11.1 Industrial Revolution

We live in a globalized world. Products are designed in one place, assembled in another from parts produced in multiple other places. These products are marketed nearly everywhere. Until a few decades ago, such a process would have been impossible. Two hundred years ago, such an idea would have been beyond comprehension. What happened to change the world in such a way. What eventually tied all the economies of the world into a global economy? Industry did. The Industrial Revolution changed the world as much as the Agricultural Revolution. Industry has made the modern lifestyle possible.

The Industrial Revolution began in England, which was by 1750, one of the wealthiest nations in the world and controlled an empire that covered one-quarter of the world’s land mass. It started with England’s textile industry, which was struggling to produce goods cheaper and faster for growing consumer markets. Making cloth, by hand, for pants, shirts, socks, bedspreads, and other domestic items had always required lots of skill and time.

As the population grew in England, more people needed textile goods. In the late 18th century, a series of innovations created by savvy businessmen and factory workers solved many of the difficulties in textile production. As the scale of production grew, the factory emerged as a centralized location where wage laborers could work on machines and raw material provided by capitalist entrepreneurs. Moreover, cotton led the way. In the 1700s, cotton textiles had many production advantages over other types of cloth. The first textile factory in Great Britain was actually for making silk, but since only wealthy people could afford the product, production remained very low. Cotton, on the other hand, was far less expensive. It was also stronger and more easily colored and washed than wool or linen.

By the late 18th century, steam power was adapted to power factory machinery, sparking an even more significant surge in the size, speed, and productivity of industrial machines. Heavy industries like ironworking were also revolutionized by new ideas, and new transportation technologies were developed to move products further and faster. Growing businesses soon outstripped the financial abilities of individuals and their families, leading to legal reforms that allowed corporations to own and operate businesses.

Nineteenth-century industrialization was closely associated with the rapid growth of European cities during the same period. Cities grew because of the influx of people desiring to take advantage of the factory jobs available in urban areas. Urbanization extended industrialization as factories were built to take advantage of urban workforces and markets.

Industrialization changed the relationship that existed between cities and their surrounding rural areas. In preindustrial times, cities consumed foodstuffs produced in rural areas but produced little that rural areas needed in return. As a result, some historians describe preindustrial cities as “economically parasitic.” Following the Industrial Revolution, cities became urgent centers of production and were able to offer a wide variety of manufactured goods to rural areas, becoming vital centers of production as well as consumption. Europe experienced the development of the major cities of its realm during this period. In England, for example, in 1800 only 9 percent of the population lived in urban areas. By 1900, some 62 percent were urban dwellers.

While industrialization alone cannot account for the rapid growth of the European population during the nineteenth century (this growth was underway before industrialization), it is believed to have been responsible for changing patterns of population density on the continent. Between 1750 and 1914, most industrialized nations (England, Belgium, France, Germany) also acquired the highest population densities. This correlation reflects not only the rapid urbanization of these countries but also the high population densities of their urban areas and the improved standards of living associated with industrializing economies.

Working in new industrial cities influenced people’s lives outside of the factories as well. As workers migrated from the country to the city, their lives and the lives of their families were utterly and permanently transformed. For many skilled workers, the quality of life decreased a great deal in the first 60 years of the Industrial Revolution. Skilled weavers, for example, lived well in pre-industrial society as a kind of middle class. They tended their gardens, worked on textiles in their homes or small shops, and raised farm animals. They were their bosses. However, after the Industrial Revolution, the living conditions for skilled weavers significantly deteriorated. They could no longer live at their own pace or supplement their income with gardening, spinning, or communal harvesting.

In the first sixty years or so of the Industrial Revolution, working-class people had little time or opportunity for recreation. Workers spent all the light of day at work and came home with little energy, space, or light to play sports or games. The new industrial pace and factory system were at odds with the old traditional festivals which dotted the village holiday calendar. Plus, local governments actively sought to ban traditional festivals in the cities. In the new working-class neighborhoods, people did not share the same traditional sense of a village community. Owners fined workers who left their jobs to return to their villages for festivals because they interrupted the efficient flow of work at the factories. After the 1850s, however, recreation improved along with the rise of an emerging the middle class. Music halls sprouted up in big cities. Sports such as rugby, cricket, and football became popular. Cities had become the places with opportunities for sport and entertainment that they are today.

