Industrialization is the transformation of a society from an agrarian economy to an industrial one. Industrialization has enormously positive impacts on wages, productivity, wealth generation, social mobility and standard of living. During industrialization, all wages tend to rise, though the wages of some rise much faster than others.
The impact of industrialization can be understood by looking at historical data or by reviewing its logical economic consequences. Standard of living, traditionally measured as real income per person, increases exponentially during and after industrialization.
Wages Before Industrialization
According to researchers at the Minneapolis Fed, gross domestic product (GDP) per capita was essentially unchanged from the rise of agricultural societies until 1750; they estimate a per capita income of $600 for this period (using 1985 dollars).
In countries such as Japan, the United Kingdom and the United States – where economic policies allowed for the greatest industrialization – per capita income exceeded $25,000 (in 1985 dollars) by 2010.
The World Health Organization defines “absolute poverty” as living on less than $2 per day, although other definitions range between $1.25 and $2.50. By these standards, the average individual in every society in the world lived in absolute poverty until 1750.
Work in agrarian life often involved working as long as the sun was up, only stopping because there was no more light. Workers often lived at the behest of their lords (whatever their title). Children were expected to begin working at a very young age, and most people were not allowed to keep the fruits of their labor. Productivity was chronically low. This changed with the Industrial Revolution.
The Industrial Revolution
Large-scale industrialization began in Europe and the U.S. during the late 18th century following the adoption of capitalist economic principles. Under the influence of thinkers such as John Locke, David Hume, Adam Smith and Edmund Burke, England became the first country to emphasize individual property rights and decentralized economies.
Under this philosophy, known as classical liberalism, England experienced the earliest industrial development. Low levels of public spending and low levels of taxation, along with the end of the Mercantilist Era, sparked an explosion in productivity. Real wages in England grew slowly from 1781 to 1819 and then doubled between 1819 and 1851.
According to economist N.F.R. Crafts, income per person among the poorest increased 70% in England between 1760 and 1860. By this time, industrialization had reached most of Europe and the U.S.
The replacement of agricultural life was dramatic. In 1790, farmers made up 90% of the labor force in the U.S. By 1890, that number fell to 49% despite a much higher level of output. Farmers made up just 2.6% of the U.S. labor force by 1990.
The Economics of Industrialization
Prior to the rise of classical liberalism, much of the wealth generated by a worker was taxed. Very little was invested in capital goods, so productivity remained very low.
Capital development became possible once private individuals could invest in competing corporations and entrepreneurs could approach banks for business loans. Without these, merchants could not afford to innovate or develop superior capital goods. Mass production led to cheaper goods and more profits.
Workers are more productive with industrialization’s capital goods, and companies have an incentive to bid up wages towards marginal revenue product when they compete for laborers.
Author: Sean Ross (Investopedia)