The first successful English colony in North America, Jamestown in Virginia, was settled in 1607 by a private corporation seeking private wealth. For more than a century afterward, British policy neglected the American colonies. It wasn’t practical to do much more than send a governor and a few soldiers—the Americans had to fend for themselves economically and govern themselves politically. After 150 years of such benign neglect, the American colonials considered benign neglect their natural right. But as Britain’s maritime power grew, it sought to control more commerce with the colonies. A series of Navigation Acts sought to keep foreign ships out of American ports and prevent American ships from trading with foreign countries. The goal was to enrich British shipping and British traders at the expense of higher costs for the colonials.

Among the many abuses of British colonial power listed in the Declaration of Independence, trade restrictions loom large. But victory for the new nation did not settle the issues of trade that helped create it. Where the British had set trade policy to enrich its businesses, some Americans sought to follow.

Alexander Hamilton, who was Secretary of the Treasury for President George Washington, issued a “Report on Manufactures” to the Congress, in which he recommended that Congress make the United States economically independent of Europe. In Hamilton’s view, the United States could not compete with more advanced countries, particularly England, in manufacturing. He thought a free-trade policy would render the U.S. a permanently agrarian society, supplying grain and taking goods. He asserted that the reason for America’s inability to compete was European manufacturing subsidies and concluded that the new country would have to do the same to advance and prosper. He recommended protective tariffs, the creation of a national bank modeled on the Bank of England, subsidies for manufacturing, and limits on trade—policies more than somewhat reminiscent of the British restrictions on the colonies that had touched off the Revolutionary War.

Hamilton carried the day on the tariff—it became the federal government’s primary source of revenue—but lost on the question of direct industrial subsidies. He did encourage creating corporations to build industries and backed the Society for Useful Manufactures, a freewheeling corporation in New Jersey that planned and eventually built the nation’s first industrial park where the falls of the Passaic River offered convenient water power.

Vicious political battles over the questions of finance and economics lasted through the Federalist Washington and Adams administrations and into the Democratic-Republican administration of Thomas Jefferson. The Federalists fell into factions that had little to do with economics, and one of the factional disputes saw Aaron Burr and Hamilton so much at loggerheads that they fought a duel in 1804, in which Hamilton was killed.

The Constitution effectively provided a free-trade area within the country, but with a high tariff wall to shelter it. That national tariff was more effective than state tariffs because no state could raise its tariff very high without prompting competition from neighboring states.

In the 1820s, the tariff issue began to divide the country along the lines of North and South, just as slavery was dividing it. The North’s interest favored a high tariff to protect New England’s manufacturing from competition, especially British competition. The South’s interest was selling cotton to English and French mills and using the profits to buy manufactured goods at the lowest possible price. In turn, Europeans who could not sell as much to America could not buy as much from America.

Senator Daniel Webster of New Hampshire was not a man of narrow political loyalty. He fought the tariff that many New Englanders favored because he understood opportunity cost: “The true inquiry is, can we produce the article at the same cost, or nearly the same cost at which we can import it?” He saw that if Americans could not, they should import it and find something more useful to do with their capital and labor.

Under the U.S. Constitution, a burning national issue is almost never really settled. With elections to the House of Representatives and one-third of the Senate every two years, and presidential elections every four years, anything the people’s representatives do can be reversed. Slavery was settled, but only with extra-Constitutional means, at the high cost of a civil war. Tariffs and other forms of protectionism, taxation, federalism, and all the economic issues of the Washington administration remain with us today.

The important issue in international trade is the power of governments to interfere with it. Everything else can be settled in the marketplace. Governments, attempting to please a small percentage of their citizens by protecting them from foreign competition, push their populations toward poverty. A country that protects farmers does so at the expense of all who eat. A country that protects auto workers does so at the expense of all who drive. Free trade, on the other hand, enlarges markets and creates prosperity everywhere it is tried. It also forces change on the companies and individuals who face competition with foreign goods and services that are cheaper or better than theirs. This is highly desirable in general, but painful in particular.

