Capitalism
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
C
39Wealth 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.