Origins

Merchants and trade are as old as civilization itself, but capitalism as a coherent economic system had its origins in Europe in the 13th century, toward the close of the feudal era. Human beings, Adam Smith said, have always had a propensity to “truck, barter, and exchange one thing for another.” This inclination toward trade and exchange was rekindled and stimulated by the series of Crusades that absorbed the energies of much of Europe from the 11th through the 13th centuries. The voyages of discovery in the 15th and 16th centuries gave further impetus to business and trade, especially following the vast flood of precious metals that poured into Europe after the discovery and conquest of the New World. The economic order that emerged from these events was essentially commercial or mercantile; that is, its central focus remained on the exchange of goods rather than on their production. Emphasis on production did not come until the rise of industrialism in the 19th century.

Before that time, however, an important figure in the capitalistic system began to emerge: the entrepreneur, or risk taker. A key element in capitalism is the undertaking of activity in the expectation that it will yield gain in the future. Because the future is unknown, both the risk of loss and the possibility of gain always exist. The assumption of risk involves the specialized role of the entrepreneur.

The thrust toward capitalism from the 13th century onward was furthered by the forces of the Renaissance and the Reformation. These momentous developments changed society enormously and paved the way for the emergence of the modern nation-state, which eventually provided the essential peace, law, and order crucial for the growth of capitalism. This growth is achieved through the accumulation of an economic surplus by the private entrepreneur and the ploughing of this surplus back into the system for further expansion. Without some minimum of peace, stability, and continuity this process cannot continue.