Second Industrial Revolution: Impacts and Transformations

Posted on Dec 21, 2024 in Economy

The Second Industrial Revolution and the New International Leadership

The Second Industrial Revolution significantly altered the international leadership established during the First Industrial Revolution. Key developments included:

  • New energy sources: Electricity (hydroelectric and thermal) and oil.
  • New energy converters: Dynamos, generators, and turbines.
  • New materials: Steel and soft iron, along with plastics and fertilizers.
  • New industries: Petrochemicals emerged as a major sector.

The Second Industrial Revolution also expanded to include countries on the European periphery. These nations were late to industrialize, but there was great diversity in their national and regional situations.

  • Group 1: Supporters like Switzerland, northern Italy, and Scandinavia replaced coal with electricity, allowing them to skip steps and move directly to steel production.

  • Group 2: Japan faced institutional constraints but eventually achieved its revolution after 1968.

  • Group 3: Mediterranean and Eastern Europe faced more significant challenges in transforming their economic structures.

Where is the Second Industrial Revolution?

This revolution was not a spontaneous process, nor did it automatically impose new technology. Many countries faced resistance due to:

  • Lack of capital to renovate equipment.
  • Deeply rooted “old” sectors and industries with strong corporate and employment commitments.

The transition from soft iron to steel required a shift from blast furnaces to lighter, cheaper furnaces. By the 1880s, a virtually total integration of science and technology was evident.

New Sources of Energy: Electricity and Oil

Electricity offered numerous applications, including lighting and transportation.

Advantages of Electricity:

  • Long-distance transmission with minimal energy loss.
  • Flexible source, usable only in the required amount.
  • Easy and efficient conversion to other forms of energy (heat, light, or movement).
  • Lower cost compared to existing energy sources (coal and hydropower) once the challenges of accumulation and long-distance transport were overcome.

These advantages significantly impacted the organization of production.

Oil: The dissemination of oil as an energy source began after World War I (1914) and was linked to the use of the combustion engine.

Advantages of Oil:

  • Possibility of intermittent use.
  • Cleanliness and ease of use.

Initially used as fuel gas, oil became more prominent with increased production and improved refining methods (diesel and gasoline), leading to better distribution techniques. Oil eventually became the primary fuel due to these factors.

New Materials and Raw Materials

Steel: A more robust, elastic, and malleable material than iron, steel found applications ranging from bridge construction to toy manufacturing. Its strength made it advantageous for producing lighter, more accurate, and faster machinery and engines. Steel eventually replaced iron, and various alloys of steel and aluminum (a non-ferrous metal) emerged.

The chemical industry’s remarkable development led to new materials in high demand, such as:

  • Glass
  • Artificial fibers
  • Rubber (for wheels)
  • Nitrogenous fertilizers (chemical fertilizers)
  • Pharmaceuticals
  • Dyes and bleaches

Electrometallurgy and electrochemistry led to the production of aluminum, ammonia, caustic soda, and copper, with diverse industrial applications, much more widespread than in the First Industrial Revolution.

New Technologies and Production Sectors: Steel

Steel Production Methods:

  • Bessemer
  • Siemens-Martin
  • Gilchrist-Thomas

These methods involved introducing coal into furnaces to convert iron into steel.

  • The first two methods used low-phosphorus iron ore, which was inexpensive and widely sold.
  • The third method overcame the limitations of the previous ones, allowing the use of all types of iron.

This led to the exploitation of new mines in specific areas, such as Lorraine and the Ruhr Basin, resulting in expanded steel production across Europe without limitations. Steel often drove the automotive, railway, shipbuilding, agricultural machinery, and oil industries.

Oil Cost: Initially used for lighting since 1853, oil replaced oil lamps and was used for heating and other domestic purposes. From 1890, it began to be used in internal combustion engines after the petrochemical industry developed the ability to distill heavy fuel oil from it.

Conclusion: More resistant, stainless steels, combined with oil and rubber vulcanization, led to a momentous innovation: the automobile and a new industry, automotive.

The theory of electricity was known since the beginning of the 19th century. Its industrial exploitation depended on lower production costs and long-distance transmission systems.

Milestones

  • 1867: Siemens patented the dynamo.
  • 1867: Bergès produced hydroelectric energy.
  • 1879: Edison invented the first incandescent lamp.
  • 1881: First long-distance transmissions.
  • 1900: Registration of early alternators and transformers to modify voltage and facilitate the use of new technologies.

