Industrial Revolution, Macroeconomics

Course Tile: Principles of Macroeconomics Course Instructor: Tamanna Abdullah
Course Code: ECO 102
INDUSTRIAL REVOLUTION
Industrial Revolution, in modern history, is the process of change from an agrarian

and handicraft economy to one dominated by industry and machine manufacturing.
These technological changes introduced novel ways of working and living and
fundamentally transformed society.
1st Industrial Revolution (mid-18th century): Use of water and steam power.
Emergence of textile industry.
2nd Industrial Revolution (late 19th century to early 20th century): Use of steel, use
of electricity, paper machine, automobile, rail.
3rd Industrial Revolution (began in the ’70s in the 20th century): Use of renewable
energy, partial automation using memory-programmable controls and computers.
4th Industrial Revolution (Present): Use of Information and communication

Technologies.
ECONOMICS IN THE INDUSTRIAL REVOLUTION
The Industrial Revolution is one of the most significant events in all of world
history and had a profound impact on the modern world. It began first in Britain in
the 1700s but soon expanded to the rest of Europe and North America. When
discussing the economics of the Industrial Revolution, it's first important to
Sources
1. Beck, E. (August 10, 2019). Economics in the Industrial Revolution.
Retrieved from https://www.historycrunch.com/economics-in-the-industrial-revolution.html#/
2. Industrial Revolution - From Industry 1.0 to Industry 4.0. (n.d.).
Retrieved from Desoutter Industrial Tools: https://www.desouttertools.com/industry-4-
0/news/503/industrial-revolution-from-industry-1-0-to-industry-4-0
3. Britannica, T. Editors of Encyclopaedia (n. d.). Industrial Revolution. Encyclopedia Britannica.
https://www.britannica.com/event/Industrial-Revolution
recognize that the early years of the Industrial Revolution were based on the
principles of capitalism while the later years introduced more socialist beliefs.
NEW INNOVATIONS
The Industrial Revolution is a significant event in world history because it
transformed European and North American societies from being based on
agriculture production to industrial production. This caused a mass migration of
people from the rural countryside to the city-centers as people moved in search of
work in the newly developed factories of the time.
Before the start of the Industrial Revolution, the production of goods was done on
a very small scale. Historians refer to this method of production as the ‘cottage
industry’. Simply put, the cottage industry refers to a period of time in which
goods for sale were produced on a small scale, usually in a home. In this system,
people produced goods, such as wool, in their homes or on their own farms and
then sold it to local communities since long distance transportation was
uncommon. This method of production was slow and inefficient and struggled to
keep pace with the growing demand caused by the increased population. As a
result, entrepreneurs and inventors sought ways to increase production, which
ultimately led to the creation of the factory system.
The factory system is a term that historians use to refer to the development of
centralized factories or mills that produced goods on a mass scale. Throughout the
1700s, inventors such as Richard Arkwright, Eli Whitney, James Hargreaves, and
Edmund Cartwright, developed machines and techniques that helped improve
production, especially in terms of the textile industry. The textile industry was
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based on the development of cloth and clothing, and was the main industry that
benefitted from the early developments of the Industrial Revolution. For example,
some of the main textile related inventions of the Industrial Revolution
included: power loom, spinning jenny, flying shuttle, water frame and cotton
gin. Another important invention of the Industrial Revolution was the steam
engine. The first steam engine was invented by Thomas Newcomen in 1712, to
help in removing water from mines. However, James Watt later improved the
design of the steam engine and made it a significant new addition to industrial
production.
CAPITALISM
None of these technological and societal changes would have been possible
without the emergence and development of capitalism. The European empires
of the 16th through the 18th centuries were empires that existed primarily to
increase trade and the wealth of the European nations. During this time, powerful
European nations such as Spain, Portugal, England and France participated in
intense economic and exploration based rivalries. The Age of Exploration shows
this rivalry in the massive colonies that each European nation amassed, as they
competed with each other for territories in the New World. At their height, these
countries controlled large sections of the world as part of their vast empires.
At the foundation of these rivalries existed the economic system of mercantilism,

which was the idea that colonies and trade should be strictly controlled to benefit
the economy of the home (European) nation. Mercantilism was an economic
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system that was heavily regulated and controlled by the government and
allowed very little freedom for individual people. This all changed with the
introduction of capitalistic beliefs and values in the late 1700s.
As the 18th century went along, some people began to reject the principles of
mercantilism. For example, in 1776 Scottish economist Adam Smith published
his famous written work “An Inquiry into the Nature and Causes of the Wealth
of Nations” which is just often shortened to “Wealth of Nations”. The book
challenged the idea that the government should control the economy and instead
proposed the idea of free trade and competition with a lesser role of the
government. The ideas of this book would eventually lay the foundation for the
principles of capitalism, which is an economic system that supports the idea of free
trade and choice as a way of achieving prosperity. The emergence of capitalism
was vitally important to the start of industrialization and the Industrial Revolution.
Capitalism caused the Industrial Revolution because industrialization required

