HIST363 Study Guide


Unit 1: Industrialization and Theories of Economic Change

1a. Name key economic theorists and summarize their main ideas about economic growth

  • Explain the basic economic and political principles behind mercantilism and how Europeans practiced it from 1600–1800.
  • What did Adam Smith mean by the invisible hand? Did he believe in the absolute freedom of the marketplace? Why or why not?
  • Describe the main principles of the Wealth of Nations. Define laissez faire capitalism.
  • What did Max Weber mean by the Protestant ethic? How does it relate to his argument about the development of modern capitalism?
  • What were Karl Marx and Friedrich Engels' basic criticisms of the industrial capitalism of their day? How did this relate to their concept of class struggle?
  • Define the bourgeoisie and the proletariat.

After you have completed the readings in Unit 1, make sure you are familiar with the concept of mercantilism which was the accepted economic theory prior to Adam Smith's seminal work, the Wealth of Nations. The mercantile system was based on the premise that national wealth and power are best served when countries increase exports and collect precious metals, goods and raw materials in return.

Adam Smith, Max Weber, Karl Marx, and Friedrich Engels were four key theorists and philosophers who discussed industrialization and economic change.

Adam Smith (1723–1790), the Scottish economist who many consider the "father" of modern economics, coined the idea of the invisible hand, in which he described how changes in supply and demand for an item typically return to a state of economic equilibrium. When a shortage of a product occurs, businesses usually raise their prices to take advantage of the increased demand. The profit margin they receive encourages other businesses to enter the market, increase production, and cure the shortage. When too many producers flood the market with increased supply, manufacturers are forced to lower the price of their products to get rid of their excess inventory and stay in business. Eventually, the competition among manufacturers achieves a market equilibrium or "natural price".

Max Weber (1864–1920), the German sociologist, believed that traditional hierarchical societies, based on honor, prestige, and religion, tended to dominate and discourage ownership of capital and modern industrial and commercial enterprises. The rise of Protestantism, particularly Calvinist theology (a major branch of Protestantism), influenced the rise of modern capitalism by reducing the importance of these societal hierarchies in favor of individual freedoms and the entrepreneurial spirit. He wrote, "the Protestants of Germany are today absorbed in worldly economic life, and their upper ranks are most indifferent to religion". He describes "materialistic joy" and an "intimate relationship" with "capitalistic acquisition".

While Adam Smith made the case for what would be known as laissez faire capitalism, Karl Marx (1818–1883) and Friedrich Engels (1820–1895) were highly critical of the exploitative nature of industrial capitalism, a social byproduct that Smith tended to ignore and was still in its infancy when he wrote his Wealth of Nations. Known for their views on social and class conflict within society, Marx and Engles witnessed and protested against the extreme poverty and abhorrent living conditions that capitalist practices created in many newly-industrialized cities. They predicted a class struggle would occur between the lower and upper classes over control of the means of production. Marx and Engels advocated the proletariat (the working class) should rise up in revolt against the bourgeoisie (the upper classes and wealthy elite) to support better working conditions. They predicted society would become more stable and equal once capitalism fails.

Review the following resources to find definitions and responses to these questions.


1b. Describe what the Industrial Revolution was and explain why England was one of the first nations to industrialize

  • In what ways was the Industrial Revolution in England based on improvements in agricultural production, what many call the Agricultural Revolution?
  • What natural advantages did England have that helped make the Industrial Revolution possible?
  • How did England's vast colonial empire contribute to it's early industrialization?
  • How did the Industrial Revolution disrupt traditional conventions in social life and psychology, and change prevalent economic patterns?

After you have completed the readings in Unit 1, you should be able to explain how and why the Industrial Revolution developed first in England, a country that possessed many of the right preconditions.

England had experienced an agricultural revolution where mechanized farming equipment was replacing farm labor, had requisite waterpower, had large reserves of iron and coal, and had a vast empire from which to draw the raw materials for industrial production, such as cotton from India and new colonial markets to sell its finished products.

Review the following resources to find definitions and responses to these questions.


1c. Compare classical and contemporary theories of industrialization

  • Define Walt Rostow's five stages of economic development: traditional society, preconditions for take-off, take-off, drive to maturity, and age of high mass consumption.
  • Compare Georg Frederich List's views on tariffs and a national economy with those of Adam Smith. What argument did each use to support their beliefs regarding the question of tariffs?
  • What did Joseph Schumpeter mean by social value? Why do capitalists try to establish monopolies and how can they stifle capitalism in the long run? 
  • Using Walt Rostow's stages of economic development, how would you characterize the modern American economy as compared to that of a developing country?

Make sure you are familiar with Walt Whitman Rostow's five stages of economic development, Georg Frederich List's ideas about tariffs and the creation of a national economy, and Joseph Schumpeter's explanation of entrepreneurship and business cycles. These three economists focused on different aspects of economic development. Their theories have impacted different economies and parts of the world in distinct ways.

Walt Rostow (1916–2003), an American economist, identified five stages of economic development: 1. the traditional society, 2. the preconditions for take-off, 3. the take-off, 4. the drive to maturity, and 5. the age of high mass-consumption.

Georg Frederich List (1789–1846), a German-American economist, described a similar series of stages, but goes a step further by explaining that countries may need to temporarily protect its infant industries (such as through tariffs or quotas) from foreign competition until these industries mature because "these transitions cannot take place automatically through the 'natural course of things,' i.e. through market forces".

Joseph Schumpeter (1883–1950), an Austrian political economist, coined the concept of creative destruction to describe how the new constantly replaces the old. He compared the economy to a living organism, which is constantly growing and changing to maintain its health. Entrepreneurs periodically disrupt existing industries, including the workers, businesses, and entire sectors that go along with it. This is part of the normal business cycle, which supports and promotes innovation and productivity. Many of today's economists look to Schumpeter's work to explain how technology and automation processes have disrupted the manufacturing industry in the current economy.

By social value, Schumpeter refers to the value society places on certain goods, depending on the wants or needs of the entire community. Social value influences that of the individual and the exchange value. For example, I may not like to eat avocados, but I may come to value them and even become an avocado farmer, because the rest of society values them and will buy them from me. I receive something in exchange for the avocados I sell, i.e. money.

Although Schumpeter promoted the benefits of a free market, capitalist innovation, and entrepreneurial growth, he also believed that elements of socialism would eventually replace capitalism due to capitalism's tendency to promote human greed, monopoly, and social inequalities.

Review the following resources to find definitions and responses to these questions.


Unit 1 Vocabulary

  • Adam Smith
  • Age of high mass consumption
  • Agricultural revolution
  • Bourgeoisie
  • Capitalism
  • Class struggle
  • Drive to maturity
  • Enclosure movement
  • Friedrich Engels
  • Georg Friedrich List
  • Industrial revolution
  • Invisible hand
  • Karl Marx
  • Laissez faire capitalism
  • Mercantilism
  • Monopoly
  • Marxism
  • National economy
  • Preconditions for take-off
  • Proletariat
  • Protestant Ethic
  • Take-off
  • Tariff
  • Traditional society
  • Social value
  • Walt Rostow
  • Wealth of Nations