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1. Lite 606: Industrial Arts and Trades
Module 8: Industrial Economics and Policy
Economic Theories of
Industrialization
PREPARED BY: JELLY ROSE S. RELLESIVA, LPT

2. Objectives:
•To understand and analyze the various economic
theories of industrialization
•To Appreciate the role of industrialization in
economic growth
•To evaluate the impact of Economic Theories of
Industrialization in the Society

3. WHAT IS INDUSTRIALIZATION?
• Process of transformation from agrarian to industrial
economy
• Characterized by mechanization, urbanization, and mass
production
• Drives economic growth and structural changes

4. Purpose of Economic Theories
•Helps us understand how money
and resources are used
•Explains why people and
businesses make certain choices
•Shows how to make smart
decisions with money
•Helps leaders plan for a better
economy

5. Economic Theories of
Industrialization
1. Classical Economic Theory
2. Marxist Theory
3. Rostow’s Stages of Growth
4. Dependency Theory
5. Schumpeterian Theory
6. Neoclassical Growth Theory
7. Structuralist Theory

6. Classical Economic Theory
Classical Economic Theory is a set
of ideas that explains how
economies function, focusing on the
role of free markets and individual
decision-making. It was developed
by economists like Adam Smith,
David Ricardo, and .

7. Economist Concepts/Ideas:
Free Markets:
Classical economists believed that the best way to run
an economy is with as little government interference as
possible. People should be free to buy, sell, and
produce goods without government restrictions. When
markets are free, resources (like labor, land, and
capital) are used most efficiently.
The Invisible Hand:
This is a famous concept introduced by Adam Smith. It
suggests that when individuals act in their own self-
interest, they unintentionally benefit society. For
example, a business owner seeking to earn a profit will
provide goods or services that people need, which
benefits everyone.

8. Economist Concepts/Ideas:
Competition:
Classical economists argued that competition leads
to better products, lower prices, and more
innovation. When businesses compete, they must
improve what they offer to attract customers.
Specialization and Trade:
David Ricardo introduced the idea of comparative
advantage. This means that countries or individuals
should focus on producing what they are best at
and trade with others for the goods they need. This
makes everyone better off because resources are
used more efficiently.

9. Economist Concepts/Ideas:
Say’s Law:
Say's Law suggests that supply creates
its own demand. In other words,
producing goods and services creates
the income to buy those goods and
services. Classical economists believed
that any increase in production would
naturally lead to an increase in demand,
and the economy would automatically
adjust.

10. Marxist Theory
Marxist Theory is an idea
introduced by Karl Marx and
Friedrich Engels that explains
how society works, focusing on
how wealth and power are
shared between different
classes of people.

11. Economist Concepts/Ideas:
Two Main Classes: Marx believed society is divided
into two main groups:
•The Capitalists (Owners) – The people who own the
factories, land, and businesses.
•The Workers (Proletariat) – The people who work
for the capitalists and get paid wages.
Exploitation: Marx said that the capitalists make
money by exploiting the workers. Workers produce
goods and services, but they are paid less than the
value of what they create. The capitalists take the
extra value (profit) for themselves.

12. Economist Concepts/Ideas:
Class Struggle: Marx believed that history is a
story of struggle between different social classes.
The workers (proletariat) are always in conflict
with the capitalists (bourgeoisie) because the
capitalists want to keep their wealth and power,
while the workers want better pay and working
conditions.
Revolution: Marx thought that eventually, the
workers would rise up against the capitalists in a
revolution. This revolution would change the
system, taking away the power from the
capitalists and giving it to the workers.

13. Economist Concepts/Ideas:
Communism: After the revolution,
Marx believed that society would
create a classless system, where
everyone shares wealth equally. In
this system, there would be no rich
or poor, and everyone would have
equal access to resources and
opportunities.

14. Rostow’s Stages of Growth
Walt Rostow, an American
economist, explained how
countries develop over time
through five stages of economic
growth. His theory shows how a
poor country can become rich
by going through these steps.

15. 1. Traditional Society
•Economy is based on
farming, fishing, or hunting.
•Limited technology and low
productivity.
•Social structure is often rigid
(little social mobility).
•Most people live in rural
areas.
5 Stages of Economic Growth
3. Take-off
•Rapid growth in certain
industries (e.g., textiles, steel).
•Increase in investment and
industrialization.
•Urbanization begins — people
move to cities for work.
•Economy becomes more
dynamic and self-sustaining.
2. Preconditions for Take-off
•New ideas and investments
begin (e.g., in infrastructure).
•Development of
transportation,
communication, and
education.
•Introduction of modern
farming techniques and small-
scale industry.
•A shift in mindset: people start
planning for growth.

16. 4. Drive to Maturity
•Technology spreads across all
sectors.
•Growth becomes steady and
diverse.
•The economy produces a
wider range of goods and
services.
•Standards of living rise;
education improves.
5. Age of High Mass
Consumption
•People have more income to
spend on luxury goods.
•Focus shifts from production to
consumption (e.g., cars,
electronics).
•Service industries grow
(education, health care, tourism).
•Living standards are high, and
economic growth is stable.
5 Stages of Economic Growth

17. Dependency Theory
Dependency Theory explains why
some countries remain poor while
others become rich.
It says that rich countries grow by
keeping poor countries
dependent on them — especially
through trade, loans, and control
over resources.

18. Concepts:
Two Types of Countries:
•Core (Rich) Countries – Developed and industrialized (like the U.S., UK, etc.)
•Periphery (Poor) Countries – Developing countries (like many in Africa, Asia, Latin
America)
Unequal Relationship:
•Poor countries export raw materials (like oil, coffee, or minerals) to rich countries.
•Rich countries turn these into finished products (like cars or phones) and sell them
back at a higher price.
•This creates dependence — poor countries rely on rich countries for technology,
goods, and money.
Result:
Poor countries stay poor because they don’t build their own industries.Rich countries
continue growing because they control trade and profits.