Generation systems, converters, distribution processes, and industrial applications were enhanced.

Conclusion: The universality of electricity altered living conditions by electrifying homes and factories.

Results of Technical Change and New International Leadership

The new technologies of the Industrial Revolution brought significant economic leadership changes, favoring countries like the USA and Germany, which invested heavily in R&D (both by companies and states). Countries with abundant minerals and energy raw materials required by new industries, such as Nordic countries and Italy, also benefited. This promoted industrialization in areas previously absent from the process of economic modernization, enabling them to catch up.

This expansion of industrialization led to a relative decline in the British economy compared to Germany and the USA. Technical transfers in the industry occurred at a higher rate, increasing production and competition, leading to a tendency for prices to decline.

Increasing competition resulted in two outcomes:

  • Lower international demand for industrial products made it easier for countries with manufacturing capacity to implement them (e.g., textiles).
  • From the 1880s, there was a rise in tariff protection for industrial activities to develop domestic production and reduce competition.

The expansion of industrialization altered not only international markets but also domestic ones. Technological change favored industrialized countries with lower benefits and countries with lower agricultural advantages. Electricity and the expansion of new crop varieties reduced the disadvantages of these economies.

The growth of the industrial sector attracted the farming population, leading to a rural-to-urban migration. This resulted in improved cities, increased urbanization, and greater social and occupational mobility. Significant changes in the demographic behavior of urban populations also began to emerge.

The increasing internationalization of the economy forced countries to adapt. Britain, in particular, had to adjust its business strategy to maintain its success in international markets. New strategies to cope with intensifying competition included trusts and cartels.

International Trade, Capital Flows, Migration, and Imperialism

The Great Depression (1870-1896)

The Great Depression, spanning from 1870 to 1896, was characterized by a large-scale economic crisis with significant social and political repercussions, including substantial population movements due to overproduction.

International Trade (Growth from the Mid-Nineteenth Century)

The transportation revolution was crucial for:

  • The rise and mainstreaming of trade, geographically separating production and consumption, and increasing market size.
  • Increased specialization of different economies, leading to interdependence among industrializing countries. Each country specialized in specific production, relying on others for different goods.
  • Increased global production of agricultural and industrial goods, both a cause and effect of trade, driven by higher demand.

Imperialism played a significant role in this aspect.

A major agrarian crisis occurred, transferring agriculture from northern Europe to a stagnant agriculture in southern Europe. The reasons for this crisis included:

  • Expansion of cultivated areas, particularly in new settlement areas like the USA and Canada, leading to increased production.
  • Improved cultivation methods through intensification, using fertilizers, improved agricultural practices, and machinery, resulting in higher yields.

This led to population growth exceeding food supply, causing oversupply and a fall in agricultural prices.

Main Consequences for the Agricultural Sector:

  • Breakdown of traditional farming systems.
  • Diffusion of capitalist management criteria, requiring specialization based on each country’s comparative advantage.
  • Farmers were forced to change their marketing strategies by reducing costs through improved farming methods or specializing in goods with greater profit potential.

Advanced European countries were heavily affected by the arrival of foreign grain, but their level of industrial development lessened the impact on the overall economy due to reduced dependence on the primary sector. Countries like Great Britain, Belgium, and Denmark experienced a 50% price drop.

In other European economies where agriculture was the main activity and growing conditions were unfavorable, the impact of the crisis was greater, leading to tariff protection as a response.

Social Consequences:

  • Increased agricultural unemployment.
  • Expulsion of the active population from agriculture.
  • Increased migration.

Capital Flows (From 1870)

This era marked the rise of finance capital, with strong links between banking and industry. New banking practices emerged around 1870, including “Joint Banks” that served all banking functions.

Commercial Banks:

  • Continued investing in previous activities.
  • Acted as both merchant and deposit banks, as well as investment banks.
  • Managed deposits and invested in manufacturing projects, maintaining a surplus for investment without touching it.
  • Handled regular payroll payments for company workers.
  • Mixed long-term (l/p) and short-term (c/p) credit needs.
  • Designed industrial policies in consultation with employers.

Company boards began to include individuals working in banks, and some industrialists joined bank boards. This practice spread rapidly across Europe, particularly in Germany.

