The centuries-long path to German industrialization must be understood as a gradual institutional evolution in response to new circumstances, new opportunities, and new scarcities. Efforts to identify a single deus ex machina—whether Napoleon, Prussian reformers, or some other exogenous driver—do not lead to convincing results. Gradualism offers a plausible account of how a market economy and capitalism took root in German society. Only those German regions that had successfully launched gradual institutional reforms in the eighteenth century were well situated, by the early years of the nineteenth century, to move quickly to an identifiable market economy. Against this background we discuss the role of Prussia and Napoleon in modernizing the institutional framework of the German economy. The Prussian model of agrarian reforms and economic freedom represents a profound event in the history of economic development. A comparable strategic approach was absent in all French-controlled territories before or after 1815. Prussian reformers were the first in history to embrace a multi-sectoral strategy of rural development, enabling them to successfully combine growth with equity.