The Story of Economic Growth

In 1776, a landmark piece of writing appeared that changed the world. This was The Wealth of Nations written by Scottish philosopher Adam Smith, the father of modern economic theory. He had surmised that expanding markets prompted a division of labor to meet increased demand and that this would lead to innovation and greater economic growth.

Proto-industrialization versus Mercantilism

Overseas exploration had opened the world to Europe and transformed the dynamics of trade. But traditional artisanal guilds—that until now had focused on craftmanship—were unable to meet the increasing volume, or speed, demanded by these new markets. This created an opportunity for merchant capitalists—men with money to invest and access to distant places—to gain potentially even more wealth for themselves.

The merchant capitalists bypassed local guilds and hired individuals to do piece-work from their homes, producing wares that the merchants would sell abroad. And instead of having one craftsman produce an entire product—from start to finish—these merchant capitalists hired out parts of the work to be done by multiple men and women in their spare time. It became known as the ‘putting out’ system, or proto-industrialization.

Until then, a much more inward-looking economic theory had prevailed in Europe. Known as mercantilism, it viewed a positive trading balance as the preferred path to wealth creation—exporting more than you import. So, trade and production were viewed primarily as means to strengthen the state. The more the state controlled and regulated the economy, the more it was thought that authorities could maintain a favorable balance of trade and build up the state treasury. In turn, that strong state would strengthen the economy.

This article comes directly from content in the video series The Great Revolutions of Modern History. Watch it now, on Wondrium.

Birth of Capitalism

As proto-industrialization expanded in the 1760s and early 1770s, Adam Smith came to believe that mercantilism was counter-productive to economic growth. Smith argued that economic development worked best in an environment of free competition. Since free trade and competition would allow surplus production to find overseas markets, and thereby lower the cost of goods, free market forces—not mercantilism—would maximize an economy’s potential and benefits.

He also believed that individuals with resources to invest would do so in order to maximize their returns. And he said that an entire nation of potential investors doing so—in aggregate—would increase the wealth of the nation as a whole.

Smith’s concepts formed the basis of the economic system that replaced mercantilism, continuing to the present era. That new system was called capitalism. Meanwhile, other contemporaneous developments brought Smith’s theoretical model to fruition. Over time, what had been proto (or primitive) industrialization became more like industrialization as we know it today. The consequences were revolutionary.

The Industrial Revolution

Revolutions of any kind—notably political ones—tend to ensue from a confluence of factors. A single event—by design or happenstance—might be the straw that breaks the proverbial camel’s back. But true revolutions arise from environments that have been primed for radical change.

So, it should be no surprise that the same was true for what became known as the Industrial Revolution. Yet it wasn’t until the mid-to-late-19th century that social theorists such as Frederick Engels and economic historians like Arnold Toynbee made reference to a holistic historical phenomenon called an Industrial Revolution. We realized the revolutionary nature of this period only after the fact, when we considered the continuous dramatic economic transformations that revolutionized not just production but also politics, living conditions, and social relations.

Given the political revolutions unfolding on both sides of the Atlantic at the end of the 18th century—and the dramatic upheavals they wrought—it isn’t surprising that the economic revolution also under way wouldn’t be identified as such for nearly a century.

‘Most Important Event in World History’

The Industrial Revolution brought no rousing speeches, no people’s marches, and no guillotine. It had no slogans promising liberty, fraternity, and equality, and it didn’t abolish centuries-old political repression overnight, though historian Eric Hobsbawm described it as, “Probably the most important event in world history, at any rate since the invention of agriculture and cities.”

Arnold Toynbee, the economic historian, says the steam engine and publication of The Wealth of Nations destroyed the old world and built a new one. The Industrial Revolution extended far beyond factory walls. Industrialization built cities, expanded trade, and reconfigured politics, warfare, culture, and social relations.

Common Questions about the Industrial Revolution

Instead of having one craftsman produce an entire product—from start to finish—the merchant capitalists hired out parts of the work to be done by multiple men and women in their spare time. It became known as the ‘putting out’ system, or proto-industrialization.

Mercantilism viewed a positive trading balance as the preferred path to wealth creation—exporting more than you import. So, trade and production were viewed primarily as means to strengthen the state. The more the state controlled and regulated the economy, the more it was thought that authorities could maintain a favorable balance of trade and build up the state treasury.

Adam Smith came to believe that mercantilism was counter-productive to economic growth. Smith argued that economic development worked best in an environment of free competition. Since free trade and competition would allow surplus production to find overseas markets, and thereby lower the cost of goods, free market forces—not mercantilism—would maximize an economy’s potential and benefits.

Keep Reading
The Consequences of the Industrial Revolution in America
The Eccentricity of John Adams: Its Effects on His Political Career
Karl Marx and Adam Smith on the Dangers of Capitalism

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