Subject: Economics

Class: M.A.
Semester: I
Name of the Paper:
Industrial Economics

Topic:
Introduction of Industrial Economics

Keywords: industrial revolution, history of industrial economics.

Dr. Rajesh Pal

Professor and Head
Department of Economics
Faculty of Social Sciences
Mahatma Gandhi Kashi Vidyapith
Varanasi-02.
Email: rajesh.pal6@gmail.com

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Copyright © 2020 by Rajesh Pal. All rights reserved with the author.

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 Introduction of Industrial Economics

Unit Structure

• Learning Objectives
• Introduction
• History of Industrial Economics
• Industrial Revolution
• Scope and Subject Matter of Industrial Economics
• Terminology
• Important Points
• Check Your Progress
• References

Learning Objectives

After studying this chapter, you will be able to:

• Define and understand industrial economics.

• Discuss history of industrial economics.
• Explain the causes of industrial revolution and their features.
• Interpret scope and subject matter of industrial economics.

Introduction

Industry plays an important and decisive role in determining the overall growth and development
of an economy of any nation. Industry uses four factors of production, viz., land, labour, capital
and organization to produce goods and services.1 Generally, the term industry is used for
economic activities in which mechanical appliances and technical skills are involved. These
economics activities comprise processing of goods, as well as breeding and raising of animals.2
Subject which concerns with these activities is known as industrial economics. Group of firms
producing similar or differentiated products is called industry. The use of various inputs like raw
material, electricity, machines etc. for producing goods and services is called industrial
development. By increasing the volume of output and employment, industrial development can
help increase the growth rate of an economy. Industrial economics is a distinct branch of
economics which deals with economic problems of firms and industries, and their relationship
with the society.3 It is known by different names like ‘Industry and Trade,’ ‘Economics of
Industries,’ ‘Commerce,’ and ‘Business Economics’ etc. The name ‘Industrial Economics’ was
adopted in the early fifties perhaps through the writings of P.W.S. Andrews.4

Industrial economics comprises two broad elements, called: (i) Descriptive elements, and
(ii) Business policy and decision making. Descriptive element is concerned with the information
2
content of the subject. It deals with industrial and commercial organisations of nations. It
provides information regarding availability of factors of production, natural resources and
climate, competitive situations in the industry, government rules and regulations, industrial
policy, commercial policy, infrastructure etc. Thus, it has a positive approach as it deals with
what is happening in the economy rather than what should happen in hypothetical or ideal
situation.5 Business policy and decision making element of industrial economics concern with
the analytical and decision making part such as location of plant, market analysis, pricing, wages,
production of commodities, size of the factory, advertisement, choice of techniques, product
diversification, hiring and firing of labour, and so on. All such decisions explain the behavior of
producers in different market situations, which we study in industrial economics.6

Industrial economics is a combination of microeconomics and macroeconomics. Like

microeconomics, it studies about producers’ behavior. For example, with the limited income,
consumers have to take decision regarding maximization of their utility. Similarly, with the
scarce and limited resources like land, raw material, labour and capital, producer has to take
decision regarding production and distribution. Though, microeconomics (i.e., theory of the
firms) provides theoretical basis for the study of the industrial economics, yet it is an abstract as
it does not go into operational details of production, distribution, and other aspects of the firms
and industries. Industrial economics goes into details of such economic activities, which is an
abstract for microeconomics. Hence, industrial economics must be taken as special and distinct
branch of economics.

History of Industrial Economics

It is difficult to find out the true beginning of industrial economics. There is, of course, some
evidence according to which monopolistic practices and other elements of the industrial
economics were in operations as far back as 2100 BC.7, 8, 9 With the publication of Adam Smith’s
“An Enquiry into the Nature and Causes of the Wealth of Nations” in 1976, we may say that
discussion on growth of industries has started. Of the causes of improvements in the productive
powers of labours, and of the order according to which its produce is naturally distributed among
the different ranks of the people have been discussed at great length in this book. The greatest
improvement in the productive powers of labour, and the greater part of the skill, dexterity, and
judgment with which it is anywhere directed, or applied, seem to have been the effect of division
of labour. The first considered exposition of the term division of labour by a modern writer was
probably Sir William Petty.11 Adam Smith stated that after thoroughly establishment of division
of labour, a man supply surplus part of his own produce, which is over and above his own
consumptions, for such parts of the produce of other men’s labour as he has occasion for. Every
man thus lives by exchanging, or becomes in some measure a merchant, and the society itself
grows to be what is properly a commercial society.

