Industrial Revolution

I INTRODUCTION

Industrial Revolution, term first used in the early 19th century to describe major changes in modes of production in Britain since the mid-18th century and their social consequences. However, it was quickly recognized outside as well as inside Britain that the consequences of the introduction of machinery, driven by steam power, would be felt worldwide.

Agriculture, backed by commerce, would no longer be the main source of wealth, and material wealth would increase through greater productivity. More than technology or resources were involved: enterprise was required, as was capital. The formation of capital depended on rates of profit and interest. How incomes would be distributed in future would raise difficult questions, for the relationships between employers, who owned the machines, and the workers, men and women (they were sometimes called “hands”), who operated them, would be different from the relationships between landowners and the agricultural workers dependent upon them. Karl Marx, who claimed that new industrial workers, separated from the products that they made, were alienated, less than full human beings, nonetheless believed in the unparalleled power of industrial advance and treated the invention of the steam engine as the beginning of a new era in human history.

By the end of the 19th century, when the term “industrial revolution” had passed into general circulation, other countries besides Britain, including Germany, the United States, and post-Meiji Restoration Japan, were already undergoing what were also called industrial revolutions. Enterprise, as had been forecast, continued to generate vast new wealth. There were signs by then, however, that in some industries Britain’s lead in production and marketing had already been lost. In many industrializing countries there was evidence also of organized working-class pressure to influence conditions of work exerted through cooperative societies, trade unions, and political parties.

Those socialists (a new 19th-century word) who followed Karl Marx believed that it was inevitable in the new economic conditions that the “capitalist system”, which was associated with the exploitation for profit of new technologies, would give way in time, following crises, to a socialist system. There were few British industrial workers, however, who subscribed to this view, although Marx had based his economic analysis on the British industrial revolution.

British experience did not serve as a model in other countries. The state usually played a bigger role elsewhere than it had done in Britain, and so, too, did science. In the United States, however, while tariff protection supported early industry, its expansion depended on the dynamics of capitalism. International trade, crucial to Britain as an island, had expanded rapidly before the Industrial Revolution, setting the revolution within a world frame, and during the 19th century Britain was the most active proponent of international free trade. In the 18th century imports of cotton from across the oceans were the basis of the most rapidly developing of the new British machine industries, mechanized cotton spinning, in the process disturbing and destroying the older Indian handicraft cotton industry. British mill owners depended for their profits on the opening up of African markets for cheap cotton goods through triangular trade between Britain, Africa, and America, in which the movement of slaves was part of the system. Britain subsequently took the lead in the movement to abolish the slave trade, but by then its industrial lead seemed secure. As other countries industrialized—some, particularly the United States, with far greater resources at the disposal of their manufacturers—competitive trade rivalries directly or indirectly influenced politics. So, too, did recurring business cycles, with booms at their peaks and depressions at their troughs.

II COMMON ELEMENTS IN THE PATTERN

However marked the contrasts in the timing and sequences of industrialization in different countries, all “industrial revolutions” had a number of elements in common.

A Power

The quest for new sources of inanimate power—steam first, electricity second—was fundamental to industrialization. Hitherto people had depended on natural power—wind, water, and human backed by animal power, and water employed in early British cotton mills continued to be used in parallel to steam until and after the beginnings of the age of electricity. Inanimate power was measured at first in units of horse power. In late 18th-century Birmingham, where the Scots engineer James Watt worked in partnership with the businessman Matthew Boulton, the latter told the visitors to his works that he was selling what all the world wanted—”power”.

The gospel of steam, proclaimed as forcefully in the 19th century as the gospel of work, rested on the conviction, not shared by all workers tied to it, that steam was a universal boon; and writing after it had been applied not only to driving machines but to locomotion (railways and ships)—considered its greatest triumph—a Yorkshire poet, Ebenezer Elliott, popular critic of agricultural protection, wrote in verses called “Storm in the Desert”:

Steam—if the nations groe not old—
Why dost not thou thy banner shake
O’er sea-less, stream-less lands, and make
One nation of mankind?

B Materials

The exploitation of existing materials and the discovery of new materials, accompanied by advances in technology and in chemistry, were other key elements in the industrial revolutions. Metals, particularly iron, acquired new uses. So, too, did glass. Coal was demanded in large quantities. One chemical product, sulphuric acid, was deemed so important that the German chemist Justus Liebig suggested that the commercial prosperity of a country might be measured by its consumption. Chemical products included caustic soda, chlorine (used for bleaching), soap, dyestuffs, and paints.

C Mechanization

The increasing use of machines as a complement to or a substitute for human labour became almost the defining feature of the new industrial economics. It made possible what was called the division of labour, increasing productivity. In the British industrial revolution, but not the first stages of the Japanese industrial revolution, machines were associated with invention, a quality greatly praised in the last half of the 18th century. From the start, however, they were sold abroad as well as at home. For the operatives who worked them, machines were associated during these early years of industrialization not with ingenuity but with discipline. The machine set the pace. In a worker’s poem, “Hand-loom versus Power Loom”, addressed to cotton workers, was written:

So come all you cotton-weavers, you must rise up very soon,
For you must work in factories from morning until noon;
You mustn’t walk in your garden for two or three hours a day,
For you must stand at their command, and keep your shuttles at play.

These were relatively light-hearted lines. As most machines were operated by women and children, however, the sense of people being yoked to machines could become bitter, while handloom weavers, supplanted by machines, regarded themselves as victims of “progress”.

For Thomas Carlyle, writing about the industrial society of the 1830s and 1840s, when factory labour (and factory ownership) had become a matter not associated with invention but with routine, the main characteristic of that society was the presence of the machine. It affected feelings as well as ways of working. Yet not everyone complained of what was happening. In 1832 Charles Babbage, who was to invent one of the most remarkable 19th-century machines, the Analytical Engine, a mechanical precursor of the electronic computer, dwelt on the increase in productivity that machines made possible in his Economy of Manufactures (1832); and Andrew Ure in his Philosophy of Manufactures (1835) went so far as to suggest, in a pre-computer age, that “the most perfect manufacture is that which dispenses entirely with manual labour”.

After the application of steam power to machines, which at first were made individually rather than to uniform designs, the most important feature of further change affecting production was the development of machine tools, making it possible through the standardization of metal parts to reproduce machines. Standardization was pushed further in the United States, leading to mass production, known at first as the “American system”. The standardization of parts began with guns and sewing machines, and then spread to bicycles and motor cars. Henry Ford, brought up on a farm, began work as a machinist’s apprentice, and his assembly-line approach to production influenced not only Americans but also Soviet Communists, pledged to carrying through their own industrial revolution under state orders.

