The Political Economy of Industrialization (Job market paper)

In this paper, I propose a theory that explains why the landowning elite promoted industrialization in the second half of the 19th century. I argue that this elite used public investment (e.g. railroad construction) as a strategic response to the threat of a coalition forming between workers and capitalists against the landowners’ political regime. Specifically, increased public investment enhanced the productivity of the industrial sector, thereby increasing capital income and augmenting capitalists’ wealth. Greater wealth among capitalists translated into heightened potential losses from redistributive policies if political power shift to the working class, which implements high taxation. If working class takes power with positive probability, there always exists level of public investment such that capitalists prefer to keep landowners’ political regime.