Capitalism during the Industrial Revolution

Ideas of Adam Smith• Believed in free economy, or free markets• Wrote book The Wealth of Nations• Economic liberty guaranteed economic progress• Three Natural Laws of Economics:• Law of Self Interest: People work for their own good• Law of Supply and Demand: Enough goods will be produced at the lowest possible price

to meet demand in a market economy• Law of Competition: Competition forces people to make a better product

Thomas Malthus and David Ricardo• Smith’s ideas influenced Malthus and Ricardo• Believed that natural laws governed economic life• Opposed government efforts to help poor workers• Their ideas formed the foundation of laissez-faire capitalism

Capitalist System• Economic system in which the factors of production are privately owned and

money is invested in business ventures to make a profit• Replaced feudal empires (i.e. Holy Roman Empire) and monarchies• Created markets where buyers and sellers of goods and services agreed on

prices • Created market types:• Competition• Monopoly• Oligopoly

• Long distance trade increased dramatically due to innovation in transportation

Capitalist System• Individuals and businesses own property and the mean of production.• Progress results when individuals follow their own self interest.• Businesses follow their own self interest by competing for the consumer’s

money. Each business tried to produce goods or services that are better and less expensive then those of competitors. • Government should not interfere in the economy because competition

create efficiency in business.

How did capitalism bring about the Industrial Revolution? • Central to this was the Bank of England, which encouraged investment,

stability, and economic growth in both the public and private sectors. • Thus, when the machines and opportunities to exploit them came along,

British businessmen were in by far the best position to take advantage of the situation, making Britain the banker of the world for the next century.• The connection is that it:

• Led to investing in factories• Led to increased production and higher demands for raw materials• Led to world wide trade• Led to new inventions and new innovations• Led to changes in transportation, agriculture, and communication

Spread of Industrialization 1850-1914

Global Diffusion of the Industrial Revolution

Summary of Institutional Capitalism• English Parliament was firmly under the control of the capitalist classes. • Increase in agricultural production and turned the established rules of land ownership on

their head. • Lands previously held in common by tenant farmers changed into large private farms,

worked by a smaller labour force. This increased the agricultural production and caused the displaced peasants to head for the cities. Subsequently, there was an abundant labour supply to mine coal and iron, and man the factories. • The revolution moved economic power away from the aristocratic classes and into the

hands of the new middle class, the bourgeoisie.