D Organization

New approaches to industrial management and marketing, going through different phases at the same time, were as important as technological changes. In the 18th century, since there was no highly organized local or national capital market that employers could fall back on for funds, and no limited liability company organization to spread risk, they had to be prepared to plough back their own profits for the acquisition of machines. These were concentrated in factories, later in what was described as “plant”. They had also to be able to supervise and manage workers, being prepared to “tame” what was now described as a “labour force”. As management was separated from ownership, it became more specialized. So too did marketing. In the 18th century there were owners whose marketing flair could be described as genius. Josiah Wedgwood, for example, who built up a flourishing pottery business with worldwide connections, was a master of publicity, as was the iron founder John Wilkinson, who helped to make Britain “iron-conscious”. His iron boat, which cynics remarked would be sure to sink, was as well known as his iron coffin. In the century that followed, new generations of entrepreneurs developed financial management and marketing skills geared to their own changing societies and cultures. It was not until the late 20th century, however, in an age of increasing scale, that the term “corporate culture” began to be used.

E New Thought

The use of the term “corporate culture”, like the use of the early 20th-century term “scientific management” in industry, and like Carlyle’s attack on the machine, was merely one manifestation of the changed nature of thinking and feeling associated with continuing industrial revolution. Industrialization also demanded new structures in banking, insurance, and allied services.

In the 18th century, “industry” was not thought of as a sector of the economy, as it was to be thought of everywhere in the 20th century, but as a human quality, individual and collective, contrasting with idleness. Until it became associated with machines and mills there could have been no sense of an “Industrial Revolution”. There was another necessary shift in thinking—the idea of taming or even conquering Nature. For centuries, Nature had been thought of as a source, an erratic source, not only of materials but of power—never entirely under human control. It was studied by philosophers, seeking to discover its laws, including the 17th-century English philosopher-statesman Francis Bacon, who had dreamt of taming nature through increased understanding of its mysteries. Looking back from a 19th-century vantage point, when the British industrial revolution was well advanced, the scientist Sir John Herschell—”scientist” was another new term of the early 19th century—commented that, “it seemed”, on the eve of the Industrial Revolution, “as if the genius of mankind, long pent up, had at length rushed eagerly upon Nature”. Watt himself had claimed in revolutionary fashion that “Nature can be conquered if we can but find her weak side”. Such an approach was completely opposed to Chinese and Indian views of Nature, where balance was stressed, not conquest. It was European, rather than British, however, and the adjective “Faustian“ was sometimes applied to it, an adjective derived from an old legend of power.

There were two other associations that influenced the term “industrial revolution”. The first was the political revolution in France that ran parallel to the economic one from 1789 onward through the Napoleonic Wars. The second was the “revolution” in the ancient world from hunter-gatherer subsistence to settled agriculture, later described as the “Neolithic Revolution”. Both “revolutions” were rightly deemed to have had more than local or national consequences. (For some historians, there were intermediate “industrial revolutions” in Britain, such as a 13th-century change in techniques in the textiles industry.)

The first person to use the term “industrial revolution”, Adolphe Blanqui, compared explicitly the social and political changes that happened in France in the 1780s and 1790s with the social and political changes that happened in Britain. He could compare Watt with Georges Jacques Danton. The British diffused techniques, the French ideas. It was the French historian Paul Mantoux, writing in his book The Industrial Revolution in the Eighteenth Century (1906; trans. 1928), who described it as “one of the most important moments in modern history, the consequences of which have affected the whole civilized world and are still transforming it and shaping it under our eyes”. By the time that Mantoux studied it in detail, the British Industrial Revolution seemed to have much in common with the French Revolution, different though they were in their origins. Factories and barricades were part of the same stage set. Thanks to Marx (and others), the new industrial proletariat, created by the factory system, were thought of (misleadingly) as carriers of continuing and ultimately worldwide revolution.

The parallel with the “Neolithic Revolution” focused on production, although it had implications too for historians of ways of life. While Watt was compared topically with Danton, Sir Richard Arkwright, inventor of the spinning frame, was compared across the centuries with an unknown early prehistoric man. “Arkwright”, it was urged, “well deserves to live in honoured remembrance among those ancient master-spirits who persuaded their roaming companions to exchange the precarious toils of the chase for the settled comforts of agriculture.”

III THE FIRST INDUSTRIAL REVOLUTION

There is no single date to attach to the beginning of the British Industrial Revolution. Nor can a single date be given for the invention of the steam engine. A sharp rise in the production of coal, iron, and cotton textiles during the 1780s points to this decade as the most exciting burst of activity in what was a long process that needs to be studied across time, in conjunction with the Agricultural Revolution. Yet it was in 1754 that a Society for the Encouragement of Arts, Manufactures, and Commerce had been created in London to encourage “invention”, and there were many examples of invention long before that. Even in 1700 there were pockets of industry—”proto-industry” as it is now called—before the introduction of steam power.

A terminal date cannot be given for the Industrial Revolution either. Even in the mid-19th century, when Britain was hailed as the workshop of the world, many areas of the country, and indeed many forms of economic activity, had been left untouched. In 1860 only 30 per cent of people in a greatly expanded population were employed in occupations that had been radically transformed in their techniques during the previous 80 years. More was to change in the rest of the 19th century and, of course, in the 20th century.

Industrialization, another new 19th-century term, like “industrial revolution” and “industrialism”, had proved to be a dynamic but uneven process, involving continuing change, some of it in bursts, with the essence of development to be found in fluidity in techniques of production and in allocation of resources. The term “Second Industrial Revolution” has been used subsequently to describe British industrial development in an age not of iron and steam but of steel and electricity. With the intervention of computers and robots, the slogans now are “post-industrial society”, “information age”, “digitalization”, and “globalization”.

Nonetheless, however far-reaching recent transformations may be, what happened during the 1780s seemed once and for all, and the excitement of that decade when much else was happening, including the loss of the American colonies in 1783, and the French Revolution, is still infectious. It was then that Watt, working in Birmingham, in its early stages of growth as an industrial city, invented—in stages—a reverberatory steam engine capable of powering machinery. This was a genuine breakthrough, yet a century earlier there had already been increasing interest in the power of steam, and in the first decade of the 18th century Thomas Newcomen, a blacksmith, had built a steam engine capable of driving a pump, a source of power that made it possible to clear coal mines of water. In the same decade, Abraham Darby had smelted iron for the first time in history using coke instead of charcoal in his furnace. Changes in cast-iron refining in the forge followed later. Further development of iron manufacture again took place in stages. Encouraged by military demand in times of war, sometimes to the point of over-expansion, it was an industry subject to sharp fluctuations as well as open to innovation. It was during the 1780s that Henry Cort made possible the cheaper production of wrought iron, iron that could be forged and shaped while hot. The molten iron in his new reverberatory furnace, kept separate from raw coal, and, therefore, more pure, was “puddled”, that is to say, stirred with an iron bar. Cort also took out a patent for rolling—the idea was not a new one—that extended the uses of iron, now the master material of the first Industrial Revolution. Cast-iron rails were introduced in the 1770s. The world’s first cast-iron bridge, Ironbridge, was constructed in the Midlands across the River Severn in 1777-1779 near the Darbys’ ironworks at Coalbrookdale, a place whose name speaks for itself and which has been called “the cradle of the Industrial Revolution”. Even the gravestones in the local churchyard were made of iron.