There was a necessary trade-off in the Industrial Revolution for the working-class. Material standards of living were in some ways, improving more material goods were produced, so they were available at lower costs, and factories provided a variety of employment opportunities not previously available. At the same time, working conditions were often horrible, and the pay was terrible, and it was often difficult for unskilled workers to move to higher skill levels and escape the working class. The traditional protections of the medieval and early modern eras, such as guilds and mandated wage-and-price standards, were disappearing.

Gradually, very gradually, middle class, or “middling sort,” did emerge in industrial cities, mostly toward the end of the 19th century. Until then, there had been only two major classes in society: aristocrats born into their lives of wealth and privilege, and low-income commoners born in the working classes. However new urban industries gradually required more of what we call today “white collar” jobs, such as business people, shopkeepers, bank clerks, insurance agents, merchants, accountants, managers, doctors, lawyers, and teachers. One piece of evidence of this emerging middle class was the rise of retail shops in England that increased from 300 in 1875 to 2,600 by 1890. Another mark of distinction of the middle class was their ability to hire servants to cook and clean the house from time to time. Not surprisingly, from 1851 to 1871, the number of domestic servants increased from 900,000 to 1.4 million. This small but rising middle class prided themselves on taking responsibility for themselves and their families. They viewed professional success as a result of a person’s energy, perseverance, and hard work.

In this new middle class, families became a sanctuary from stressful industrial life. The home remained separate from work and took on the role of emotional support, where women of the house created a moral and spiritual safe harbor away from the rough-and-tumble industrial world outside. Most middle-class adult women were discouraged from working outside the home. They could afford to send their children to school. As children became more of an economic burden, and better health care decreased infant mortality, middle-class women gave birth to fewer children.

Ironically, life in the middle class still had its downside. Stuck in a new position in the middle of society, the new middle class were hostile both to the aristocracy and to the lower classes. They were angered by their political exclusion from power in a system that still favored aristocrats they felt they had the wealth and education to deserve a political voice. They also had contempt for the lower classes, particularly the growing mass of urban poor. In their lifestyles and political positions, they tried to separate themselves from this uneducated and politically powerless herd, with whom they had less and less culturally in common (and who often worked for them in their factories).

By the early twentieth century additional countries, usually culturally associated with Europe, began to industrialize, including Russia, Japan, other nations in Eastern and Southern Europe, Australia, and New Zealand. Britain and the other previously industrialized countries became highly urbanized. The last craft industries, such as shoemaking and glassmaking, became industrialized. The most developed countries, such as the United States, mass-produced consumer goods – such as dishwashers, furniture, and even houses – for the growing middle classes. The service sector grew and matured with jobs for teachers, waiters, accountants, lawyers, police, and clerks. Essential inventions included the assembly line, the automobile, and the airplane. Western countries and businesses typically controlled world trade and took direct or indirect control of critical industries in less developed countries, enriching themselves in the process.

The Industrial Revolution, an era that began in England at the end of the 18th century, has yet to end. Since the 1950s the so-called “Asian Tigers” (Hong Kong, Singapore, Taiwan, South Korea) rapidly industrialized by taking advantage of their educated and cheap labor to export inexpensive manufactured goods to the West. Other countries in Asia and the Americas, such as China, India, Brazil, Chile, and Argentina, began to develop key economic sectors for export in the global economy.

The world moved gradually toward global free trade. Western countries in Europe and North America turned increasingly to service and high technology economies as manufacturing moved to the cheap labor markets of developing countries. The important new inventions of this phase were the computer and the Internet. This era is now referred to as the “Post-Industrial age,” since the most developed countries focus on service jobs rather than manufacturing, called the “Information Age.” With only a few exceptions, most impoverished nations have not become wealthy in the fiercely competitive global market. There is an increasing wealth gap between more developed and less developed countries in the world.