19. Schumpeterian Theory
of Economic Development
Proposed by Joseph
Schumpeter, an Austrian
economist, this theory focuses
on the importance of
innovation and the
entrepreneur in driving
economic growth and
development.

20. Concepts:
Innovation as the Key
to Growth
•Schumpeter believed
that economic
development
happens through
innovation, not just
through saving money
or investing in
machines.
Entrepreneur's Role
•Entrepreneurs are central
figures in this theory.
•They introduce
innovations, take risks,
and change the
economy.
•They don’t just run
businesses — they
disrupt existing systems
to create something new.
Cycles of Development
• Schumpeter
explained that
economic growth
happens in cycles —
not in a straight line.
• Each cycle begins
with a wave of
innovation, led by
entrepreneurs,
followed by growth,
and then slowdown
until the next wave.
Creative Destruction
•Schumpeter introduced
the idea of "creative
destruction."
•As new innovations
emerge, old industries
and jobs disappear.
•Example: The rise of
digital photography killed
film cameras, but created
new opportunities in tech
and media.

21. Neoclassical Growth Theory
The Neoclassical Growth Theory
focuses on how capital
accumulation, labor growth, and
technological progress lead to
long-term economic growth. This
theory was developed by
economists Robert Solow and
Trevor Swan in the 1950s, and it
highlights that technological
progress is the key driver of
sustained economic growth.

22. Concepts:
Capital Accumulation:
•Investment in physical
capital (like factories,
machines, and
infrastructure) increases
productivity.
•The more capital a
country has, the more it
can produce, leading to
economic growth.
Labor Force:
•An increase in the
number of workers or
improving the
productivity of workers
leads to more
production.
•A skilled workforce
enhances productivity
and promotes economic
growth.
Technological Progress:
•Technological innovation
is the most crucial factor
that drives sustained
long-term growth.
•New technologies make
workers more productive
and enable businesses to
create more goods and
services using the same
amount of labor and
capital.

23. Concepts:
Diminishing Returns
•The theory suggests that, over
time, adding more capital to a
system will lead to
diminishing returns.
•This means that the more
capital you invest, the less
impact each additional unit of
capital will have on economic
growth, unless technological
progress occurs to improve
productivity.
Steady-State Growth
According to Neoclassical
Theory, economies eventually
reach a steady-state where
growth slows down unless
there is technological
advancement.
Technological improvements
are what push the economy
beyond the steady-state and
maintain long-term growth.

24. Structuralist Theory
The Structuralist Theory focuses on the
idea that the economic problems of
developing countries are caused by
structural weaknesses—both within their
own economies and in the way the global
economy works. It argues that in order
for these countries to grow and develop,
they need to change their internal
structures and reduce their dependency
on rich, industrialized countries.

25. Concepts:
Developing Countries Have
Structural Problems:
•Many poor countries face
problems like unequal
distribution of wealth, lack of
modern industries, and reliance
on exporting raw materials.
•These issues prevent them from
growing economically.
The Global Economy is Unfair:
•The rich (core) countries control the
global market and dominate trade,
technology, and finance.
•Poor (or periphery) countries
mostly export raw materials (like
coffee, oil, or minerals), which limits
their ability to grow because they
depend on what rich countries buy
from them.
•This keeps them stuck in poverty
and prevents them from growing at
the same pace as developed
countries.
The Need for Industrialization:
•Structuralists say that poor countries
need to build industries (factories,
technology) to make products instead of
just selling raw materials. This will help
them grow and become self-sufficient.
•Industrialization creates more jobs,
helps people earn better wages, and
makes economies more diverse.
Countries Have Structural Problems:
•Many poor countries face problems like
unequal distribution of wealth, lack of
modern industries, and reliance on
exporting raw materials.
•These issues prevent them from growing
economically.

26. Concepts:
Import Substitution
Industrialization (ISI):
•This is a policy where
developing countries try to
produce things locally rather
than relying on imports from
rich countries.
•Example: If a country is
importing cars, they should
build their own car factories and
start making cars within the
country.
Government's Role:
•Governments should support
local industries and help
them grow by providing
things like education,
infrastructure, and
protection from foreign
competition (through tariffs
and regulations).

27. References:
1.
Hirschman, A. O. (1958). The strategy of economic development. Yale University Press.
2.
Prebisch, R. (1950). The economic development of Latin America and its principal problems. Economic Bulletin for Latin
America, 7(1), 1-22. https://doi.org/10.18356/698cd4f0-en
3.
Rostow, W. W. (1960). The stages of economic growth: A non-communist manifesto. Cambridge University Press.
4.
Schumpeter, J. A. (1942). Capitalism, socialism and democracy. Harper & Row.
5.
Gerschenkron, A. (1962). Economic backwardness in historical perspective: A book of essays. Harvard University Press.
6.
Sachs, J. D. (2005). The end of poverty: Economic possibilities for our time. Penguin Press.
7.
Frank, A. G. (1969). Capitalism and underdevelopment in Latin America: Historical studies of Chile and Brazil. Monthly Review
Press.
8.
Baumol, W. J., Litan, R. E., & Schramm, C. J. (2007). Good capitalism, bad capitalism, and the economics of growth and
prosperity. Yale University Press.
9.
Amsden, A. H. (2001). The rise of "the rest": Challenges to the West from late-industrializing economies. Oxford University Press.
10.
Rodrik, D. (2016). Straight talk on trade: Ideas for a sane world economy. W.W. Norton & Company.

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