The widespread application of steam power depended on an increase in the production both of iron and coal, which was facilitated by improved pumping of water. Methods of working coal differed regionally, with north-eastern England a key area. Already by 1765 there were 100 steam engines at work in the coal mines there. Steam power was used at Coalbrookdale too. A Newcomen engine, installed by the Darbys in 1776, remained in use for 100 years, and two Watt engines were built by the Darbys in 1787 and 1789 from drawings supplied by Watt himself.

By then, the cotton textiles industry had undergone substantial transformation, at first mainly using not steam but water-power. Richard Arkwright, pioneer of the factory system, who started life as a barber, used horses in his first cotton-spinning mill, but in 1771 turned to water at a handsome and impressive new mill at Cromford. The cotton industry, using a raw material imported from abroad that was hailed as a “magic shrub”, developed faster than any other industry in the economy. This was under the stimulus of growing foreign markets. “We want as many spotted Muslins and Fancy Muslins as you can make”, a northern cotton spinner was addressed by his London agent in 1786, “You must look to Invention. Industry you have in abundance … As the Sun shines let us make Hay.”

A sequence of inventions followed. John Kay‘s flying shuttle for weavers in 1733, followed in 1764 by James Hargreaves’s spinning jenny, encouraged interrelated invention in weaving and printing, although the development of the power loom, first invented by Edmund Cartwright in 1785, was relatively slow. It was estimated that there were not more than 2,300 of these in 1813. The older woollen industry developed far less rapidly than the cotton industry, which centred on Lancashire. The patenting of inventions, including the steam engine itself, was a complex process and generated legal disputes, while among the other problems confronting inventors was labour resistance. Kay had to flee the country. In the early 19th-century Luddite Rising, Luddites, named after a mythical King Ludd, smashed machines. The machines’ makers, mechanics, constituted a new skilled labour force, what one writer in the 1840s called “a new race of men”. By then, they were employing a whole new range of machine tools. The so-called “father of the machine tool industry”, Henry Maudsley, a blacksmith by original occupation, made the first all-metal lathe and fitted it with a slide rest that held the tool in the best position. He went on to devise a micrometer screw gauge that could measure thickness down to a ten-thousandth of an inch by turning a screw. One of the men who worked with him for seven years, Sir Joseph Whitworth, set up his own business in Manchester and carried forward Maudsley’s work, inventing a self-acting planing machine that could cut metal in both directions and a micrometer that could measure down to a hundred-thousandth of an inch. He also worked out a standard system of screw sizes, based on the number of threads to each diameter of screw, known as the Whitworth standard, which was being used by the end of the 1850s in most engineering works. The need for precision had become as important in industry as the provision of power.

So had the need for improved transport. In the 18th century, industry had depended on canals. The great invention of the 19th century was the railway. The first person to use high-pressure steam to power a vehicle was Richard Trevithick in 1801, but the first engineers to usher in the railway era were a father and son, George Stephenson and Robert Stephenson. By 1855 there were over 12,870 km (8,000 mi) of track, and all the great cities, some of them—such as Birmingham, Sheffield, and Manchester—industrial centres, had been linked. The railway linked smaller cities and other towns also, and ran through hitherto open countryside. Everyone felt the consequences, and more people owned railway shares than had ever before had a stake in industrial ownership. It was not easy, however, during the 1840s the years of railway boom, to distinguish between speculation and investment, and many people lost money.

Railways depended on engineering skill as well as on finance. “We who lived before railways and survive out of the ancient world,” wrote the novelist William Makepeace Thackeray, “are like Father Noah and his family out of the Ark,” locomotives were “iron horses” with dazzling power. The tracks, cutting through tunnels that required not only engineering skill but teams of unskilled workers to construct, had provided a national network. Two running parallel to each other constituted a system, complete with signals, serving the needs of passengers as well as of the movement of freight, much of it heavy or perishable. It was a system that, like the factory system, rested on a new sense of time. Workers were called to their factories by hooter at regularly precise times. Railways ran according to timetables. By the 1850s, railways were taken for granted, as were machines in factories and the routines necessary to work them. By then, indeed, many of the once-and-for-all consequences of the first Industrial Revolution were apparent. Ways, not only of producing but of living, thinking, and feeling, had been remoulded. Markets had expanded in an age of competition. Landscapes had been transformed. Systems of transport, banking, and insurance had evolved. The new industrial cities and towns, some completely new like Middlesbrough and Crewe, appeared on the map. Agriculture lost labour to industry. New structures of business and, equally significant, of labour emerged: they included trade unions. Technologies themselves continued to change, with new industrial revolutions dependent not on coal, iron, and steam, but on steel and electricity.

The successful making of cheap steels—there was soon to be a whole range of them—marked a turning point in the history of the first Industrial Revolution. Henry Bessemer, subsequently knighted as Arkwright had been, developed a new process in 1855 for converting crude iron into steel. Air was blown through Bessemer blast furnaces to burn away impurities. British inventors developed other processes that, ironically, were more quickly adapted to overseas iron fields than to those in Britain. The United States, with huge deposits of raw iron and other metals, now forged ahead. Steel was a more adaptable metal than iron, and its efficient production came to depend increasingly on applied science. The role of science was enhanced also as the uses of electricity multiplied. The scale of organization in both industries grew, and it was within this new context that management, by then separate from ownership, became more specialized. Britain now seemed to be a country of “old industries” such as textiles (Japan became the main competitor in the 20th century) and coal. Exports of coal sustained the British economy long after other countries had gone through the early stages of their own industrial revolutions. By 1914, the year of the outbreak of World War I, which was to greatly increase world demand for metals, both Germany and the United States were producing more steel than Britain, the United States almost four times as much.