A small dispute between two neighbors illustrates the difficulty. Canadian two-by-four lumber holds up about one-third of houses constructed in the U.S. The American timber industry doesn’t like this, and it complained for years that Canadian provincial governments, especially British Columbia’s, didn’t charge Canadian woodcutters as much to cut on public lands as Americans are charged by their state and federal governments. The only appropriate Canadian answer to this was, “So? What business is that of Americans?” But the American answer was to charge 20 percent tariffs on Canadian lumber to make up for the allegedly unfair discounting.

An international panel set up to decide trade disputes ruled in favor of the Canadians over and over again. But the American government’s position was that Canada should negotiate—apparently on the principle that “what’s mine is mine and what’s yours is negotiable.” Eventually the two countries negotiated, and the only losers were consumers. The U.S. paid back $4 billion of the $5 billion it had collected from Canadian lumber exporters, and the Canadian industry agreed not to increase its exports. To enforce that “voluntary” restriction, the Canadian government agreed to collect a tax on lumber exports if the price of lumber in the U.S. fell below a certain price.

Americans should have been delighted if Canadians wanted to subsidize their forest-product industries and make Americans pay less for home building. We also shouldn’t mind when Canadians sell us oil and natural gas from Alberta, electricity from Ontario and Quebec, or Broadway-bound theatrical productions created in Toronto, all of which are subsidized one way or another by the Canadian government. It’s in America’s short-term, selfish interest not to do anything to make them reconsider their generous policies in any sector they subsidize.

Having real free trade in lumber might even have focused American forest-product companies on the American lawmakers and regulators who compromised their efficiency and blighted their operations with ill-conceived regulatory policies. The more important beneficiaries, as always, would be American consumers. The housing boom in the U.S. that started in 2003 made the U.S.-Canadian lumber dispute less relevant. Demand for lumber was so strong that it pushed prices up enough to satisfy U.S. producers, and it also enriched Canadian producers. Lumber mills on both sides of the border expanded capacity. Unfortunately for all of them, the boom didn’t last. By the end of 2007, house-building was in a definite recession. Even the newest and most efficient lumber mills were retrenching, laying off workers and cutting production. The stage was set for producers and consumers to renew their trade dispute.

The most important power of free trade is the opportunity for competition and choice. Consumers choose between domestic and foreign cars or among shoes imported from many different countries with different qualities, styles, and prices. They are better off for having the freedom to choose. Even if they patronize domestic producers, they usually enjoy lower prices or higher quality than they might if the local goods faced no foreign competition.

For every such decision consumers make, business executives in the commercial web make thousands. Nearly every component of their business, from nuts and bolts to accounting services, can be done in-house or by outside suppliers, even if they are located overseas.

Business executives must compare every facet of their production cost in the U.S. with their production cost in another place. Centralizing any business has advantages, but cheaper materials might be obtained abroad and imported. Or cheaper labor might be the crucially attractive factor of production.

The United States has been outsourcing its least-productive jobs to Mexico and Asia for decades. It is one of the least-recognized sources of the productivity boom that began in the 1980s. (Other sources include lower taxes and advancing technological leverage.) When the “giant sucking sound” that Ross Perot warned about in the 1994 debate over the North American Free Trade Agreement (NAFTA) sucks away a textile worker’s factory job in North Carolina, it creates two or three jobs in Haiti or China because labor is cheaper there and factories are much less mechanized. If the U.S. worker gets another low-paying manufacturing job, productivity probably goes up because only the jobs that produce goods with more value added remain in the U.S. Even if the textile worker goes on unemployment, total U.S. productivity might be enhanced because using a worker to produce cheap goods drags down productivity. Taking the worker out of the productivity calculation entirely is statistically better. There is an even better answer for the laid-off workers and the economy: former workers should go to school or get job training to add to their human capital. The real goal should be to qualify them for higher-paying, more productive jobs in other industries.

