The fifth graders looked up as I placed a gift on each of their desks. Each student randomly received a small item, such as candy, a box of crayons, a magic trick, or a comic book.
After giving each child a gift, I told the students they could each trade - if they chose - with the person seated to their left or right. Several made trades; some didn't. Next I told them they were free to walk around the room and exchange their gifts. In a moment the room was filled with excited kids making trades.
When they had sat down, I asked them how many traded. Nearly all had. How many felt they were better off after their trade? I asked. They all did.
I was trying to teach these fifth graders a little bit of the magic of trade - how it allows us to improve our lives while improving the lives of others. As long as the people trading do so voluntarily, trade is always a winwin proposition.
But trade is far more magical than this. In the fifthgrade class, all the things being traded were simply handed out, free. Nothing had to be produced. In the real world things must be produced, meaning people must spend time, effort, and other resources producing them.
This is where we find trade's real magic: It directs people into areas of work and production where they can make the most at the lowest cost. That increases the total amount of wealth for everyone.
This is David Ricardo's law of comparative advantage. It indicates that trade opportunities will exist between people and groups even when one side is absolutely more efficient at everything than the other side. (A $500-an-hour lawyer who is also an excellent typist will nevertheless hire a $10-an-hour typist because every hour the lawyer spends typing is an hour in which he could have made far more money lawyering.)
In short, generating wealth requires productive resources, such as labor, capital, and land. Free trade promotes the discovery of the best uses of scarce productive resources to make the most goods and …