In retrospect, the climax of the British Industrial Revolution had been reached in 1851, the year of the Great Exhibition of All the Nations in the Crystal Palace, when Victorian Britain was proudly described as “the workshop of the world”, and the benefits of new machines and of the application of steam power were extolled. Industrialization, it was claimed, had made possible both the “conquest of Nature” and “the betterment of the species”. The popular writer Samuel Smiles, who, like most of his mid-Victorian contemporaries, did not use the term “industrial revolution”, wrote proudly in his Lives of the Engineers (1861) that: “England was nothing, compared with continental nations, until about the middle of the last century when a number of ingenious and inventive men … succeeded in giving an immense impetus to all the branches of national industry … We are an old people but a young nation.” By 1914 there were more, still younger nations, including Germany, newly united following German unification, which had added new chapters to the story.

IV MOTIVES AND FACTS

One effect of industrialization was to focus attention on facts, particularly the statistics of growth, including comparative growth. The motives behind industrialization could be private—mainly, but not exclusively, the pursuit of profit (and this depended on the provision of capital); regional—the improvement of local facilities and wealth; and national—the buttressing of power. Whatever the motives, one effect of industrialization was to focus attention on the facts of growth, including comparative regional and national growth.

The collection and interpretation of statistics, including those concerning population, were now treated as official tasks. For British contemporaries, facts concerning late 18th-century and early 19th-century economic growth were particularly striking, although they were for the most part alarmed rather than excited by the rise in population. Between 1750 and 1800 coal production doubled, and in the 19th century it was to increase twentyfold. Pig-iron production quadrupled between 1740 and 1788, and quadrupled again during the next 20 years, stimulated by war demand. Raw cotton imports quintupled between 1780 and 1800, and were to rise again thirtyfold during the 19th century. For the novelist Charles Dickens, one of whose novels, Hard Times (1854), was set in a cotton mill town, such facts were less impressive than they were in the eyes not only of mill owners but of teachers who believed that everything could be reduced to fact. For Dickens, feelings mattered more, and education was more than amassing facts.

The relationship between population growth and industrial growth was a matter not of fact but of speculation, even controversy. The fact of growth was obvious. The population of England and Wales in 1700, before returns were kept, has been estimated at around 5.5 million, and in 1750 at 6.5 million. By the time of the first census in 1801 it was 9 million, and in 1831, 14 million. It was because Britain had the agricultural capacity to support an abundant and rising population that its industrial economy could grow. Labour was plentiful and therefore cheap, and industrial workers could be fed. As the national income rose, a greater volume of imports could be financed from internal growth and exports, mostly carried in British ships. Population growth, measured from 1801 in decennial censuses, facilitated migration from one region to another. There remained marked contrasts between regions in fertility and mortality rates and in standards of living.

Immigration underpinned later American industrialization, where agriculture was transformed not only to feed the growing American population but also to export cereals and other agricultural products to other parts of the world. In the process, agriculture itself was said to have been “industrialized”.

Workers in industry were both producers and consumers, and as Charles Babbage observed in 1833, “if machines went on improving for 500 years at the rate they have done for the last century … [there could be no] limit to the wants of the consumers”. The “great mass of facts” that he had assembled in his book The Economy of Manufactures “must have shown that the cheaper an article of necessity becomes, the more of it is used”. “The first great object of every invention,” Babbage wrote, “is to confer a benefit upon the consumers—to make the commodity cheap and plentiful.” The “working man”, therefore, stood “in a double character” as “both a producer and a consumer”.

V UNREST, PROTEST, AND REGULATION

Nonetheless, as producers, industrial workers were often restless as the number of machines multiplied. Sometimes they destroyed machines. The Luddites considered them a threat to their independence and livelihood. A different reaction was to develop collective bargaining through unions (and if necessary enforced by strikes) to raise wages. While industrial workers were paid higher wages than farm labourers and there was thus an economic incentive for individuals to find industrial jobs and move into industrial towns, there were many signs of family and social unrest as rhythms of work changed along with patterns of community.

Since industry developed through alternating booms and slumps, there were also large numbers of unemployed in “bad times”, which often coincided with bad harvests when the price of food rose. The demand for cheap bread was not new, but it was louder than ever before. Yet when a large section of the new employing class, in their campaign against the Corn Laws, claimed that bread would be cheap if imports of grain were allowed into the country free of commercial duties and employment would rise with the increased exports thereby generated, many industrial workers refused to cooperate with them in attacking the landed interests as the source of all the country’s troubles. Chartism was the world’s first specifically industrial working-class movement, with industrial workers demanding political rights along with bread.

The years of most active and open protest followed the start of what was to be Britain’s first prolonged industrial slump in 1837, a depression that lasted until a boom, generated by railway expansion, in the mid-1840s. These were years when the Anti-Corn Law League, with middle-class leadership, agitated in parallel to the Chartists, both conscious of the new significance of “class” in an industrial society. The Corn Laws, protecting British agriculture from foreign imports, were finally repealed in 1846, but the Chartist demands for votes and other political rights were not conceded until later in a complex political process.

One of the working-class agitations that merged into Chartism was that of anti-Poor Law demonstrators, who campaigned against the abolition of outdoor relief for the poor and the building of workhouses, enshrined in a new Poor Law of 1834. In Britain, and even more conspicuously in industrialized Germany later in the century, the demand for social security was to figure on the political agenda.

So, too, was the demand for regulation of hours of labour and conditions of labour, beginning with the hours and conditions of work of women and children in the new textiles factories in the earliest Factory Reform Acts. It was through a vigorous Ten Hours agitation, backed by philanthropists concerned especially with the “plight” of children, that a Ten Hours Act was passed in 1847. Already there had been earlier acts, based on investigative inquiries, introducing the essential machinery of inspection, and through a sequence of later acts of Parliament, a network of controls was introduced that by the beginning of the 20th century had become a factory code. If Britain had launched the world’s first specifically working-class movement, it had also carried through, therefore, never without opposition, the first attempts to regulate conditions of work through legislation and administration. The opposition to reducing hours had been led by one of the most influential British political economists, Nassau Senior, and it was a radical minister, Charles Poulett Thomson, who urged that: “In pursuing a gradually progressive but steady approach to a liberal system, we must tamper as little as possible with manufacturing or commercial industry by legislative regulation. Like love, its workings must be free as air; for at sight of human ties, it will spread the light wings of capital and fly away from bondage … The elements of industry may be expressed in one word—competition.”