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Industrial Revolution

In modern history, the process of change from handicraft and agrarian economy to one
dominated by industry and machine making began in 18th century in the Great Britain.11 The
economy changed from agrarian to machine making goods due to invention of steam around
1760s, which powered everything from agriculture to textile manufacturing.12 The first industrial
revolution was characterised by the age of mechanical production, where water and steam power
was used to mechanise production. The term industrial revolution was first popularised by
Arnold Toynbee (1852-83) to describe Britain’s economic development from 1760 to1840. Since
Toynbee’s time the term has been broadly applied. The first industrial revolution was largely
confined to the Britain for the period from 1760-1830. By developing machine shops, two
Englishmen William and John Cockrill brought the industrial revolution to Belgium. Belgium
revolution was also centered to iron, coal and textiles. Despite vast resources of coal and iron,
Germany was far behind in industrial expansion. After achievement of national unity in 1870,
Germany, by the turn of the century, Germany outpaced the Britain in steel and had become the
world leader in chemical industries. During 19th and 20th centuries America and Japan joined the
industrial revolution.

Second industrial revolution began with the exploitation of natural and synthetic
resources not hitherto been utilized. Invention of gasoline engines, airplanes, and chemical
fertilizers helped to bring second industrial revolution, which was characterised by the age of
science and mass production. In this industrial revolution, electric power was used to create mass
production. During second half of the 20th century, development of machines, tools and
computers gave rise to automatic factory and automatic operation, as distinct from assembly line.
During this period, ownership of means of production also went change and laissez-faire policy,
which dominated the classical industrial revolution, was replaced by government intervention in
the social and economic realm to meet the needs of complex industrial societies.

Invention of semiconductors, mainframe computing, personal computing and the

internet-connected tablet that lets you steam movies (digital revolution) in the beginning in
1950s gave birth to third industrial revolution, known as digital revolution. In this industrial
revolution, electronics and information technology were used to automate production.

With the invention of robots, genetic sequencing and editing, artificial intelligence,
miniaturised sensors, and 3D printing, to name a few, we have entered in fourth industrial
revolution.13. This industrial revolution is based on the third industrial revolution. This industrial
revolution began from the middle of the last century and it is characterised by the fusion of
technologies that is blurring the lines between physical, digital, and biological spheres.14

Before the beginning of industrial revolution, India is documented to have dominated the
world’s cotton textiles markets during 1750s. India used to export cotton textiles to different
parts of the world like Europe, Britain, America and the Middle East among others. After

4
invention of steam power and with the beginning of first industrial revolution in Britain created
threat to Indian textile industry. Spinning mule and power loom became more effective and
efficient with the invention of steam power. Consequently, it had reduced the cost of British
cotton by 85 per cent and made it internationally competitive.15 By the year 1820, Britain
outpaced Indian in cotton textile industry and became the world leader in cotton textile market.
India farmers were forced to grow cash crops in lieu of food crops, which resulted in awfully
deadly famines in India.

The history of industrialisation in India started with the establishement of cotton textile
mill in Mumbai (Bombay) in 1854 with the predominantly Indian capital and enterprise. India
was an industrially developed country before the advent of industrial revolution in Europe.16
Industrial revolution had its adverse effects too. European countries had limited natural resources
and hence limited scope for development. They ventured out of their own countries to find
natural resources and market for their finished products. Consequently, the situation reversed.
Europe which was underdeveloped and agriculturally less developed due to unfavourable
climatic conditions became developed, and other continents, specially Asia which were more
developed became less developed.17

Scope and Subject Matter of Industrial Economics

Industrial economics is a distinctive branch of economics which deals with economic problems
of firms and industries, and their relationship with the society.18 It is concerned with the study of
descriptive element and business policy and decision making elements of the subject. It is a
positive science as it studies what is the situation of economy rather than what should be the
situation of an economy. It comprises both micro and macroeconomics. The subject matter of
industrial economics incorporates the study of theory of the firm, decision regarding price,
investment, location of firms, wages of labour, advertising strategy, elements of market structure,
demand analysis, determinants of profitability, industrial policy and government regulation,
diversification, merger and acquisitions, industrial fiancé and accounting and so forth.