In the USA, banks engaged in significant investment activity, and a structure was created to centralize the Federal Reserve banks. Japan also adopted the American banking system, which was highly decentralized and tied to businesses.

A modernization of the monetary system also occurred. Trade relationships necessitated credit and liquidity, requiring an expansion of payment methods. An international monetary system was needed to support liquidity and reserves with metal, leading to the establishment of monetary standards.

Bimetallic System:

This system was based on the indiscriminate use of gold and silver for coinage. Proponents argued that relying on a single metal could have negative economic consequences. However, the bimetallic system resulted in unstable monetary operations.

Theoretically, two types of coins circulated with unlimited legal tender, and their value ratio was fixed by law, corresponding to their metal value ratio in the market. A key feature was the disparity between the legal and market relationships between the two metals. Often, the market relationship deviated from the legal relationship, leading to “Gresham’s Law”: bad money (overvalued in the legal relationship) displaces good money (undervalued in the legal relationship).

Several countries adopted the gold standard. The Netherlands, France, Belgium, Switzerland, and Italy formed the Latin Monetary Union to maintain bimetallism in Europe. However, its success was limited due to the discovery of silver mines, which prevented silver from losing value. The gold standard gradually became established.

Characteristics of the Gold Standard:

  • Each country’s monetary unit was defined by a certain weight in gold, fixing its exchange or legal relationship (e.g., 1 pound equaled X grams of gold). The difference depended on the weight in grams of gold, with the pound having the most weight.
  • Central banks bought and sold gold at this fixed price.
  • Notes were convertible into gold based on the weight of gold in each currency.
  • Note issuance was regulated by the existing gold reserves in the central bank, guaranteeing the issue.

The Gold Standard

Balance of Payments Deficit (-):

  • Gold output
  • Reduced money supply
  • Price fall
  • Increased competitiveness
  • Gold flow from other countries
  • Central banks avoid gold leakage by raising interest rates
  • Accentuated deflation

Balance of Payments Surplus (+):

  • Gold input
  • Increased money supply
  • Price increase
  • Reduced competitiveness
  • Gold flees to where interest rates are higher
  • Central banks respond to gold inflows by lowering interest rates
  • Accentuated inflation

Operating until 1914, the Gold Standard’s rules required automatic balancing of the balance of payments:

  • Balance of Payments Deficit (-): Imports exceed exports, leading to gold output, falling prices, and a phenomenon where banks pay more for money.
  • Balance of Payments Surplus (+): Exports exceed imports, leading to gold inflows and a situation where banks pay less for money.

Did it work well in the international economy? No, because central banks often disregarded the rules and resisted sacrificing internal balance. Surplus countries were reluctant to release gold.

Performance Characteristics of the Gold Standard:

  • Significant changes in the money supply, with a new composition established.
  • A double backing: gold and silver for banknotes, and later scriptural or bank money (checks, money orders, bank accounts, transfers).

Without this second backing, international trade would have been frozen as money wouldn’t have covered all needs. Gold was limited to a liquidity reserve with minimal movement. London’s financial strength and its currency (the Pound) acted as a backup instead of gold, as gold often remained in the same places. This period coincided with growth and the opening of trade, enabling countries with problems to rebalance their economies without resorting to deflationary solutions.

Migration

The 19th century was a century of migration, especially intercontinental movements. Capitalism and globalization drove these movements, primarily from Europe, initially from northwestern Europe and later from southeastern Europe. These Europeans migrated to America, particularly the USA, due to its vast tracts of land and farmland, seeking a new life. Significant migration also occurred from Asia to America in the late 19th century, providing cheaper labor compared to Europe.

Causes of Migration:

  • Push Factors:

    • Crisis in European traditional farming, starting in southern and including eastern Europe.
    • Excess labor in both the north and south.
    • Decreased mortality and increased birth rates, leading to high population growth.
    • Policies encouraging emigration, with rulers facilitating people’s departure.

  • Pull Factors:

    • Abundance of land in America.
    • Lack of labor in new settlement countries.
    • Higher wages than in Europe.
    • Increased passenger transport due to falling ticket prices.
    • Policies encouraging immigration.
    • Chain migration, where families followed previous immigrants.

Consequences of Migration:

  • Europe: Reduced the fall in wages and initiated rural depopulation.
  • USA: Moderated wages due to increased labor supply and spurred economic development.