VI INTERPRETATIONS AND ASSESSMENT

How people have interpreted the Industrial Revolution depends in large part on their vantage points in space and time. Like most historical transformations, the Industrial Revolution has not only encouraged investigation and analysis but has provoked controversy. The first British social historians to popularize the term “industrial revolution”, following in the wake of earlier critics of industry such as John Ruskin, claimed that while changes in methods of production had increased wealth they had not increased “well-being”. They dwelt more on the “victims” of industrialization than on those who benefited from it. Some later economic historians focused instead on inventors and entrepreneurs, some of them treating the Industrial Revolution as a success story. For others “revolution” was the wrong term, “evolution” the right one. The extent and spread of economic and social transformation had been exaggerated.

Detailed studies of particular industries, even particular business, and of particular regions are essential if “industrialization” is to be assessed, and they make generalization difficult. In any assessment, however—and it must relate not only to Britain but to other countries—what happened to the environment as well as to human relations must form part of the reckoning. So, too, must human aspirations as well as grievances and memories of often mythical “golden ages” before the “intrusion” of steam power. It was as a result of industrialization that the early British socialist Robert Owen, who was himself a mill owner, dreamt of a cooperative “new society” and Karl Marx envisaged what to him would have been the decisive revolution in human history. In retrospect—and in a new age of even greater unprecedented change associated with the rise of the computer—the first British Industrial Revolution, for long abandoned as a model for other countries to follow, now belongs to what seems a distant past.

Contributed By:
Asa Briggs

Capital

I INTRODUCTION

Capital, collective term for a body of goods and monies from which future income can be derived. Generally, consumer goods and monies spent for present needs and personal enjoyment are not included in the definition or economic theory of capital. Thus, a business regards its land, buildings, equipment, inventory, and raw materials, as well as stocks, bonds, and bank balances available, as capital. Homes, furnishings, cars, and other goods that are consumed for personal enjoyment (or the money set aside for purchasing such goods) are not considered capital in the traditional sense.

In the more precise usage of accounting, capital is defined as the stock of property owned by an individual or corporation at a given time, as distinguished from the income derived from that property during a given period. A business firm accordingly has a capital account (frequently called a balance sheet), which reports the assets of the firm at a specified time, and an income account, which reckons the flow of goods and of claims against goods during a specified period.

Among the 19th-century economists, the term capital designated only that segment of business wealth that was the product of past industry. Wealth that is not produced, such as land or ore deposits, was excluded from the definition. Income from capital (so defined) was called profit, or interest, whereas the income from natural resources was called rent. Contemporary economists, for whom capital means simply the aggregate of goods and monies used to produce more goods and monies, no longer make this distinction.

The forms of capital can be distinguished in various ways. One common distinction is between fixed and circulating capital. Fixed capital includes all the more or less durable means of production, such as land, buildings, and machinery. Circulating capital refers to nonrenewable goods, such as raw materials and fuel, and the funds required to pay wages and other claims against the enterprise.

Frequently, a business will categorize all of its assets that can be converted readily into cash, such as finished goods or stocks and bonds, as liquid capital. By contrast, all assets that cannot be easily converted to cash, such as buildings and equipment, are considered frozen capital.

Another important distinction is between productive capital and financial capital. Machines, raw materials, and other physical goods constitute productive capital. Claims against these goods, such as corporate securities and accounts receivable, are financial capital. Liquidation of productive capital reduces productive capacity, but liquidation of financial capital merely changes the distribution of income.

II THEORIES OF CAPITAL

The 18th-century French economists known as physiocrats were the first to develop a system of economics. Their work was developed by Adam Smith and emerged as the classical theory of capital after further refinements by David Ricardo in the early 19th century. According to the classical theory, capital is a store of values created by labour. Part of capital consists of consumers’ goods used to sustain the workers engaged in producing items for future consumption. Part consists of producers’ goods channelled into further production for the sake of expected future returns. The use of capital goods raises labour productivity, making it possible to create a surplus above the requirements for sustaining the labour force. This surplus constitutes the interest or profit paid to capital. Interest and profits become additions to capital when they are ploughed back into production.

Karl Marx and other socialist writers accepted the classic view of capital with one major qualification. They regarded as capital only the productive goods that yield income independently of the exertions of the owner. An artisan’s tools and a small farmer’s land holding are not capital in this sense. The socialists held that capital comes into being as a determining force in society when a small body of people, the capitalists, owns most of the means of production and a much larger body, the workers, receives no more than bare subsistence as reward for operating the means of production for the benefit of the owners.

In the mid-19th century the British economists Nassau William Senior and John Stuart Mill, among others, became dissatisfied with the classical theory, especially because it lent itself so readily to socialist purposes. To replace it, they advanced a psychological theory of capital based on a systematic inquiry into the motives for frugality or abstinence. Starting with the assumption that satisfactions from present consumption are psychologically preferable to delayed satisfactions, they argued that capital originates in abstinence from consumption by people hopeful of a future return to reward their abstinence. Because such people are willing to forgo present consumption, productive power can be diverted from making consumers’ goods to making the means of further production; consequently, the productive capacity of the nation is enlarged. Therefore, just as physical labour justifies wages, abstinence justifies interest and profit.

Inasmuch as the abstinence theory rested on subjective considerations, it did not provide an adequate basis for objective economic analysis. It could not explain, in particular, why a rate of interest or profit should be what it actually was at any given time.

To remedy the deficiencies of the abstinence theory, the Austrian economist Eugen Böhm-Bawerk, the British economist Alfred Marshall, and others attempted to fuse that theory with the classical theory of capital. They agreed with the abstinence theorists that the prospect of future returns motivates individuals to abstain from consumption and to use part of their income to promote production, but they added, in line with classical theory, that the amount of returns depends on the gains in productivity resulting from accretions of capital to the productive process. Accretions of capital make production more roundabout, thus causing greater delays before returns are realized. The amount of income saved, and therefore the amount of capital formed, would accordingly depend, it was held, on the balance struck between the desire for present satisfaction from consumption and the desire for the future gains expected from a more roundabout production process. The American economist Irving Fisher was among those who contributed to refining this eclectic theory of capital.

John Maynard Keynes rejected this theory because it failed to explain the discrepancy between money saved and capital formed. Although, according to the eclectic theory and, indeed, all previous theories of capital, savings should always equal investments, Keynes showed that the decision to invest in capital goods is quite separate from the decision to save. If investment appears unpromising of profit, saving still may continue at about the same rate, but a strong “liquidity preference” will appear that will cause individuals, business firms, and banks to hoard their savings instead of investing them. The prevalence of a liquidity preference causes unemployment of capital, which, in turn, results in unemployment of labour.

