The Political Economy Of Industrialization

Consider a broad sketch or model of a national economy that contains roughly five kinds of people. You have industrialists who’ve made large fixed capital investments in factories that run generous operating profits. You have landowners who are living off renting land to peasants. You have peasants whose labor (and therefore earnings net of rent) is very unproductive due to scarcity of land. You have workers whose wages are low due to competition from the peasants. And you have a variegated class of service professionals—shopkeepers, tailors, accountants, etc.—who work for the rich people.

Industrialization in Yiwu, China (my photo available under cc license)

In this economy, the fundamental fact is that there’s a huge gap between the workers’ wages and their productivity because their wages are held down by the low average productivity of workers + peasants and the peasants’ wages are held down by a shortage of land. This wage gap creates giant profits for the industrialists. But it also creates an opportunity. If the workers band together, they can force the industrialists to share a larger portion of the profits with the workers. On the other hand, the higher the industrialists’ profits are the more rapidly they’ll build new factories pulling more peasants into the (marginally) higher wage factory sector and (marginally) increasing the available land per peasant.

This creates a number of possible political coalitions:

1) The industrialists might persuade the peasants that their interests are aligned in pursuing high factory profits and rapid industrial expansion, especially if the peasants have traditionalist views on sex & religion and the industrialists can forge an alliance with the majority church.

2) The industrialists might forge a broad front of “richer than average” people, aligning the landowners and the professionals with themselves in defense of private property defined not as abstract free market liberalism but rather as upholding all existing legal privileges.

3) The workers might form an alliance with the professionals on the theory that redistributing urban earnings from industrialists to workers will broaden the professionals’ customer base and give them more practical autonomy.

4) The industrialists could engage in more-or-less voluntary profit sharing with the workers to form an urban coalition that reduces real earnings of rural land with trade policy.

5) The workers could forge a broad coalition with the peasants by combining the profit-extraction agenda with proposals to dispossess the landowners and redistribute their land.

Obviously, that’s all pretty skeletal. But that’s the idea of a model. And historically and presently, I think it’s a model that approximates a lot of scenarios. Some versions of numbers one and two are the classic right-wing political strategies of the industrializing west. Number four is roughly the ruling philosophy of the People’s Republic of China and I think it more or less describes what the liberal coalition was trying to do in 1930-70, when it rarely had a working majority but always influenced events. Number three is more like the “revisionist” socialism of the SPD in pre-World War One Germany. And obviously number five is the most properly left-wing approach.

Anyway, nothing particularly original here. But I think it’s important to note both that this kind of political economy is an important element of human history and also that it doesn’t apply at all to the contemporary West. It’s founded on the combination of low rural labor productivity and the existence of viable technological and organizational strategies for industrial production. And over time, even thought he mix of political responses implemented varies from place to place, it comes to an end. Eventually the quantity of people involved in rural production falls to the point where average rural labor productivity is quite high. At this point the windfall cooperative surplus of the industrial sector largely goes away, and higher industrial wages are directly related to the adoption of productivity enhancing technologies that reduce employment. Trying to apply political ideas from that world to today’s world doesn’t work. Of the five political strategies sketched above, only strategy number two has a clear applicability to a modern economy. And I think it’s not a coincidence that some version of number two seems to be winning the day.