The Industrial Revolution had a major influence on the rise of capitalism. The free market existed well before the Industrial Revolution, as most people could decide what to purchase and at what price to purchase it. People could also decide what to produce according to the resources available and their abilities to produce it.
The Industrial Revolution led to goods being produced on a massive scale by laborers who were not responsible for every step of the process, unlike artisans. The owners of factories justified not paying the laborers a high price because they said they could always get more laborers who were willing to work cheaply. Mass production led to more goods being available at cheaper prices, but it also led to workers making less money. The worker was now dependent on the factory owner for his or her wages instead of his or her own ability to produce...
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goods and sell them to the public directly.
The Industrial Revolution also led to criticisms of capitalism. Some critics of capitalism pointed out the wealth discrepancies between factory owner and worker and stated that the factory owner was being paid unfairly and that the worker was the one who should be compensated for his or her labor. The Industrial Revolution led people to consider alternatives to capitalism.
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 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.
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 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'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.
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.