Capitalism as we know it didn't pop up overnight. It emerged in Europe gradually as the feudal system broke down. It is difficult to determine exactly when modern capitalism first emerged in Europe, not to mention this issue is hotly debated by historians. That said, it is relatively safe to say modern capitalism, as we know it, emerged between the 16th-19th centuries.
One important event that helped to breakdown the feudal system and give birth to free market economics was the Protestant Reformation. The Protestant Reformation was an anti-Catholic movement sparked by Martin Luther in 1517. Many Protestant Christians held to a revolutionary new view of work and wealth. They regarded hard work and thrift as traits which pleased God, and they regarded material wealth not as an evil, but rather a gift from God.
The effects of the Protestant Reformation were felt well into the 17th century. The Reformation helped fuel the growth of democracy and individualism; it caused peasants and lower-class Europeans to realize they could act independently and were not doomed to be mistreated. Because of this, many lower-class citizens aspired to educate themselves and to better themselves by learning a trade. For example, a 17th century peasant might feel empowered enough to give up working in the field, and, instead, learn blacksmithing. If he became good enough, he might even be able to open up his own shop and be his own boss. This was a huge change from the economic structuring under feudalism! Advances in technology also helped the spread of free market economics in Europe. Manufacturing and production increasingly became more common.
The settlement of the New World during this time helped give rise to a popular economic view called mercantilism. Mercantilism is an economic philosophy in which a country seeks to amass as much raw wealth as possible, usually through trading, monopolizing resources and strict regulation. Mercantilism contained elements of capitalism, but it was not entirely free market since it involved strict government regulation. Although mercantilism was a dominant economic view, in time, many intellectuals began favoring an approach free from state regulation. This is often called laissez-faire economics, or just laissez-faire. Laissez-faire is a term used to describe free market economics and capitalism. 'Laissez-faire' is French and means 'hands off' or 'leave it alone.' The idea here is that the government should leave the economic market alone and not try to control it. So, we can see mercantilism and laissez-faire economics are different.