11.2 The Economies of Geography

It is easier to understand why people move from rural to urban, from the periphery to core, from Mexico to the United States when one begins to understand the global economy. Economic conditions are connected to how countries gain national income, opportunities, and advantages. One way of gaining wealth is simply by taking someone else’s wealth. This method has been common practice throughout human history: a group of armed individuals attacks another group and takes their possessions or resources. This is regularly practiced through warfare. Unfortunately, this pillage-and-plunder type of activity has been a standard way of gaining wealth throughout human history.

The taking of resources by force or by war is frowned upon today by the global economic community, though it still occurs. The art of piracy, for example, is still practiced on the high seas in various places around the globe, particularly off the coast of Somalia.

The main methods countries use to gain national income are based on sustainable national income models and value-added principles. The traditional three areas of agriculture, extraction/mining, and manufacturing are a result of primary and secondary economic activities. Natural resources, agriculture, and manufacturing have been traditionally targeted as the means to gain national income. Postindustrial activities in the service sector, including tertiary, quaternary, and quinary economic activities, have exploded in the past seventy-five or so years.

Services constitute over 50 percent of income to citizens in low-income nations. The service economy is also crucial to growth, for instance, it accounted for 47 percent of economic growth in sub-Saharan Africa over the period 2000 – 2005; industry contributed 37 percent and agriculture 16 percent in the same period. This means that recent economic growth in Africa relies as much on services as on natural resources or textiles, despite many of those countries benefiting from trade preferences in primary and secondary goods. As a result, employment is also adjusting to the changes, and people are leaving the agricultural sector to find work in the service economy. This job creation is particularly useful as often it employs low-skilled labor in the tourism and retail sectors, thus benefiting the poor and representing an overall net increase in employment.

Places around the world have sometimes been named after the methods used to gain wealth. For example, the Gold Coast of western Africa received its label because of the abundance of gold in the region. The term breadbasket often refers to a region with abundant agricultural surpluses. Another example is the Champagne region of France, which has become synonymous with the beverage made from the grapes grown there. The Banana Republic earned their name because their large fruit plantations were the primary income source for the large corporations that operated them. Places such as Copper Canyon and Silver City are examples of towns, cities, or regions named after the natural resources found there.

The United States had its Manufacturing Belt, referring to the region from Boston to St. Louis, which was the core industrial region that generated wealth through heavy manufacturing for the more significant part of the nineteenth and twentieth centuries.

Countries with few opportunities to gain wealth to support their governments often borrow money to provide services for their people. The national debt is a significant problem for national governments. National income can be consolidated into the hands of a minority of the population at the top of the socioeconomic strata. These social elites can dominate the politics of their countries or regions. The elites may hold most of a country’s wealth, while at the same time, their government might not always have enough revenues to pay for public services. To pay for public services, the government might need to borrow money, which then increases that country’s national debt. The government could have a high national debt even when the country is home to many wealthy citizens or a growing economy. Taxes are a standard method for governments to collect revenue. If economic conditions decline, the amount of taxes collected can also decline, which could leave the government with a shortfall. Again, the government might borrow money to continue operating and to provide the same level of services. Political corruption and the mismanagement of funds can also cause a country’s government to lack revenues to pay for the services it needs to provide its citizens. The National debt, defined as the total amount of money a government owes, is a growing concern across the globe.

Many governments have problems paying their national debt or even the interest on their national debt. Governments whose debt has surpassed their ability to pay have often inflated their currency to increase the amount of money in circulation, a practice that can lead to hyperinflation and eventually the collapse of the government’s currency, which could have serious adverse effects on the country’s economy. In contrast to the national debt, the term budget deficit refers to the annual cycle of accounting of a government’s excess spending over the number of revenues it takes enduring a given fiscal year.

11.3 Globalization and international trade

Before we begin a discussion about why nations trade, it would be helpful to take a moment to consider the character and evolution of trade. It is important to keep in mind, first, that although we frequently talk about trade “between nations,” the vast majority of international transactions today take place between private individuals and private enterprises based in different countries. Governments sometimes sell things to each other, or individuals or corporations in other countries, but these comprise only a small percentage of world trade.

Trade is not a modern invention. International trade today is not qualitatively different from the exchange of goods and services that people have been conducting for thousands of years. Before the widespread adoption of currency, people exchanged goods and some services through bartering—trading a certain quantity of one good or service for another good or service with the same estimated value. With the emergence of money, the exchange of goods and services became more efficient.

