Two Economic Models

Mercantilism

In the seventeenth century Ambassador Jean Baptiste Colbert (1619-1683) of France developed economic practices that brought in more gold for King Louis XIV called Mercantilism. It was designed so the country would import more gold than it exported, and export more goods than it imported. The profit would go to the king. You can see it is impossible for every country to import more gold then it exports; somebody has to lose in that deal, and it is usually the weaker countries that lose. Mercantilism became official, and was adopted quickly among strong nations.

Mercantilism is a theory based on these assumptions: 1) wealth is derived from limited natural resources such as gold and 2) wealth is obtained either by digging it out of the ground or taking it away from somebody else.

Mercantilism is designed to enrich the government, the king, by taking money away from other, weaker people.

This is the policy that gives rise to the proverb, “The Rich get richer and the Poor get poorer,” because the Rich take money away from the Poor.

Capitalism

Adam Smith, an eighteenth century English Oxford professor, wondered, "Why are some nations more prosperous than others? Why is Russia, rich in natural resources, so poor, and why is England, poor in natural resources, the richest country in the world? What is it they do differently?"

Until that time, economies evolved in a hodgepodge way. A monarch may grant one city special favors or one class of people special favors, while keeping other people and other cities in serfdom. Mercantilism had been defined in the early seventeenth century, but it did not have a pure implementation throughout all nations. The result was that one economic practice was implemented in one city, another one in another city, and still another for the country overall. In this situation, some countries prospered and some did not.

Adam Smith studied what economic practices make one country wealthy and another poor. He showed that the more a country practiced these principles, the richer they become. They more they practice the other principles, the poorer they become.

Adam Smith explained these practices in a book published March 1776, Wealth of Nations. That book laid out the principles of capitalism and was immediately adopted by the newest nation in the world, the United States.

In his book, Adam Smith showed that a nation’s wealth is not measured by how much money the government has but how much money the people have. Capitalism enriches the people of a nation. Adam Smith also showed that wealth is created by business, not by taking gold away from other people.

Confusion

These two systems exist side by side today and there is much confusion about them. Some people tend to think very narrowly, “I work very hard to get my money and just have to give it away to someone else. The Rich get richer and the Poor get poorer.” They don’t realize one system is designed to get them rich and the other is designed to keep them poor.