Globalization clarifies why some countries are poor. Beyond the ravages of war, disease, and corruption, some countries are poor because they would rather be poor and proud than get richer following the examples of rich countries.

That’s frequently on display at World Trade Organization (WTO) meetings, when trade ministers from poor countries walk out of negotiations that could make their countries richer, and rich countries persevere in policies that harm their own citizens.

Trade negotiations, like trade wars, are best seen as wars between governments and their own people.

“If the developed countries had offered more to the developing countries, it would have created an atmosphere more conducive to a settlement,” said a delegate from Jamaica, explaining to a Washington Post reporter why developing countries walked out of WTO negotiations at Cancun, Mexico, in 2003.

The U.S. and Europe said they were prepared to reduce agricultural export subsidies in return for poorer countries’ putting lower tariffs on industrial goods. But a group of 21 relatively poor countries, including Brazil, China, India, Indonesia, and South Africa, did not want to make a deal. They preferred to denounce the United States and the European Union for trying to dictate to them. They were more intent on preserving their own forms of protectionism, which benefit their own special interests, than they were in tearing down the production and export subsidies that industrial countries lavish on their farmers.

The Cancun meeting was part of the Doha Round of trade negotiations, begun by the WTO in Doha, Qatar, in 2001. All parties had agreed at Doha the goal was to reduce agricultural trade barriers. The question turned out to be, “Whose trade barriers?” and the answer was “not mine.”

As is so often the case in trade negotiations, each side would have been better off if it had taken the other side’s advice. Industrial nations do not make themselves richer by catering to their farmers. Their agricultural future probably requires adoption of industrial farming of commodities on one hand and gourmet truck gardening on small patches of land on the other. These are both enterprises that can stand on their own. Subsidies keep too much land too intensively cultivated and produce gargantuan surpluses that have to be disposed of at a loss. If industrial countries took the advice of poor countries, they could have cheaper commodities and lower government spending.

The poor countries can’t make their citizens better off through trade restrictions that raise prices and reduce supplies of everything they import. If they took the advice of industrial countries, they could have more capital investment in agriculture and industry, more productive jobs, and higher wages.

Countries such as India, Bangladesh, Pakistan, Guatemala, Vietnam, and most of those in Africa have economies heavily dependent on agriculture for the little bit of wealth they can create. Agriculture’s share of gross domestic product (GDP) ranges up to 45 percent in Tanzania. Not coincidentally, most of its poor people live in rural areas.

William R. Cline, an economist at the Center for Global Development, calculates that eliminating U.S. and European agricultural export subsidies and import restrictions would reduce their overproduction of agricultural commodities. That would increase food prices on world markets, which might not seem like a good thing for poor countries, but it would increase income in the rural areas of poor countries more than it would increase expenses for their urban poor, he says. Cline estimates that about 200 million of the world’s poorest people would receive significant boosts in income if the world could agree on unsubsidized free trade in agriculture.

The shoe also fits the other foot. By Cline’s estimate, if poor countries abandoned their self-defeating trade restrictions and opened themselves more completely to trade and investment, 450 million of the world’s poor—many of them farmers—could find more productive work and lift themselves up.

Industrialization in a more open economy rapidly increases opportunity and hope. If Mexico, for example, earns only 4 percent of its GDP from agriculture and 32 percent of its poor people are still scratching out a marginal existence on the land, then most of those farmers need a more productive way of making a living..

Economics is not always a dismal science. Sometimes it points the way to wealth creation and eventual prosperity for those willing to see it.

The Doha Round collapsed a couple times in a general demand for more concessions from the other side. But the deal that’s been on the table for discussion can be accepted by either side. Free trade can be unilateral because it enriches countries that practice it, even if their trading partners aren’t so wise. The citizens of free-trading countries are guaranteed the lowest possible prices for everything they consume, whereas their counterparts in protectionist countries face artificial scarcities and high prices. Producers in free-trading countries are pushed to compete in their home markets by cutting costs to the absolute minimum, and if they are exporters, they face high hurdles in hostile countries, which they can only overcome with world-class salesmanship and low costs. If they try hard enough and succeed, they become more productive and wealthier.

