In the centuries after 1450, Europe first entered and then gradually came to dominate a global commercial network. Building off the voyages of exploration and colonization, the commercial revolution of the 17th and 18th centuries involved a wide range of new financial and economic practices — such as joint-stock companies, widely capitalized banks, and triangular trade — all of which supported an emerging money economy. New commercial techniques and goods provided Europeans with an improved diet and standard of living. Wealth from commerce supported, in turn, the growth of industrial capitalism in subsequent centuries.
Commercial wealth helped transform a preindustrial economy based on guild production, cottage industry, and subsistence agriculture into one driven by market operations. While market mechanisms generated wealth and social position for some, they also destabilized traditional patterns of economic activity, such as when the wages of urban artisans and workers declined in the 16th century because of the price revolution. Still, commercial wealth generated resources for centralizing states, many of which, prior to the French Revolution, justified government management of trade, manufacturing, finance, and taxation through the theory
of mercantilism. Mercantilism assumed that existing sources of wealth could not be expanded; accordingly, the only way to increase one’s economic power over others was to gain a greater share of the existing sources of wealth. As a result, mercantilism promoted commercial competition and warfare overseas.
Market demands generated the increasingly mechanized production of goods through the technology of the Industrial Revolution. Large-scale production required capital investment, which led to the development of capitalism, justified by Adam Smith through the concept of the “invisible hand of the marketplace.” The growth of large-scale agriculture and factories changed social and economic relations. Peasants left the countryside to work in the new factories, giving up lives as tenants on landlords’ estates for wage labor. Improved climate and diet supported a gradual population increase in the 18th century, and then came a seeming breakthrough of the Malthusian trap (the belief that population could not expand beyond the level of subsistence) with a population explosion in the industrial 19th century. Industrialization generated unprecedented levels of material prosperity for some Europeans, particularly during the second industrial revolution (1850–1914), when an outburst of new technologies ushered Europe into modern mass society.
Prosperity was never equally distributed, either geographically or by social class, and despite the wonders of the railroad and airplane, poverty never disappeared. Capitalism produced its own forms of poverty and social subjection. It created financial markets that periodically crashed, putting people dependent on wages out of work and wiping out investors’ capital. Its trading system shifted production from expensive to inexpensive regions, reducing or holding down the wages of workers. By the 19th century, conditions of economic inequality and the resultant social and political instability across Europe raised questions about the role evolving nation-states could or should play in the economic lives of their subjects and citizens. Socialism argued for state ownership of property and economic planning to promote equality, and later, Marxism developed a systematic economic and historical theory that inspired working- class movements and revolutions to overthrow the capitalist system.
The devastating impact of two world wars and the Great Depression transformed pre-1914 economic patterns and complicated the task of governments in managing the unstable economic situation. Soviet Russia and its post–World War II satellites represented one path, while nations in Western and Central Europe modified laissez-faire capitalism with Keynesian budget and tax policies and an expanding welfare state. Consumerism, always an important factor in economic growth, took on even more importance in the second half of the 20th century, although not without criticism. Perhaps the most significant change since World War II has been the movement toward European economic unity and a common currency. Although policies of unity have supported Europe’s postwar economic miracle, they have also encountered challenges of a stagnating population, financial crises, and growing social welfare commitments.
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