The British Industrial Revolution was a time of major socio-economic transformations. We review a number of recent economic theories which analyze the transition from a preindustrial world characterized by high fertility, stationary standards of living, and rigid social hierarchies to modern capitalism. One of the key social transformations that accompanied the Industrial Revolution was the economic decline of the aristocracy. Standard theories of wealth inequality cannot explain why the aristocrats, in spite of their superior wealth and education, failed to be the main protagonists and beneficiaries of industrialization. We discuss recent research based on a model of endogenous preferences that is consistent with the demise of aristocracy.

We construct a dynamic general equilibrium model with endogenous policy choice to analyze the adoption of child labor laws. The key mechanism in our model is that parents’ decisions on family size interact with their preferences for child labor regulation. If policies are endogenous, multiple steady states with different child labor policies can exist. Consistent with empirical evidence, the model predicts a positive correlation between child labor, fertility, and inequality. In addition, the theory implies that the political support for regulation should increase if a rising skill premium induces parents to choose smaller families. The model replicates features of the history of the U.K. in the nineteenth century, when regulations were introduced after a period of rising wage inequality, and coincided with rapidly declining fertility rates and an expansion of education.