Consider Hong Kong. The former British Crown colony has no natural economic advantages. It is not much more than a large rock with millions of people clinging to it, yet it prospers, even under Communist control, because it has free trade. And Hong Kong does free trade the brilliantly easy way: It declared free trade unilaterally. No negotiations, no trade-offs, no exchanges of political favors.

The squabbling nations of the WTO should have as much courage as Hong Kong. Even the wealthiest would gain, but the poorest would gain the most.

The world’s diplomats and politicians consider these issues to be more complicated. Most countries protect some industries, and a few countries protect practically every economic activity. They make their economic choices based on domestic politics and their politicians’ biased estimates of their national interests.

In the U.S., the government caves in to timber interests, to steel, and to other industries that have stagnated under the smothering embrace of protectionism. It’s not even cost-effective. Other Americans have to pay for the expense of protecting jobs from foreign competitors or from outsourcing, and the cost often far exceeds the value of the jobs saved in the U.S. economy. Steel jobs, for example, pay less than $50,000 a year, but a system of quotas and tariffs protected jobs in steel for years at a cost of $800,000 per job. That’s like giving away $10 bills to steelworkers and getting back 68 cents as a thank you.

The U.S. government also protects farmers from competition with low-cost imported crops. Sugar, grain, and citrus are among the most important products Latin American countries would immediately be able to export in greater quantities if the U.S. opened all its agricultural markets to trade competition. The protected U.S. farmers who consider them important could grow other crops.

If you had been hanging around Greenville, Michigan, in spring 2004, you might have seen a bus full of union activists pull up and deliver a ready-made demonstration. Their signs demanded, “Show Us the Jobs.” The 51 out-of-work bus riders hailed from every state, plus the District of Columbia, and the union folks who hired the bus and organized the passengers hoped to impress upon the nation that Bush administration policies and attitudes were to blame for the loss of millions of jobs to other countries.

When they arrived in Greenville, at the site of a refrigerator factory owned by the Swedish appliance company Electrolux, the protestors denounced a company plan to close the plant and terminate 2,700 workers while sinking $195 million over the next few years into the construction of a new plant in Juarez, Mexico, that would employ 3,000 Mexicans. Wages in Mexico would start at roughly one-tenth the wages Electrolux paid in Michigan.

“Giant sucking sound,” anyone? What could be a clearer example of the kind of outsourcing that sacrifices American jobs on the altar of free trade? That’s what the bus riders said, anyway. They made a lot of noise in that vein, though they apparently were deaf to the thundering irony that Electrolux is a Swedish company. The American jobs being outsourced were Swedish jobs that were outsourced to America years earlier.

Electrolux is an international company, based in Sweden but manufacturing in more than 50 countries and selling appliances in nearly every country in the world. It is a survivor in a difficult industry. Electrolux didn’t become the biggest appliance company in the world by staying in one place. In the same season of 2004, the company also announced a plant closing in Durham, England, and plans to build new factories in Thailand and India. It was getting ready to shut a vacuum-cleaner factory in Sweden and replace it with production from a factory in Hungary.

Without constantly calculating cost-effectiveness, companies don’t survive and don’t employ anybody. Focusing on the 2,700 workers in Greenville caused the riders to miss several points.

Other American jobs were also at stake, those to be preserved or created by the decision of Electrolux to move to Mexico. Employees of Electrolux appliance dealerships would have new products to sell at more attractive prices. Truckers would haul parts and material from the U.S. to Juarez during construction of the new factory and later haul refrigerators from Juarez to everywhere. U.S. businesses would equip and supply the new factory.

Other products, possibly of higher value and greater economic importance than refrigerators, might be made in the U.S. after the last refrigerator plant was gone. They could even be made in Greenville and by refugees from Greenville who moved to places with more opportunities—some of whom probably would be paid more than they ever would have earned at the Electrolux plant in Greenville.

