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If you define capitalism simply as free markets, it existed long before the Industrial Revolution. If, however, you define capitalism as a system in which a class of owners employes a class of wage laborers, the connection to the Industrial Revolution becomes much more clear.
As industrialization occurred, companies got bigger and there came to be much more of a divide between the people who did the work and the people who supervised them and owned the factories where they worked. The rise of these large firms is what really developed the wage labor-based capitalist system.
There's a direct connection between the rise of industry and the political ideology of and robber baron preference for laissez-faire economics. While the social cost of the Gilded Age was huge and tragic (and Europe underwent a very similar industrial era), if you set that aside, the late 19th century was also a grand experiment in economic theories. Capitalism was defined within the contexts of that experiment, and refined in the century and a quarter since.
The Industrial Revolution more than any other period of history (arguably) exacerbated the divide between the rich and the poor, the haves and the have nots. By creating a dependency on employers to give wages, capitalism was thus firmly established as the dominant economic system that we still live under today.
There was an expansion of business with the Industrial Revolution, a change that provided poor people with jobs. Given more purchasing power from having employment, the hitherto poor now had some money with which to become consumers. As a result, small businesses were created to provide these new consumers with products for their homes, etc. Of course, the large businesses profited, too, and capitalism expanded. After all, there were many lower class people buying kerosene for their lamps from J.D. Rockefeller's companies. So, there was a great exchange of goods, and there was no government control on these businesses as there is today.
The power and influence of the capitalist system grew with the massive increase in the ability to concentrate capital in the hands of a smaller group of people. This became possible during the industrial revolution because of advances in production technology and the ability to mass-produce commonly used consumer items.
The Industrial Revolution created more goods, more choices and cheaper products. How could this not be an incentive to a capitalist economy? If factories and production are government owned the incentives to create better technology and more choices and cheaper options is lacking. It is only under a capitalist system that factory owners have the monetary incentive to keep moving forward with technology in the factories (to make production faster and cheaper) and to create more varieties of goods ( to keep consumers interested). In any other economic system there is no competition, no choices for consumers, and no incentives to the factory owners to make changes.
The industrial revolution that occurred in the first half of the nineteenth century in the countries of northern Europe resulted from a succession of several events, of which the most important were:
- the agricultural revolution that occurred in the eighteenth century with the emergence of new agricultural techniques, which made possible the increase in food production. And because less labour force was required, rural population was released from agricultural work and migrated to the cities, creating an extra supply of workers available to be employed in industry;
- the technological development, mainly the invention of the steam engine, which allowed both the development of industrial mass production and the evolution of transportation;
- the possession of colonial empires by European countries, which not only provided cheap raw materials that were manufactured in Europe but also constituted markets for the sale and placement of such products.
The development of production and transportation changed the existence of a mercantilist capitalism or trade in which countries were limited to exchange among themselves raw materials or agricultural products that were produced or obtained from their colonies, into an industrial capitalism, with the multiplication of production and wealth (financial capitalism).
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