Terminology
• Industry: Group of firms producing similar or differentiated products is called industry.
• Industrial economics: Industrial economics is a distinct branch of economics which
deals with economic problems of firms and industries, and their relationship with the
society.
• Industrial Development: The use of various inputs like raw material, electricity,
machines etc. for producing goods and services is called industrial development.
• Digital Revolution: Invention of semiconductors, mainframe computing, personal
computing and the internet-connected tablet that lets you steam movies (digital
revolution) in the beginning in 1950s gave birth to third industrial revolution, known as
digital revolution.

5
Important Points
• Fourth industrial revolution began from the middle of the last century and it is
characterised by the fusion of technologies that is blurring the lines between physical,
digital, and biological spheres.
• Generally, the term industry is used for economic activities in which mechanical
appliances and technical skills are involved
• The name ‘Industrial Economics’ was adopted in the early fifties perhaps through the
writings of P.W.S. Andrews
• Industrial economics comprises two broad elements, called: (i) Descriptive elements, and
(ii) Business policy and decision making.
• The first considered exposition of the term division of labour by a modern writer was
probably Sir William Petty.
• The first industrial revolution was characterised by the age of mechanical production,
where water and steam power was used to mechanise production.
• The term industrial revolution was first popularised by Arnold Toynbee (1852-83) to
describe Britain’s economic development from 1760 to1840.
• Invention of gasoline engines, airplanes, and chemical fertilizers helped to bring second
industrial revolution, which was characterised by the age of science and mass production.

Check Your Progress

1. What is industrial economics?

2. Explain the scope and subject matter of industrial economics.
3. Expound in brief the history of industrial Development.
4. Who is being given credit to bring industrial revolution to Belgium?
5. Write a short note on cotton and textile industries in India.
6. Discuss the situation of cotton and textile industry of India before and after industrial
revolution.
7. Explain different causes of industrial revolution and their features.

References

1. Jain, T.R; Ohri, V.K. 2006-07. Indian Economic Development. K. K. Educational

Publishers. New Delhi: 63.
2. NCERT. 2008. Business Studies; Textbook for class XI. National Council of Educational
and Research Training, New Delhi:15.
3. Barthwal, R. R. 2010. Industrial Economcis: An Introductory Textbook. New Age
International Publishers, New delhi: 01
4. P.W.S. Andrews, ‘Industrial Analysis in Economics’ in T. Wilson and P.W.S. Andrews
(Ed.), Oxford Studies in the Price Mechanism, Clarendon Press, Oxford, 1951; and
‘Industrial Economics as a Specialist Subject,’ Journal of Industrial Economics, 1952.

6
5. Barthwal, R. R. 2010: 06.
6. Ibid.
7. Ibid.: 03
8. M. Hamphrey. 1940. The Economics of Ancient Greece. Macmillan, New York,
9. W.G. Shepherd. 1979. The Economics of Industrial Organisation. Prentic-Hall. England
Cliffs: 14.
10. Smith, Adam. 1976. An Inquiry into the Nature and Causes of the Wealth of Nations.
Edited by R. H. Campbell, A.S. Skinner. Textual editor: W.B. Todd. Volume I. Liberty
Classic Indiapolis. 1981: 13.
11. The Editors of Encyclopaedia Britannica, last updated: Sep 10, 2020. See Article History
https://www.britannica.com/event/Industrial-Revolution
12. https://trailhead.salesforce.com/en/content/learn/modules/learn-about-the-fourth-
industrial revolution/meet-the-three-industrial-revolutions
13. Ibid.
14. Klaus Schwab. Founder and Executive Chairman, World Economic
Forumhttps://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-
it-means-and-how-to-respond/
15. https://www.vedantu.com/question-answer/what-were-the-effects-of-the-industrial-
revolution-in-india-5b7ff361e4b0a50233a67b5b
16. Sharma, S.K. 2003. India: People and Economy. A Textbook in Geography for Class XII.
National Council of Educational Research and Training. New Delhi: 119.
17. Yadav, Hira; Sinha, Savita. 2003. Fundamentals of Human Geography. Textbook for
class XII. National Council of Educational Research and Training. New Delhi: 36.
18. https://www.scribd.com/document/326013482/Lecture-Notes-for-Industrial-Economics