Beginnings of Modern Capitalism

Two 18th-century developments paved the way for the emergence of modern capitalism. The first was the appearance of the economists called physiocrats in France after 1750. Physiocracy is the term applied to a school of economic thought that suggested the existence of a natural order in economics, one that does not require direction from the state for people to be prosperous. According to the physiocrats, productive activities such as agriculture, fishing, and mining produce a surplus or net product. Other activities, such as manufacturing, do not produce new wealth but simply transform or circulate the output of the productive class.

The second development was the thought of British philosopher Adam Smith. He also tried to show the existence of an economic order that would function most efficiently if the state played a limited role, but unlike the physiocrats he did not believe that industry was unproductive. Rather, Smith saw in the division of labor and the extension of markets almost limitless possibilities for society to expand its wealth through manufacture and trade.