Conclusion: Wages converged between Europe and North America. In the early 20th century, the USA began to control these migration flows, which were initially unrestricted.

Imperialism

In just over 30 years (1880-1914), industrialized countries annexed most of Africa, Oceania, and much of Asia. This military, administrative, and economic control by major powers, primarily European, is called imperialism (used synonymously with colonialism). Control was typically exercised in two ways:

  • Direct Control: The territory became part of the empire as a colony, with the metropolis applying its laws and exploiting resources directly.

  • Indirect Control: More common, without military occupation or administrative control, merchants engaged in various businesses.

This imperialism was closely related to the economic boom experienced by some European countries. Britain, France, and later Germany, Belgium, Italy, and Spain expanded into Asia, Africa, and Oceania to trade for new raw materials and food and to invest.

Imperialist expansion was slow until the 1880s, then accelerated, leading to conflicts between colonial powers. Agreements like the Berlin Conference (1885) were established to design the Scramble for Africa and conduct settlements without fighting.

Major Empires:

  • British Empire: The largest, based on a powerful army and navy, with significant economic influence in independent areas like Latin America and China. It was divided into:

    • Dominions (Canada, Australia, New Zealand, South Africa)
    • Colonies for resource extraction

  • French Empire: Except for Indochina and some Pacific and Caribbean islands, most of its empire was in North, West, and Equatorial Africa.

Causes of Colonialism or Imperialism:

  • Economic Factors: European countries sold industrial production, obtained raw materials, and invested in infrastructure and other activities in the colonies. Colonies also served as markets during times of difficulty, providing raw materials and foods not found in Europe (e.g., copper, tin, matches, rubber).

  • Political Factors (Geopolitical): During the mid-19th century, geo-strategic relations among major powers were based on an unstable balance of power, requiring control of territories across continents. Annexation sometimes aimed to prevent areas from falling under another power’s influence or to offset advantages gained by competitors. Ruling elites used imperialism to gain popular consent and establish national goals.

The First Industrial Rupture and Large-Scale Mass Production: The Emergence of the Modern Corporation

During the first half of the 19th century, the organizational form of business was the partnership, often formed by a small number of partners linked by family ties, with no separation between ownership and management. These companies were self-financed, resorting to foreign capital only for short-term loans from commercial banks.

In the second half of the 19th century, as transportation costs declined (railways, steamships), data transmission sped up (telegraph, telephone), and technology enabled cost reductions, large firms emerged. These were corporations with large capital and limited liability in case of bankruptcy.

Two countries that developed these large companies were:

  • USA: Large corporations developed between 1860 and 1914, exploiting economies of scale, diversification, and speed. This required the scientific organization of work to avoid time loss, a process developed by Taylor, known as Taylorism.

    • Taylorism: Developed methods of production to increase income through organization and mechanization, achieving cost savings beneficial to both employers and workers.

    • Fordism: Introduced by Ford, it involved rotation and assembly lines with transformers, eliminating travel and downtime, leading to mass production in capital-intensive industries with large facilities, economies of scale, and standardized production. This dramatically reduced unit costs.

    Large corporations increased labor productivity, producing more in less time and reducing unit costs, making it difficult for smaller companies to compete. Large companies grew through horizontal and vertical integration.

    • Horizontal Integration: Merging similar companies in the same sector.

    • Vertical Integration: Acquiring firms upstream and downstream in the production process to ensure a steady supply of raw materials and intermediate products and to secure markets for selling their products.

  • Germany: Developed large firms with a high degree of vertical integration (e.g., Thyssen, Stinnes, Krupp), controlling mines, blast furnaces, factories, mechanical construction, and shipbuilding. These companies achieved economies of scale and high levels of technological progress. Horizontal integration also led to oligopolies in some sectors, such as Siemens and AEG.

    Germany had an efficient system of public secondary technical schools and higher-level polytechnics, producing a significant number of engineers with high status. It was also the first European nation to introduce a state-managed social welfare system for all workers in the 1880s, covering occupational accidents, disability, and old age.

Conclusion: In large companies, the owner is not the director. There is a separation of ownership and control, with the general director appointed by the board of directors to make decisions for the company’s smooth operation and shareholder profit. In Europe, the spread of corporations faced serious obstacles, increasing the American peculiarity and productivity gap. The real transition to large companies in Europe only occurred after World War II.