significant work and investment from individuals and not necessarily the
government. For example, in Britain, where the Industrial Revolution began,
wealthy entrepreneurs were important because they used their wealth to create
factories and mines. This investment from individuals, whose actions were guided
by the profit motive, would not have been possible without the emergence of
capitalism. Furthermore, as the Industrial Revolution began the individualistic
principles of capitalism helped create a climate wherein industrialization exploded,
and eventually spread worldwide.
Sources
Capitalism was a central component of classical liberalism in the societies of the

Industrial Revolution. Classical liberalism was an ideology that was based on
economic individualism and the principles of: economic freedom, private
ownership, competition, self-interest and self-reliance. In general, all of these
principles focused on little or no government intervention in the economy and as
much economic liberty for individuals as possible. This contrasted with the
previously mentioned mercantilism, which favored heavy government regulation
and intervention. The economic ideals of classical liberalism first emerged in the
18th and 19th centuries and quickly shifted European society from left-sided
mercantilism to right-sided capitalism.
SOCIALISM
However, by the mid-1800s the economics of the Industrial Revolution began to

shift with the emergence and development of socialism (A socialist economy is a
system of production where goods and services are produced directly for
use). During the early 19th century many people began to question whether or
not laissez-faire capitalism was meeting the needs of all people in
society. Laissez-faire capitalism was the dominant economic system in Europe at
the time and, in general, was based upon little or no government intervention in the
economy. In fact, some argued that laissez-faire capitalism was causing a wide
income gap in society between business owners and the working class. Socialism
developed as a response to how some felt about laissez-faire capitalism and its
apparent failings. For example, early socialists argued that laissez-faire capitalism
led to several issues of the Industrial Revolution, including: child labor,
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dangerous and dirty working conditions and a lack of basic workers’

rights. Therefore, socialism is a left-wing economic system that favors
government intervention in the economy in order to try to decrease the imbalances
created by laissez-faire capitalism. In general, socialism was favored by working
class people, as it sought to create a more equitable distribution of income.
With that said, historians acknowledge several different types of socialism that
each formed over different periods of time. For instance, early socialist
movements that developed in the timeframe of the Industrial Revolution
included Utopian Socialism (voluntary and peaceful surrender of the holdings
by the propertied groups) and Marxism, and Democratic Socialism. The central
difference between these types of socialism is the degree to which they support
government intervention and what types of political systems they are combined
with.
A central figure of the development of these socialist ideologies, which

transformed the economies of the Industrial Revolution, was Karl Marx. Marx is
perhaps one of the most influential philosophers of the last two centuries. He is
best known for writing (along with Fredrich Engels) The Communist Manifesto.
The basic ideas of The Communist Manifesto were centered on the nature of
society and the struggles between different classes. In general, they discussed the
failings of capitalism and sought to bring about a final revolution that would end
the struggle between classes. For example, in The Communist Manifesto, Marx
and Engels argued that a socialist society formed by workers should involve a
move towards the following: a shift from private property to public property,
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factories controlled and owned by the proletariat, free public education for all
children.
KEY NOTES:
1. 3 major economic systems related to industrial revolution are capitalism,

socialism and communism.
2. Key effects of industrial revolution are
 factory system,
 mass production
 urbanization
 Opportunity and increase in the standard of living
 Rise of Capitalism
 Rise of Socialism and Marxism
 Technological advancement
 Exploitation of the Working Class
 Transfer of wealth to the west
 Pollution and destruction of environment
Sources

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Course Tile: Principles of Macroeconomics Course Instructor: Tamanna Abdullah

Course Code: ECO 102

Industrial Revolution, in modern history, is the process of change from an agrarian

4th Industrial Revolution (Present): Use of Information and communication

ECONOMICS IN THE INDUSTRIAL REVOLUTION

At the foundation of these rivalries existed the economic system of mercantilism,

Capitalism caused the Industrial Revolution because industrialization required

Capitalism was a central component of classical liberalism in the societies of the

However, by the mid-1800s the economics of the Industrial Revolution began to

dangerous and dirty working conditions and a lack of basic workers’

A central figure of the development of these socialist ideologies, which

1. 3 major economic systems related to industrial revolution are capitalism,

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