Developments in transportation and communication revolutionized economic exchange, not only increasing its volume but also widening its geographical range. As trade expanded in geographic scope, diversity, and quantity, the channels of trade also became more complex. Individuals conducted the earliest transactions in face-to-face encounters. Many domestic transactions, and some international ones, still follow that pattern. However, over time, the producers and the buyers of goods and services became more remote from each other.

A wide variety of market actors, individuals and firms, emerged to play supportive roles in commercial transactions. These “middlemen,” wholesalers, providers of transportation services, providers of market information, and others, facilitate transactions that would be too complex, distant, time-consuming, or broad for individuals to conduct face-to-face efficiently.

International trade today differs from economic exchange conducted centuries ago in its speed, volume, geographic reach, complexity, and diversity. However, it has been going on for centuries, and its fundamental character, the exchange of goods and services for other goods and services or money, remains unchanged.

That brings us to the question of why nations trade. Nations trade a lot, but it is not quite as obvious why they do so. Put differently, why do private individuals and firms take the trouble of conducting business with people who live far away, speak different languages, and operate under different legal and economic systems, when they can trade with fellow citizens without having to overcome any of those obstacles?

It seems evident that if one country is better at producing one good and another country is better at producing a different good (assuming both countries demand both goods) that they should trade. What happens if one country is better at producing both goods? Should the two countries still trade? This question brings into play the theory of comparative advantage and opportunity costs.

The everyday choices that we make are, without exception, made at the expense of pursuing one or several other choices. When you decide what to wear, what to eat for dinner, or what to do on Saturday night, you are making a choice that denies you the opportunity to explore other options.

The same holds for individuals or companies producing goods and services. In economic terms, the amount of the good or service that is sacrificed to produce another good or service is known as opportunity cost. For example, suppose Switzerland can produce either one pound of cheese or two pounds of chocolate in an hour. If it chooses to produce a pound of cheese in a given hour, it forgoes the opportunity to produce two pounds of chocolate. The two pounds of chocolate, therefore, is the opportunity cost of producing the pound of cheese. They sacrificed two pounds of chocolate to make one pound of cheese.

A country is said to have a comparative advantage in whichever good has the lowest opportunity cost. That is, it has a comparative advantage in whichever good it sacrifices the least to produce. In the example above, Switzerland has a comparative advantage in the production of chocolate. By spending one hour producing two pounds of chocolate, it gives up producing one pound of cheese, whereas, if it spends that hour producing cheese, it gives up two pounds of chocolate.

Thus, the good in which comparative advantage is held is the good that the country produces most efficiently (for Switzerland, it is chocolate). Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good for which it holds the comparative advantage. The country can trade with other countries to get the goods it did not produce (Switzerland can buy cheese from someone else).

The concepts of opportunity cost and comparative advantage are tricky and best studied by example: consider a world in which only two countries exist (Italy and China) and only two goods exist (shirts and bicycles). The Chinese are very efficient in producing both goods. They can produce a shirt in one hour and a bicycle in two hours. The Italians, on the other hand, are not very productive at manufacturing either good. It takes three hours to produce one shirt and five hours to produce one bicycle.

The Chinese have a comparative advantage in shirt manufacturing, as they have the lowest opportunity cost (1/2 bicycle) in that good. Likewise, the Italians have a comparative advantage in bicycle manufacturing as they have the lowest opportunity cost (5/3 shirts) in that good. It follows, then, that the Chinese should specialize in the production of shirts and the Italians should specialize in the production of bicycles, as these are the goods that both are most efficient at producing. The two countries should then trade their surplus products for goods that they cannot produce as efficiently.

A comparative advantage not only affects the production decisions of trading nations, but it also affects the prices of the goods involved. After the trade, the world market price (the price an international consumer must pay to purchase a good) of both goods will fall between the opportunity costs of both countries. For example, the world price of a bicycle will be between 5/3 shirt and two shirts, thereby decreasing the price the Italians pay for a shirt while allowing the Italians to profit. The Chinese will pay less for a bicycle and the Italians less for a shirt than they would pay if the two countries were manufacturing both goods for themselves.