III HISTORY OF CAPITAL

Although theories of capital are of relatively recent origin, capital itself has existed in civilized communities since antiquity. In the ancient empires of the Middle and Far East and to a larger degree in the Graeco-Roman world, a considerable amount of capital, in the form of simple tools and equipment, was employed to produce textiles, pottery, glassware, metal objects, and many other products that were sold in international markets. The decline of trade in the West after the fall of the Roman Empire led to less specialization in the division of labour and a reduced use of capital in production. Medieval economies engaged almost wholly in subsistence agriculture and were therefore essentially noncapitalist. Trade began to revive in the West during the time of the Crusades. The revival was accelerated worldwide throughout the period of exploration and colonization that began late in the 15th century. Expanding trade fostered greater division of labour and mechanization of production and therefore a growth of capital. The flow of gold and silver from the New World facilitated the transfer and accumulation of capital, laying the groundwork for the Industrial Revolution. With the Industrial Revolution, production became increasingly roundabout and dependent on the use of large amounts of capital. The role of capital in the economies of Western Europe and North America was so crucial that the socio-economic organization prevailing in these areas from the 18th century through the first half of the 20th century became known as the capitalist system, or capitalism.

In the early stages of the evolution of capitalism, investments in plant and equipment were relatively small, and merchant, or circulating, capital—that is, goods in transit—was the preponderant form of capital. As industry developed, however, industrial, or fixed, capital—for example, capital frozen in mills, factories, railways, and other industrial and transport facilities—became dominant. Late in the 19th and early in the 20th centuries, financial capital in the form of claims to the ownership of capital goods of all sorts became increasingly important. By creating, acquiring, and controlling such claims, financiers and bankers exercised great influence on production and distribution. After the Great Depression of the 1930s, financial control of most capitalist economies was superseded in part by state control. A large segment of the national income of the United States, Great Britain, and various other countries flows through government, which as the public sector exerts a great influence in regulating that flow, thereby determining the amounts and kinds of capital formed.

Investment

Investment, expenditure of wealth to enable future production or other advantageous economic yield. What constitutes “investment” depends on the economic “agent” in question. For an individual or a household, investment might comprise mainly the purchase of financial assets (stocks or bonds), as well as the purchase of durable goods, notably dwellings, cars, and so on. But for the economy as a whole (leaving aside international transactions), most of this will not count as investment. To begin with, the total wealth of a nation cannot be increased by an increase in the amount of financial assets held by its citizens, since these merely represent claims against other citizens and hence appear as liabilities on the balance sheets of other citizens. Purchases and sales of financial assets merely reflect changes in the claims on existing assets (or on the income produced from them). For similar reasons, purchases of second-hand items of capital equipment are not included in investment for an economy as a whole. This is because their purchase or sale does not constitute any net addition to national income (apart from adding to dealers’ commissions) since they, too, represent merely the change in ownership of existing assets, and their production would have been counted once already in the national output and income of the year when they were produced.

Furthermore, according to the national accounting conventions adopted by almost all countries in the world, private households’ purchases of consumer durables, such as cars or TV sets, are not included in investment at any time, but are treated as “private consumption”. This is because, by convention and largely for reasons of statistical convenience and feasibility, it is assumed that the services derived by private households from such durable goods do not add to national product or national income. Likewise, a car purchased by government is not included in estimates of investment.

For the economy as a whole, investment—or “gross capital formation” in national accounting parlance—is an addition to its stock of real capital, notably its stock of productive capital in the form of factories, machinery, transport equipment, and so on, as well as human capital in the form of a skilled and educated labour force. If changes in stocks (inventories) are excluded, the relevant concept is gross fixed capital formation. If allowance is made for depreciation (more exactly for “capital consumption”) the net addition to the economy’s stock of productive capital is known as “net capital formation”. Thus, unlike, for example, a car purchased by a private individual, an item of transport equipment purchased by a company would be included as investment, since this is regarded as adding to the community’s productive capital. One major anomaly is that the purchase of newly produced private dwellings is included in the conventional definition of gross capital formation, although the services obtained from such dwellings are not usually included in estimates of national income.

Insofar as the national capital includes its human capital, it is arguable that investment in human capital should be taken into account. This would mean that a part of education should be included in investment, rather than be treated as consumption (by private household or the state).

What determines the level of investment is still a highly contentious topic in economics. Various main approaches have been adopted. One approach—the “accelerator theory”—has been to link annual investment to the changes required in the economy’s capital stock resulting from changes in annual output. This theory, when linked to other assumptions, plays a major role in certain theories of business cycles. Another approach—the “neo-classical theory of investment”—focuses on the determination of the equilibrium capital stock in terms of variables such as the level of activity, the price of output, the cost of capital goods, and the “opportunity cost” of capital (reflecting mainly the interest rate that could be earned by investing in a financial asset). Investment is thus determined by the desire to eliminate any divergence between the actual capital stock and the desired capital stock for any given value of the variables determining the latter. Many ingenious attempts have been made to estimate these relationships and the “production function” underlying them, but such attempts are fraught with immense econometric difficulties. Some of these reflect the fact that accurate observations of the “capital stock” itself are not available and the extent to which the investment in any time period, say a year, reflects the attempt to reach the desired level depends on the speed of adjustment. Insofar as the determining variables are constantly changing and insofar as much investment may have a long gestation period over several years (for example, a power station or a “green field” site factory), the interpretation of past changes in investment and its related variables is obviously an extremely complex matter. Other approaches would put great emphasis on the buoyancy of company expectations and on the role of uncertainty in determining investment, or the liquidity position of companies, and so on. These different theories are not necessarily all mutually exclusive. Since firms can vary the precise timing of their investment, as well as its volume, much will depend on the time period in question and the precise circumstances.

Contributed By:
Wilfred Beckerman

Business Cycle

I INTRODUCTION

Business Cycle, term used in economics to designate changes in the economy. Ever since the Industrial Revolution, the level of business activity in industrialized capitalist countries has veered from high to low, taking the economy with it.

II PHASES OF THE BUSINESS CYCLE

The timing of a cycle is not predictable, but its phases seem to be. Many economists cite four phases—prosperity, liquidation, depression, and recovery—using the terms originally developed by the American economist Wesley Mitchell, who devoted his career to studying business cycles.

During a period of prosperity a rise in production becomes evident. Employment, wages, and profits increase correspondingly. Business executives express their optimism through investment to expand production. As the upswing continues, however, obstacles begin to occur that impede further expansion. For example, production costs increase; shortages of raw materials may further hamper production; interest rates rise; prices rise; and consumers react to increased prices by buying less. As consumption starts to lag behind production, inventories accumulate, causing a price decline. Manufacturers begin to retrench; workers are laid off. Such factors lead to a period of liquidation. Business executives become pessimistic as prices and profits drop. Money is hoarded, not invested. Production cutbacks and factory shutdowns occur. Unemployment becomes widespread. A depression is in progress.

