5.7 Economic Effects of Industrialization

From roughly 1500-1750, Western European nations utilized mercantilism as their dominant economic philosophy. In the mercantilist system, governments controlled trade within their borders. Governments frequently imposed tariffs (taxes on imports/exports) and other trade barriers under this system, and the goal was often to export more than import. The government's role in directing and regulating economic activity was significant and included strict control of the money supply and credit to maintain a favorable trade balance. Navigation acts also controlled trade by requiring that certain goods could only be transported on ships owned by a given country and manned by its citizens.

By 1750 and through 1900, Western European nations put aside mercantilism in favor of free trade and laissez-faire (government is “hands off”) policies. They prompted the removal of tariffs and other trade barriers to allow for the free flow of goods and services; limited government intervention; an emphasis on the rights and freedoms of individuals; deregulation and privatization within industries.

Adam Smith wrote The Wealth of Nations (1776) on laissez-faire capitalism and free markets. Throughout this period, his practices gain more complete acceptance. The notions of mercantilism and governments controlling trade fade away. His ideas included several innovative beliefs that are still considered valid today:

The theory of the invisible hand: Smith believed that the economy would naturally regulate itself if individuals were allowed to pursue their own self-interest. He argued that the market, guided by the "invisible hand" of competition, would naturally lead to an efficient allocation of resources and the production of goods and services that people wanted to buy.

The division of labor: Smith argued that the division of labor (the specialization of workers in specific tasks) led to increased productivity and economic growth. He observed that workers who specialized in one task could become much more efficient than those who performed multiple tasks.

Free trade: Smith believed that free trade led to greater economic prosperity, as it allowed countries to specialize in the production of goods and services in which they had a comparative advantage and trade with other countries for goods and services in which they did not have an advantage.

Nations' wealth: He argued that the wealth of a nation could be measured by its national income and that economic growth could be achieved by increasing labor productivity.

Laissez-faire approach: He advocated for minimal government intervention in the economy and for the free market to regulate itself. He believed that government intervention would lead to inefficiency and that allowing individuals and businesses to pursue their own self-interest was the best way to promote prosperity.

Equipped with free trade government policies, businesses developed new approaches and new banking practices. Large businesses developed into corporations with ownership from shareholders, with some even taking control over whole industries, thus becoming a monopoly.

During the Industrial Age, several innovations in banking occurred. Joint-stock banks were formed by a group of individuals who pooled their money together to start a bank. This allowed for more significant amounts of capital and allowed banks to finance more extensive projects such as industrial ventures. The concept of limited liability entered the world of banking. It meant that shareholders were only responsible for the amount of money they had invested in the bank, rather than being held liable for all of the bank's debts. One of the current leading banks, HSBC, was founded exactly during the Industria Age. Banks increased in number, especially with the advent of the insurance industry.

Some companies began operating in more than one country. HSBC bank is also known as the Hongkong and Shanghai Banking Corporation, and apart from being a bank, it is also a transnational business. It initially operated as a British financial institution that conducted a lot of its business in China, including making a lot of money off the opium trading of the mid-1800s. During the industrial age, transnational businesses played a significant role in driving economic growth and expansion. They established factories and created jobs, and their products were traded and sold in global markets. They also significantly impacted international trade and transportation, as new technologies and infrastructure were developed to support their operations.

During the Industrial Age, financial instruments further developed. Apart from the introduction of joint-stock and limited liability companies (as described under the advances in banking), stock markets emerged. They allowed for individuals to buy and sell stocks or shares, thus becoming part owners of companies. Stockholders were not personally liable; therefore, it decreased risk for individuals while also increasing opportunities to make a profit. The insurance industry became more prevalent as the risk and uncertainty of business activities increased. Investment trusts were formed, allowing investors to pool their money and invest it in a diverse portfolio of companies and securities.

With people becoming wealthier, including the emerging middle class, people spent money on products they did not need to survive. This describes consumerism, and the continual improvement and efficiency of manufacturing increased the availability of consumer goods. Along with more money, people had leisure time. Biking and boating became popular activities for people, and athletics and enjoying professional sports became part of everyday life within industrialized areas. Other entertainment choices, such as music halls and parks, brought people together despite economic class designations. Additionally, the rise of consumerism and leisure activities also led to changes in social norms and values, as people began to emphasize material possessions and leisure time. Consumerism also significantly impacted the economy, as the constant demand for new goods and services sustained the industry's growth and led to the development of new marketing and advertising strategies.

Industrialization resulted in a massive gap between the wealthy (factory owners) and everyone else. This gap resulted from several factors, including the concentration of wealth and power in the hands of a small group of industrialists, and the exploitation of the working class by these industrialists.

The factory owners and other business leaders, who controlled the means of production, became immensely wealthy by exploiting the working class, who were paid low wages and often worked in dangerous and unhealthy conditions. This led to a widening gap in terms of economic power and wealth gap between the two classes.

Additionally, the working class had limited access to education and opportunities, which further perpetuated their lower economic status. As a result, they were often confined to low-paying jobs and had limited upward mobility. The gap between classes was also reflected in the living conditions and standard of living. Wealthy factory owners and business leaders lived in luxury. In contrast, the working class lived in overcrowded, unhealthy slums and tenements, with limited access to basic necessities such as clean water and sanitation.

The widening gap between classes during the industrial age also led to social tensions and conflicts. The working class became increasingly discontent with their living and working conditions, and began to demand better wages and working conditions. This led to the rise of labor unions and social movements, which aimed to improve the lives of the working class and reduce the gap between classes.

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