Adam Smith's ideas in The Wealth of Nations influenced the development of capitalism during the Industrial Revolution. He believed in free markets and that economic liberty guaranteed progress. Competition forces businesses to make better products at lower prices according to the laws of self-interest, supply and demand, and competition. Thomas Malthus and David Ricardo built on Smith's ideas and opposed government assistance to workers. Under capitalism, private individuals and businesses own property and means of production, and progress results from self-interest and competition between businesses. This system replaced feudalism and helped bring about the Industrial Revolution through investment, increased production, trade, transportation innovations, and changes in industries.

1. Capitalism during the
Industrial Revolution

2. Ideas of Adam Smith
• Believed in free economy, or free markets
• Wrote book The Wealth of Nations
• Economic liberty guaranteed economic progress
• Three Natural Laws of Economics:
• Law of Self Interest: People work for their own good
• Law of Supply and Demand: Enough goods will be produced at the lowest possible price
to meet demand in a market economy
• Law of Competition: Competition forces people to make a better product

3. Thomas Malthus and David Ricardo
• Smith’s ideas influenced Malthus and Ricardo
• Believed that natural laws governed economic life
• Opposed government efforts to help poor workers
• Their ideas formed the foundation of laissez-faire capitalism

4. Capitalist System
• Economic system in which the factors of production are privately owned and
money is invested in business ventures to make a profit
• Replaced feudal empires (i.e. Holy Roman Empire) and monarchies
• Created markets where buyers and sellers of goods and services agreed on
prices
• Created market types:
• Competition
• Monopoly
• Oligopoly
• Long distance trade increased dramatically due to innovation in transportation

5. Capitalist System
• Individuals and businesses own property and the mean of production.
• Progress results when individuals follow their own self interest.
• Businesses follow their own self interest by competing for the consumer’s
money. Each business tried to produce goods or services that are better and
less expensive then those of competitors.
• Government should not interfere in the economy because competition
create efficiency in business.

6. How did capitalism bring about the Industrial
Revolution?
• Central to this was the Bank of England, which encouraged
investment, stability, and economic growth in both the public and
private sectors.
• Thus, when the machines and opportunities to exploit them came
along, British businessmen were in by far the best position to take
advantage of the situation, making Britain the banker of the world for
the next century.
• The connection is that it:
• Led to investing in factories
• Led to increased production and higher demands for raw materials
• Led to world wide trade
• Led to new inventions and new innovations
• Led to changes in transportation, agriculture, and communication

7. Spread of Industrialization 1850-1914

8. Global Diffusion of the Industrial Revolution

9. Summary of Institutional Capitalism
• English Parliament was firmly under the control of the capitalist classes.
• Increase in agricultural production and turned the established rules of land ownership on
their head.
• Lands previously held in common by tenant farmers changed into large private farms,
worked by a smaller labour force. This increased the agricultural production and caused
the displaced peasants to head for the cities. Subsequently, there was an abundant labour
supply to mine coal and iron, and man the factories.
• The revolution moved economic power away from the aristocratic classes and into the
hands of the new middle class, the bourgeoisie.