The Spread of Industrialization and Economic Thought in the 19th Century

Posted on Sep 6, 2024 in Social sciences

The Economic Thinking of the Epoch

The 19th century was extraordinarily fruitful in terms of economic thought. Here, we present a synthesis of the ideas of economists considered most relevant to the spread of industrialization.

Thomas Robert Malthus (1766-1834)

Head of a Chair in Economics, Malthus anonymously published the pamphlet Essay on the Principle of Population in 1797, in which he affirmed the impossibility of improving economic conditions for society. He argued that such improvements would be hampered by population growth. Malthus spoke of a trend whereby, as the number of inhabitants approaches the limit, brakes on growth are applied. The basis of his argument is what would later be formulated as the law of diminishing returns of land. He believed it was counterproductive to assist the poor because it removed the stimulus to work. His ideas served as the basis for the New Poor Law of 1834, which restricted such aid. He also published Principles of Political Economy (1836).

David Ricardo (1772-1823)

Ricardo is considered the most representative of the classical school of economics. He mastered the mechanisms of banking and finance at a young age, accumulating a fortune by the age of 26. In his seminal work, Principles of Political Economy (1817), he developed several influential theories:

Labor Theory of Value: The value of goods is determined by the labor required to produce them. If producing one object takes twice as much labor as another, the first has double the value. However, the production of the same good may require different amounts of labor.
Land Rent: Based on the law of diminishing returns, the most fertile lands produce wheat at a lower cost but sell it at the same price as less fertile lands. The difference between cost and price is the income of the land.
Wages: Ricardo distinguished between two kinds of wages: natural wages (required to sustain the worker) and market wages (determined by the supply and demand of labor).
Theory of Comparative Costs: Trade between two countries can be beneficial even if one country has an absolute advantage in the production of all goods.

Jean Baptiste Say (1767-1832)

Say published Treatise on Political Economy in 1803, where he developed his fundamental ideas. He continued the ideas of Adam Smith, though, influenced by the Industrial Revolution, Say placed more emphasis on industry. He was a pioneer in highlighting the importance of the entrepreneur, who carries out the organization and combination of factors to produce goods and services. He was the first to state that the quantity demanded for a good depends on its price and discussed the relationship between demand, cost, and price, which served as the basis for the subsequent contributions of Cournot and Menger. However, his most famous contribution was the “law of markets,” according to which all production creates its own demand.

John Stuart Mill (1806-1873)

The son of James Mill, a friend and disciple of David Ricardo, John Stuart Mill’s education was heavily influenced by classical economics. In his Principles of Political Economy (1848), a rigorous economics manual, he summarized and systematized classical theories, making his own contributions to supplement them. One such contribution was his vision of the stationary state, which he did not view negatively.

Karl Marx (1818-1883)

Marx is the foremost representative of scientific socialism (as opposed to utopian socialism). His main works were the Communist Manifesto (in collaboration with Friedrich Engels, 1847), Critique of Political Economy (1859), and, most notably, Capital (1867). With a solid intellectual foundation, he adopted ideas from previous thinkers like Ricardo and Sismondi. His work presents a comprehensive alternative to classical political economy. His fundamental economic theses are:

Labor Theory of Value: Marx built upon Ricardo’s concept but added the concept of “socially necessary labor” (which changes with technological development).
Exploitation of the Proletariat: The worker receives a wage lower than the value of their labor, generating a surplus value appropriated by the entrepreneur.
Trend Toward Concentration and Elimination of Competition: This trend results from mechanization and the growth of enterprises, ultimately triggering a general crisis that will destroy the capitalist system.

Theories About the Expansion of the Industrial Revolution

Walt Whitman Rostow (1916-2003)

Rostow, who was deeply involved in American politics during the presidencies of John F. Kennedy and Lyndon B. Johnson, was highly regarded among liberals but criticized by others. In his 1960 book, The Stages of Economic Growth: A Non-Communist Manifesto, he proposed a model of economic growth through which all countries supposedly pass. This model distinguishes five phases or stages:

Traditional Society: Characterized by subsistence agriculture with low productivity and yields.
Preconditions for Take-Off: Increased productivity and specialization of labor generate surpluses, some of which are channeled into foreign trade. Improved infrastructure promotes trade relations, social changes occur, and an entrepreneurial class emerges (corresponding to early 18th-century Europe).
Take-Off: This stage approximates what is known as the “Industrial Revolution.” Barriers to growth are overcome with technological development in agriculture and industry, increasing productivity. The agricultural population migrates to urban centers for industrial jobs, new markets open, investment increases, and imbalances emerge between economic sectors (Great Britain in the late 18th century, Germany, France, and the United States in the 19th century).
Drive to Maturity: After the initial momentum, a long interval of sustained progress, albeit with fluctuations, occurs. The economy diversifies, labor specialization increases, technological innovation spreads, and investment reaches 10-20% of national income.
Age of High Mass Consumption: This stage is characterized by high levels of consumer spending and a shift towards services.

