Political economy was a creation of the European Enlightenment — more specifically, at first, of the French and Scottish Enlightenments. By the early nineteenth century, Adam Smith’s Wealth of Nations (1776) had been widely acknowledged as the founding text of a new classical economics that treated labor as the source of value and the accumulation of the products of human industry as the path to national wealth. It regarded commercial liberty and civic liberty as joint conditions for progress along this path. “Political economy” was understood in the early nineteenth century as a body of doctrine that identified the principles governing the good order of the body politic, or of wise legislation. “Economics,” the modern term that displaced this usage in the late nineteenth century, systematically elaborated these basic principles; they became more arcane and academic, no longer part of the general knowledge of those active in public life and the world of commerce. The economic agents of the classical world — laborer, capitalist, and landlord — contributed in their different ways to the production of commodities, and received revenues — wages, profits, and rents — according to their contributions. The “new economics” of the later nineteenth century replaced these social groups, each with its particular income, with agents linked only by the mutuality of supply and demand, the allocation of resources becoming purely a question of price formation. Each agent sought to maximize its own welfare through a calculus of choice; economics became a logic of optimizing decisions capable of mathematical representation.

The principle turning point in this development is the so-called marginal revolution of the 1870s, during which William Stanley Jevons, Léon Walras, and Carl Menger published books that were based upon a rejection of the classical paradigm, and that shared a common understanding of price formation as the outcome of choices based upon an evaluation of the marginal utility of economic goods.