ISI policies implemented in Latin American countries during the 20th century. See if you can recognize the threads of List's theories that helped inform this trade and economic policy.
1.9: The Stages of Growth Theory: Walt Rostow
Walt Rostow (1916–2003), an American economist, identified five stages of economic development: 1. the traditional society, 2. the preconditions for take-off, 3. the take-off, 4. the drive to maturity, and 5. the age of high mass-consumption. His theories, released in 1960, relied heavily on modernization theory, which suggested that all countries will follow a similar path to industrialized development. Acknowledging the significant disparities between the wealthy countries and those that seemed to have been "left behind" in their industrial development, modernization theory also suggests that wealthy countries have some responsibility in helping to develop poorer ones and that by doing so, "all boats will rise".
Read this overview of Rostow's Stages of Growth Theory. Pay particular attention to the impact of the World Bank, International Monetary Fund (IMF), "structural adjustment" programs, and how they impact the development of the countries whose aid they accepted.
Read this text about globalization and its effects. About ⅔ of the way through, it brings in Rostow's ideas and how it informs the Human Development Index (HDI). It then explains how, together, the HDI and Rostow's stages of growth combine to create a way to understand development.
1.10: Dependency Theory
Dependency Theory is a way of conceptualizing the effects of the modern globalized economy on poorer nations. As with social classes within a society, it is concerned with the interdependence between poor countries, where resources are extracted and goods are manufactured to be consumed in wealthier countries at low prices; and wealthier countries, which then sell those goods back to poorer countries at prices that deplete the poorer countries' resources, in a globalized alienation of labor. In this way, poorer countries may be somewhat "stuck" in their development, unable to get ahead. In some ways, Dependency Theory is considered a response to the "failure" of Modernization Theory.
Read this article, which lays out the role of dependency theory in global development and trade. It also includes historical perspectives and critiques of the theory.
Read this article to understand the arguments that dependency theorists make about industrialization and trade. It also offers some possible remedies to dependency.
Unit 1 Assessment
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