Recovery from a depression may be initiated by several factors, including a resurgence in consumer demand, the exhaustion of inventories, or government action to stimulate the economy. Although generally slow and uneven at the start, recovery soon gathers momentum. Prices rise more rapidly than costs. Employment increases, providing some additional purchasing power. Investment in capital-goods industries expands. As optimism pervades the economy, the desire to speculate on new business ventures returns. A new cycle is under way.

In fact, business cycles do not always behave as neatly as the model just given, and no two cycles are alike. Business cycles vary considerably in severity and duration. Major and minor cycles can occur, with varying spans.

The most severe and widespread of all economic depressions occurred in the 1930s. The Great Depression affected the United States first but quickly spread to Western Europe. From 1933 to 1937 the United States began to recover from the depression, but the economy declined again from 1937 to 1938, before regaining its normal level. This decline was called a recession, a term that is now used in preference to liquidation. Real economic recovery was not evident until early 1941.

III SPECIAL CYCLES

Apart from the traditional business cycle, specialized cycles sometimes occur in particular industries. The building construction trade, for example, is believed to have cycles ranging from 16 to 20 years in length. Prolonged building slumps made two of the most severe American depressions worse. On the other hand, an upswing in building construction has often helped to stimulate recovery from a depression.

Some economists believe that a long-range cycle, lasting for about half a century, also occurs. Studies of economic trends during the 19th and early part of the 20th centuries were made by the Russian economist Nikolai Kondratieff. He examined the behaviour of wages, raw materials, production and consumption, exports, imports, and other economic quantities in Great Britain and France. The data he collected and analysed seemed to establish the existence of long-range cycles. His “waves” of expansion and contraction fell into three periods averaging 50 years each: 1792-1850, 1850-1896, and 1896-1940. Such studies, however, are not conclusive.

IV CAUSES OF CYCLES

Economists did not try to determine the causes of business cycles until the increasing severity of economic depressions became a major concern in the late 19th and early 20th centuries. Two external factors that have been suggested as possible causes are sunspots and psychological trends. The sunspot theory of the British economist William Jevons was once widely accepted. According to Jevons, sunspots affect meteorological conditions. That is, during periods of sunspots, weather conditions are often more severe. Jevons felt that sunspots affected the quantity and quality of harvested crops; thus, they affected the economy.

A psychological theory of business cycles, formulated by the British economist Arthur Pigou, states that the optimism or pessimism of business leaders may influence an economic trend. Some politicians have clearly subscribed to this theory. During the early years of the Great Depression, for instance, President Herbert Hoover tried to appear publicly optimistic about the inherent vigour of the American economy, thus hoping to stimulate an upsurge.

Several economic theories of the causes of business cycles have been developed. According to the underconsumption theory, identified particularly with the British economist John Hobson, inequality of income causes economic declines. The market becomes glutted with goods because the poor cannot afford to buy, and the rich cannot consume all they can afford. Consequently, the rich accumulate savings that are not reinvested in production, because of insufficient demand for goods. This savings accumulation disrupts economic equilibrium and begins a cycle of production cutbacks.

The Austrian-American economist Joseph Schumpeter, a proponent of the innovation theory, related upswings of the business cycle to new inventions, which stimulate investment in capital-goods industries. Because new inventions are developed unevenly, business conditions must alternately be expansive and recessive.

The Austrian-born economists Friedrich von Hayek and Ludwig von Mises subscribed to the overinvestment theory. They suggested that instability is the logical consequence of expanding production to the point where less efficient resources are drawn upon. Production costs then rise, and, if these costs cannot be passed on to the consumer, the producer cuts back production and lays off workers.

A monetary theory of business cycles stresses the importance of the money supply in the economic system. Since many businesses must borrow money to operate or expand production, the availability and cost of money influence their decisions. Sir Ralph George Hawtrey suggested that changes in interest rates determine whether executives decrease or increase their capital investments, thus affecting the cycle.

V ACCELERATOR AND MULTIPLIER EFFECTS

Basic to all theories of business-cycle fluctuations and their causes is the relationship between investment and consumption. New investments have what is called a multiplier effect: that is, investment money paid to wage earners and suppliers becomes income to them and then, in turn, becomes income to others as the wage earners or suppliers spend most of their earnings. An expanding ripple effect is thus set into motion.

Similarly, an increasing level of income spent by consumers has an accelerating influence on investment. Higher demand creates greater incentive to increase investment in production, in order to meet that demand. Both of these factors also can work in a negative way, with reduced investment greatly diminishing aggregate income, and reduced consumer demand reducing the amount of investment spending.

VI REGULATING THE CYCLE

Since the Great Depression, devices have been built into most economies to help prevent severe business declines. For instance, unemployment insurance provides most workers with some income when they are laid off. Social security and pensions paid by many organizations furnish some income to the increasing number of retired people. Although not as powerful as they once were, trade unions remain an obstacle against the cumulative wage drop that aggravated previous depressions. Schemes to support crop prices (such as the European Common Agricultural Policy) shield farmers from disastrous loss of income.

The government can also attempt direct intervention to counter a recession. There are three major techniques available: monetary policy, fiscal policy, and incomes policy. Economists differ sharply in their choice of technique.

Monetary policy is preferred by some economists, including the American Milton Friedman and other advocates of monetarism, and is followed by most conservative governments. Monetary policy involves controlling, via the central bank, the money supply and interest rates. These determine the availability and costs of loans to businesses. Tightening the money supply theoretically helps to counteract inflation; loosening the supply helps recovery from a recession. When inflation and recession occur simultaneously—a phenomenon often called stagflation—it is difficult to know which monetary policy to apply.

Considered more effective by American economist John Kenneth Galbraith are fiscal measures, such as increased taxation of the wealthy, and an incomes policy, which seeks to hold wages and prices down to a level that reflects productivity growth. This latter policy has not had much success in the post-World War II period.

The Theory of the Business

I INTRODUCTION

Business, complex economic operations concerning those functions that govern the production, distribution, and sale of goods and services for the benefit of the buyer and the profit of the seller. The economic transformation ushered in by the Industrial Revolution brought with it new and constantly changing ways of conducting business, and the creation of new forms of business organization that themselves have subsequently evolved to a greater or lesser degree. The main forms of business organization are described below.

II SOLE PROPRIETORSHIP

A sole proprietor is in sole charge of a business and is responsible for its success or failure. Unless an activity is specifically prohibited by law, no line of business is closed to an owner.