On the whole, Americans have gained much more from open markets and the free movement of capital than they have lost. Specific losses like those in Greenville are painful and easy to blame on others, whereas profits, like those earned when a Japanese car company moved to Michigan, are too easily accepted as the just desserts paid to superior ability.

Complaining about outsourcing makes a political mountain out of an economic molehill. Critics of outsourcing cannot claim that as many as 1 million American jobs are exported in a year. Normal forces of job creation and job destruction in the U.S. economy eliminate at least 27 million jobs a year in good times. Because the American tradition of economic liberty is allowed to work, the U.S. economy creates more than 30 million jobs a year, even when growth is not particularly robust. (The Bureau of Labor Statistics tracks the ebb and flow of jobs in its quarterly report on Business Employment Dynamics, available on the BLS web site, www.bls.gov.) If unemployment grows in the next few years, the most likely cause will be demographic pressure, not trade; a new generation is arriving on the job market in greater numbers than the cohorts of the past 20 years.

Too many Americans see free trade as a painful form of foreign aid, in which we generous Yankees agree to take foreign goods and throw our own people out of work. They ignore the benefits of free trade, which are generated in four ways:

Measuring these benefits is not simple. If it were, senators and presidents would do it, and the politics of trade wouldn’t need to rely on scare tactics.

Economists Gary Hufbauer, Scott Bradford, and Paul Grieco ran gigabytes of data from many countries through econometric models created by the Organisation for Economic Co-operation and Development and other independent economic experts. The models ran with different assumptions and rules. Some put emphasis on macroeconomic policies and the growth of GDP per capita; others focused on microeconomic analysis of the behavior of firms. Another tried to analyze today’s world as if the high tariffs of the 1930s had never been repealed by the many postwar rounds of trade negotiations, as if the U.S. had suddenly gone back to the Smoot-Hawley Tariff Act of 1930 and the rest of the world’s nations retaliated as they did then.

No matter how they sliced and diced the numbers, they found that Americans benefit substantially from the past pains of trade liberalization. Between 7 percent and 13 percent of U.S. GDP has come to us each year as a result of loosened trade restrictions. That’s net, after the costs to individuals who lost their jobs and the costs to firms that had to shut down. It’s at least $980 billion a year, $3,200 per person, $8,500 per household. On the high end of the results, it could be $1.8 trillion a year for America—$6,000 for every person, $16,000 per household.

If objectors knew what they were saying when they denounced globalism and demanded level playing fields and international traffic cops, they would change their tunes. Wouldn’t they? Perhaps not. Some Americans remember a land that never was, where all vegetables were locally grown, all stores were run by moms and pops who gave credit, all bankers were kindly benefactors of their communities, all unions won their rights in open bargaining and all politicians were honest.

Every year we get richer because we have reduced international trade barriers. We should keep reaching higher. If we go forward realistically, continuing to liberalize trade restrictions by lowering our barriers in agriculture, textiles, transport, and services, the three economists tell us we have more benefits to earn: As much as 12 percent more GDP annually could be produced with a complete free-trade regime that forces us to redeploy capital and labor to the sectors with the highest returns on investment.

Industrial capitalism requires mass markets. Mass markets require consumer sovereignty. A consumer allowed to choose among six brands of toothpaste eventually finds freedom of choice natural, and then it becomes natural to spit out tyrants in a new revolution, perhaps even to ignore them on such a grand scale that a violent revolution becomes unnecessary.

This is the point of the American policy toward China, just as it was the point of American policy toward the Soviet Union. Call it what you will—military containment, constructive engagement, peaceful coexistence—America rests its strategy on the economic strength of freedom. Facing political patience, military determination to deter conquest, and open-handed business deals of mutual advantage, socialism crumbles.

