Ytdyklly

Joel Mokyr writes in Demand vs. Supply in the Industrial Revolution that

The determination of 'when,' 'where,' and 'how fast' are to be sought first and foremost in supply, not demand-related process.

I am confused as to what is meant by "supply" and "demand" in this case. What are specific examples of supply-side explanations? Would it be similar to the argument that supply creates its own demand due to overproduction leading to excess inventory and price drops? Any help on understanding the terminology would be great.

Question:

What do historians mean when they talk about “supply side” and “demand side” explanations of the industrial revolution?

Short Answer:

"Supply side" describes industry and it's motivation to produce goods and make profit. "Demand side" describes consumers and their desire to purchase goods. Together they describe a cycle of Supply and Demand which allows a free market to efficiently regulate itself without the need for centralized government planning or intervention.

Detailed Answer:

You are touching on a major theme of Adam Smith's opus "An Inquiry into the Nature and Causes of the Wealth of Nations" also known simply as "The Wealth of Nations", first published in 1776; a foundational book in science of Economics.

Adam Smith Institute

• The first theme is wealth is not determined by how much gold and silver a country possess but rather in the stream of goods and services that a country creates.




• The second theme is vast orders of magnitudes of efficiency are to be obtained by breaking any production effort down into it's component tasks and spreading the efforts across people dedicated to these component tasks. Smith uses the classic example of pin manufacturing. One craftsman could create one pin per day, 10 craftsmen each dedicated to performing a component task could create 4800 pins per worker per day. see Division of Labor and Specialization.




• The third theme is a country's future earnings are dependent upon the handing of it's wealth. Namely whether and how it invests profits to improve production.




• The fourth theme builds upon these previous themes describing the automatic mechanism in the production cycle. Supply and Demand. When "supply" is scarce people are prepared to pay more which encourages producers to invest more capital to make more goods. When supply exceeds demand, prices drop, producers invest their capital in other places. Industry remains focused on the most important needs without the need for central direction.

Supply and Demand refers to the cycle, motivation and net effect that left to market forces the market itself will act in the best interest of the country by dispersing it's capital where it will do the most good.
Sources:

• Adam Smith


• The Wealth of Nations


• wiki: The Wealth of Nations


• Adam Smith Institute


• Division of Labor and Specialization

For most of history, the economy was supply constrained. That is, people could manufacture goods at a slower rate than they were able to consume them. So if you could make more or better "mousetraps," you could probably find a buyer for them. Under these circumstances, the important variable to monitor was the supply of goods. In an economy of "scarcity" any additional supply would create its own demand. This was the premise of the so-called Say's Law, which "described" the world up to the Industrial Revolution, although it came later. "Supply," in this context, refers to "aggregate" supply in the whole economy of say, the United States, if not the whole world.

During the late 19th and early 20th centuries, there arose the phenomenon of mass production. Now it was possible to manufacture goods in large quantity, sometimes to "excess." In this "new" era, it was important for manufacturers to restrict the quantity of a given type of goods produced, and not "flood the market." (This had never been a problem under the old, supply-based regime.)

When there is excess capacity in many parts of the markets, (as occurred from time to time in the middle and late 20th century and later), not only companies, but governments have to get into the act, e.g by raising interest rates or taxes to discourage too much spending, or "excess demand." This process is called "demand management," and ultimately refers to "aggregate" demand (not just in one good or industry).