Alexander Gerschenkron (1904-1978)

Gerschenkron is best known for his thesis that developing countries can achieve rapid economic growth through a “catch-up” process. In his book, Economic Backwardness in Historical Perspective (1962), he argued that less developed countries can shorten their development process by adopting technologies created by more advanced nations. He called this the “advantages of backwardness.” The peculiarities of this mechanism are:

Industrialized countries experience inertia that slows down innovation and equipment replacement, leading to obsolescence.
Developing countries can undergo rapid industrialization by exploiting existing technologies and importing capital.

Gerschenkron emphasized that developing countries cannot simply imitate the development models of other countries. They require specific institutional instruments to assimilate and adapt these advancements.

Sydney Pollard (1925-1998)

A prominent historian specializing in economic and labor issues, Pollard took a novel approach to analyzing industrialization processes. He argued that emphasis should be placed on the regional perspective, even within the framework of the nation-state. This is because economic activity primarily develops within national markets.

Industrialization in Various European Countries

The 19th century was marked by two significant general phenomena: the spread of industrialization and the growth of trade. These two phenomena are closely intertwined.

Belgium

Belgium, which became a kingdom in 1830 (from 1795 to 1814, it was incorporated into France, and from 1814 to 1830, it was part of the Netherlands), was the first European region to adopt the British model of industrialization. Several factors explain its rapid industrialization:

Proximity to Great Britain and the consequent transfer of information and technology.
A long-standing industrial tradition (Flanders was an important textile manufacturing center since the Middle Ages).
Availability of abundant natural resources (coal, iron, lead, and zinc deposits).
Location, tradition, and relationships made Belgium a recipient of technology, entrepreneurship, and capital. A prime example is Englishman William Cockerill, who founded a large steel company that still exists today.

The strong roots of technology in Belgium are evident in the numerous steam pumps already operating in the country in the 18th century. Later, a prestigious engineering school was established in Liège, linked to the artillery factory.

France

The French model of industrial growth has been considered anomalous, and several circumstances seem to confirm this. Firstly, while Britain was undergoing its Industrial Revolution, France was embroiled in a social revolution and a series of wars that set it on a very different path. Secondly, French population growth was very low throughout the 19th century due to low birth rates. France also experienced an agricultural revolution, but it was not until the second half of the century that there was a significant increase in production and productivity. Finally, France lacked abundant coal deposits, forcing it to import a third of its consumption. Moreover, low population density resulted in slow urban growth and a limited domestic market, which also impacted industrial development. However, when magnitudes like GDP are expressed in per capita terms, the French case becomes comparable to that of other countries. At its peak in 1913, “the average Frenchman enjoyed a standard of living as high as or higher than any other citizen of continental Europe” (R. Cameron).

Germany

Germany was “the last of the first” industrializing countries. At the beginning of the 19th century, Germany was a collection of independent and poorly connected states whose small size and multitude of borders hindered trade. A hundred years later, by 1913, the German Empire had become the most powerful nation in Europe. Between these two dates, rapid development occurred with the following chronology and characteristics:

In 1833, the Zollverein (Customs Union) was formed, creating a “common market.”
Starting in 1870, strong growth in coal mining production in the Ruhr Valley fueled the chemical and steel industries.
The German corporate structure was characterized by large size, vertical integration, and the existence of cartels (agreements between companies to fix prices, share markets, limit production, and restrict competition). The close relationship between industrial enterprises and financial groups was also notable.

Italy

Italy was a late industrializer. Before its unification in 1861, it exhibited a duality in which only some regions showed signs of economic modernization. Difficulties arising from its mountainous terrain and the long distances between the North and South prevented the formation of an integrated domestic market for a long time. Consequently, the North found its markets in other European countries, allowing it to develop an export industry, which was nonetheless limited by the lack of coal and other natural resources. In contrast, low agricultural incomes in the South hindered any attempt at industrialization. Unification, which established a single currency and tax system and promoted the construction of a basic railway network (using imported materials), laid the foundation for future development. In the last decade of the century, German and Swiss capital boosted the industrial sector.

Expansion and Economic Growth in the United States

The United States, which began its history as an independent nation in 1787, experienced spectacular economic growth throughout the 19th century. By 1890, it had become the world’s leading industrial power. The most characteristic features of its dazzling growth were:

Constant Population Growth: The population increased from less than 4 million in 1790 to 40 million in 1870 and over 100 million in 1915. The United States was the destination for most European emigrants.
Continuous Westward Expansion: Territorial expansion through colonization, usurpation, or purchase not only incorporated new and abundant resources but also influenced the creation of a “frontier” mentality.
Rapid Increase in Income and Wealth: Income and wealth grew even faster than the population, fueled by abundant resources.
Technological Progress: The relative scarcity of labor and its high cost drove rapid technological progress. The existence of an inexhaustible domestic market was the necessary condition for the development of the American economic system, making it possible to mass-produce consumer goods such as lawnmowers, weapons, sewing machines, bicycles, and typewriters.
Importance of Communications: In such a vast country, communications were crucial. Although canal construction was undertaken in the early decades of the 19th century to facilitate communication with the interior, the arrival of the railroad halted and replaced it. The railroad, in addition to being a means of transport that facilitated and reduced the cost of communication, was itself a source of demand for various materials, stimulating a multitude of industries, especially the steel industry.