The chief advantages of sole proprietorship for the proprietor are that the owner is in total control of the business (subject to the requirements of anyone who has provided finance for it), and is entitled to all the profit. The main disadvantage is that the owner is also personally responsible for all the losses and debts of the business. This is called unlimited liability.

III PARTNERSHIP

A partnership is a business association of two or more people who have formally agreed to work together, each contributing skills, labour, and resources to the venture in return for an agreed share of the profits. The formal partnership agreement usually covers all the partners’ rights, responsibilities, and obligations, the circumstances in which their partnership may be dissolved, and a specific length of time during which the partnership is in effect.

Unless a limited partnership has been established, all parties share the burden of loss and debts.

IV THE CORPORATION

As businesses grew, it often became difficult for sole proprietors or partnerships to raise the required finance. It was to overcome this problem that the ingenious concept of the corporation, or company, came into being. A company is a legally defined business entity separate from its owners: it lives on if they die; it can own assets; it can sue and be sued in the courts. The legal requirements and limitations regarding the setting up of a company or corporation are determined by company law.

The concept of the company or corporation allowed investors to acquire a fixed ownership stake in a business, and thus get a much greater return than they would by collecting interest on money lent to it, provided that the business was successful. A further refinement was the concept of limited liability, whereby, however badly a company performed, its owners could only be held liable up to the amount of their investment (unless they had given additional personal guarantees). Any such investor who had a share in the ownership of a company knew the absolute extent of their risk; unlike sole proprietors, for instance, whose liability and risk is unlimited.

The ways in which corporations and companies operate vary considerably, and they may informally be classified in several ways. Vertical integration characterizes companies that engage in the different stages of manufacturing or marketing a product. Horizontal integration embraces companies engaged in the sale of the same or similar products. A conglomerate is where a holding company controls other companies conducting diverse types of business, ranging perhaps from financial services to electronics manufacture.

In modern business, there are complex webs of interest and ownership in which companies are connected with other companies through shareholdings or business alliances. These are further complicated by the large stakes held in businesses by banks and institutional investors such as pension funds. A multinational is a company that transacts business and has interests or branches in many countries. These huge concerns generate revenues that can be larger than the gross domestic product of some of the countries in which they operate.

V REGULATION OF BUSINESS BY GOVERNMENT

In order to ensure that businesses operate fairly with regard to, and in the best interests of, their owners, their customers, their competitors, and the economy as a whole, numerous laws have been passed to regulate business. These cover areas such as takeovers of one company by another and actions that inhibit competition, such as the formation of cartels or business monopolies. This kind of regulation varies from country to country, though some international legislation exists, as within the European Union. In general, the more economically developed the country, the more developed are the rules governing corporate behaviour.

VI CONCLUSION

Business is the dominant form in the modern free market economy, following the principle of the “invisible hand” developed by Adam Smith, whereby individual businesses seeking their own benefit in the form of profit tend to provide the greatest general benefit if left free to do so. Most business regulation, such as legislation on product safety, is designed to enhance this principle. Business ethics are determined by the competition system, which makes it profitable to satisfy the consumer. Businesses are sometimes tempted to make a profit by doing harm to others, and occasionally they do; but planned economies, command economies, and other forms of economic organization developed to restrict or even eliminate business have proven far less able to maximize general benefit.

Corporation

I INTRODUCTION

Corporation, an organization, recognized and created by law, that allows people to associate together for a common purpose under a common name. The corporation is a key economic institution, even though it is not the most prevalent form of business organization.

Business corporations are known as joint-stock companies because they are jointly owned by different people who receive shares of stock in exchange for an investment of money in the venture. In business, corporate organization has a number of advantages. First, a corporation exists independently of its owners (the stockholders). Second, in British law (and that of many other countries) the corporation is recognized as a legal person with many of the same rights that individuals have. These include the right to buy and sell property, to sue and be sued, and to enter into contracts. Third, the corporation is an enormously successful device for raising vast amounts of business capital by pooling the financial resources of thousands of individuals, something that cannot be done by other forms of business organizations (the individual proprietorship and the partnership). This also serves to spread the risks of a new venture among many people. Finally, the owners of a corporation are not liable for its debts beyond their investment.

II HISTORICAL BACKGROUND

As a legal form of organization, the corporation can be traced to Roman times. In the Middle Ages corporations were used to organize universities, monasteries, and guilds. The voyages of exploration and discovery in the 16th and 17th centuries stimulated the use of the corporate form of organization, not only for the pursuit of trade but also to carry to distant lands the power of the governments that chartered the corporations. A joint-stock chartered company such as the British East India Company was both a business enterprise and a form of government. The American colonies were established by corporate bodies chartered by the British Crown with the authority both to govern and to engage in trade.

A boom in joint-stock ventures in the early 18th century led to overdevelopment and excessive speculation, resulting in the collapse of some large corporate enterprises, including the South Sea Company in England (in the South Sea Bubble scandal) and John Law’s Louisiana Company in France. In 1720 the British Parliament passed the Bubble Act, which for more than a century after its passage severely restricted the use of corporate organization in business.

In the 19th century the Industrial Revolution brought a tremendous increase in the number of business opportunities that required large amounts of financial capital for their exploitation. In all the industrial nations laws were changed or enacted to permit corporate growth. Thus, industrialization provided the impetus for the emergence of the modern corporation, especially the corporate giants that now dominate much of the world economy.

III CORPORATE CHARACTERISTICS

Most corporations are private; that is, they are owned through shares held by private individuals. Shares are traded in organized markets such as the world’s stock exchanges. Public corporations are owned by governmental bodies.

The majority of corporations are small, but in practice a few giant corporations dominate vast sectors of the global economy, accounting for much of world economic output.

In view of the growing importance of corporations, society is faced with three major problems. First, the growth in corporate size has brought an increasing separation of control from ownership. In large firms, the shareholder (and nominal owner) no longer exercises effective control; actual control rests with management, which tends to be self-selecting and responsible only to itself. Second, the size of many corporations gives them economic power, a development that permits escape from the discipline of the competitive market, because large corporations have substantial control over the prices charged for the goods they produce. Finally, society has not been wholly successful in making certain that corporate performance serves the public interest as well as the interests of owners and managers. Competition laws may prevent the emergence of outright monopoly, but they do not guarantee fair and equitable business competition.

These problems, present in the developed economies, have become acuter with the growing number and power of multinational corporations. The multinationals, many of which are American, are business firms whose sales, workforce, production facilities, and other operations are worldwide in scope. They represent the latest development in the continuing growth of corporate organization. Their power to create wealth on a worldwide scale means that multinationals are likely to remain a dominant force shaping the world economy far into the future.