International division of labour

During the first half of the nineteenth century, the Industrial Revolution was essentially an English phenomenon. For this reason the structural evolution of the English economy provides the key to the radical changes which took place during this period in the world economy as a whole. The economists who witnessed the beginnings of these changes, and interpreted them from the English viewpoint, immediately realised that it was in England's interests to become a vast factory, opening its doors to primary products from all over the world. In fact, industrial activity, violating the law of diminishing returns, signified unprecedented qualitative change.

In economies in which technology had made little or no progress – based essentially on agricultural activity – it was evident that there were limits to the degree to which the relative proportions of the productive factors employed could be altered. Beyond a certain point, the output obtained per unit of agricultural land necessarily tended to decrease, regardless of the amount of labour added, which meant that availability of land governed the use of the other factors. Industrial activity made it possible to break this barrier, since growth itself, by creating the possibility of further specialisation in labour and equipment (greater division of labour, additional and more complex machinery), became the source of increased productivity, which meant increasing returns. In such circumstances, even if prices of imported agricultural products remained stable and were the same as those of home-produced goods.