In reality, of course, trade specialization does not work precisely the way the theory of comparative advantage might suggest, for several reasons:

• No country specializes exclusively in the production and export of a single product or service.
• All countries produce at least some goods and services that other countries can produce more efficiently.
• A lower income country might, in theory, be able to produce a particular product more efficiently than the United States can but still not be able to identify American buyers or transport the item cheaply to the United States. As a result, U.S. firms continue to manufacture the product.

Generally, countries with a relative abundance of low-skilled labor will tend to specialize in the production and export of items for which low-skilled labor is the predominant cost component. Countries with a relative abundance of capital will tend to specialize in the production and export of items for which capital is the predominant component of cost.

Many American citizens do not fully support specialization and trade. They contend that imports inevitably replace domestically produced goods and services, thereby threatening the jobs of those involved in their production.

Imports can indeed undermine the employment of domestic workers. We will return to this subject a little later. From what you have just read, you can see that imports supply products that are either 1) unavailable in the domestic economy or 2) that domestic enterprises and workers would be better off not making so that they can focus on the specialization of another good or service.

Finally, international trade brings several other benefits to the average consumer. Competition from imports can enhance the efficiency and quality of domestically produced goods and services. Also, competition from imports has historically tended to restrain increases in domestic prices.

• Name a product/business where labor would be the comparative advantage for a developing country.
• Name a product/business where capital would be the comparative advantage for a rich country.
• Name a product/business where natural resources would be a comparative advantage.

Global Interdependence

The tremendous growth of international trade over the past several decades has been both a primary cause and effect of globalization. The volume of world trade increased twenty-seven-fold from $296 billion in 1950 to $8 trillion in 2005. Although international trade experienced a contraction of 12.2 percent in 2009, the steepest decline since World War II, trade is again on the upswing.

As a result of international trade, consumers around the world enjoy a broader selection of products than they would if they only had access to domestically made products. Also, in response to the ever-growing flow of goods, services, and capital, a whole host of U.S. government agencies and international institutions have been established to help manage these rapidly developing trends.

Although increased international trade has spurred tremendous economic growth across the globe, raising incomes, creating jobs, reducing prices, and increasing workers’ earning power, trade can also bring about economic, political, and social disruption.

Since the global economy is so interconnected, when large economies suffer recessions, the effects are felt around the world. One of the hallmark characteristics of the global economy is the concept of interdependence. When trade decreases, jobs, and businesses are lost. In the same way that globalization can be a boon for international trade; it can also have devastating effects. Activities such as the choice of clothes you buy have a direct impact on the lives of people working in the nations that produce

There are several elements that are responsible for the expansion of the global economy during the past several decades: new information technologies, reduction of transportation costs, the formation of economic blocs such as the North American Free Trade Association (NAFTA), and the reforms implemented by states and financial organizations in the 1980s aimed at liberalizing the world economy.

Trade liberalization, or deregulation, has become a ‘hot button’ issue in world affairs. Many countries have seen great prosperity thanks to the disintegration of trade regulations that had otherwise been considered a harbinger of free trade in the recent past. The controversy surrounding the issue, however, stems from enormous inequality and social injustices that sometimes comes with reducing trade regulations in the name of a bustling global economy.

Given the dislocations and controversies, some people question the importance of efforts to liberalize trade and wonder whether the economic benefits are outweighed by other unquantifiable negative factors such as labor exploitation.

With globalization, competition occurs between nations having different standards for worker pay, health insurance, and labor regulations. Corporations benefit from lower labor costs found in developing regions, thanks to free-trade agreements and a new international division of labor. A worker in a high-wage country is thus increasingly struggling in the face of competition from workers in low-wage countries. Entire sectors of employment in developed countries are now subject to this growing international competition, and unemployment has crippled many localities.

The outcome has been an international division of labor in all sectors of the economy. In particular, manufacturing is increasingly being contracted out to lower- cost locations, which are often found in developing countries with no minimum wage and few environmental regulations.

An excellent example of international division of labor can be found in the clothes-making industry. What was once a staple industry in most developed Western economies has now been relocated to developing countries in Central America, Eastern Europe, North Africa, Asia, and elsewhere.