An economic system stressing free markets and enterprise that played a vital role in the development of the United States.
Capitalism first arose in Europe and stemmed from the decline of feudalism, the rise of private property, and the placing of the individual good over the common good. It developed over hundreds of years in combination with various internal and external factors including state building, an agricultural revolution, a demographic revolution, a price revolution, and, in the 1800s, the Industrial Revolution.
Elements of capitalism have always existed, but beginning in the 1400s, as Europe started to expand outward, the means of production and mercantile activity slowly concentrated in the hands of private individuals. Europe’s expansion into the Indian and Atlantic Oceans integrated its economy into those of the Far East and the Americas while introducing it to new sources of wealth, commodities, raw materials, markets, and consumers. The wealth of New Spain, for example, flowed back to Europe, initiating a price revolution as Europe moved away from a subsistence and barter economic system to a moneyed and market-driven economic system. This increase in the money supply corresponded with growth in the European population, which created both more workers and more consumers.
As more European states became involved in colonizing the Americas, they developed an economic system—termed mercantilism by economic theorist Adam Smith—designed to increase the power of the state. This system saw land, gold, and silver as the major forms of wealth and believed that wealth remained finite. Therefore, if a state gained or lost wealth, it gained or lost power. One issue stressed by Smith and many other early theorists was that a nation could increase its power by establishing colonies and foreign trade. They believed that monopolies allowed the state to acquire its revenues but that they limited the full potential of this developing economic system. In the mid-seventeenth and early eighteenth centuries in England, a debate began between supporters of monopolies and supporters of free trade. This debate culminated in the 1776 publication of Adam Smith’s
Wealth of Nations exploring this new capitalist economic system. In his work, Smith argued that wealth, in the form of commodities, remained infinite and that a free market system created more wealth than a closed system. Smith and the political economists who built upon his work created the theoretical foundations of capitalism and expanded our understanding of how the economy works.
England’s economic development set the stage for the rise of capitalism in the Americas. During the American Revolution, the American colonists hoped to establish free enterprise. After the creation of the U.S. Constitution, Secretary of the Treasury Alexander Hamilton used the powers it granted to further expand America’s economic development. From the eighteenth century onward, capitalism played an important role in forming the American political, economic, social, ideological, and cultural system.