The Soviet Union opened its old autocratic economy out of sheer necessity. The path of slow starvation, as chosen by North Korea, was its only other option. China has also opened its old autocratic economy out of sheer necessity. Mass starvation has been replaced by rural development and urban economic growth. But even as they transform the economy, the old revolutionaries still profess that they are indispensable to maintaining order in a country that has often fallen into anarchy.

If we are determined and patient, trade will bring China the profits and wealth needed to make it stable enough to enjoy a weak government. While we trade with China to help its people, we should do the same for other countries. The denial of favorable status does nothing to bring a government to Somalia, liberalize the nations of former Indo-China and former Yugoslavia, feed the people of North Korea, or protect Sudanese refugees from the slaughter of Darfur. Trade sanctions are doing nothing to liberalize the Iranian theocracy or shake the thrones of dictators in Myanmar or Syria.

The most conspicuous failure of using trade for political ends is the U.S. trade embargo with Cuba. For nearly 50 years, Fidel Castro and his minions have been comfortable in power, blaming the U.S. embargo for all their economic mismanagement. Politically connected Cubans easily obtain from other countries anything their government permits them to have, whereas the government easily blames the U.S. embargo for its economic and social tyranny.

In early times, only one relatively easy way existed to improve the productivity of land, labor, and capital: Moving products from a place where they were abundant to a place where they were scarce. Trading, across seas or deserts, added a new dimension beyond local supply and demand.

The owners of certain capital equipment, such as ships and camels, could move goods from a place of local surplus to a place where goods were greatly desired. Early traders risked their capital to purchase goods outright in hopes of selling them somewhere else, where they were more valued.

By trade, it was possible to become rich without conquest.

Some economists do not understand trade except as an enforcement of some kind of power. They assert that profit occurs because the trade parties operate from unequal strength, such as unequal possession of information, political subjugation, or a monopoly of buying or selling power.

If silk was common in China and scarce in Europe, as it was in the Middle Ages, a merchant who bought silk cheap in China and sold it dear in Europe served both places in addition to himself. He provided transportation and bore the risk of loss along the way, for which he was compensated as a service-provider and middle-man. But beyond that, he relieved China of something it had in excess and provided China with something it wanted—probably gold—while providing Europeans with something they wanted more than a particular quantity of gold. The merchant, the middle-man, relieved economic stress in both places.

Immobile merchants sitting in a bazaar, buying quickly and selling quickly, also perform a service that relieves economic stress. If three farmers sell baskets of apples, berries, and peaches to one fruit merchant, who then sells individual pieces of fruit to customers, the merchant has relieved the farmers of their excessive dependence on large quantities of their specific crops, saved them the trouble of finding buyers, and, of course, saved the individual customers the trouble of finding sellers.

In the history of wealth, the seventeenth century stands as the high point of a belief in state power and conquest. This belief drove all European countries, none more than France. Building on the comment of Machiavelli that for the state to be rich, the people must be poor, French mercantilist philosophers concluded that merchants must flourish so they could be taxed; then soldiers could be paid and the state could wage wars of conquest and defense.

“We must have money,” said the philosopher Montchretien, “and if we have none from our own productions, then we must have some from foreigners.” He advised his readers to purchase only what was essential from abroad, to tax imports, and to create manufacturing enterprises in France. All this was to make the nation more than self-sufficient so that it could earn more gold and silver by exporting. Above all, mercantilists recommended that their countries hoard their gold and silver.

The impossibility of conducting trade by enriching one’s own country while beggaring all neighbors was lost on the mercantilists, who saw trade as war by other means. Victory in this kind of war, however, is defeat for the interests of the victorious country. A country with vast quantities of silver and gold cheapens the value of that bullion at home and drives up the prices of goods and services produced at home. It finds that imported goods are cheaper, except that it then subjects those goods to high tariffs and other restrictions: In other words, it drives its citizens to smuggling and black marketeering.

Montchretien’s advice was taken up by French ministers, especially the Cardinals Richelieu and Mazarin, and later the Finance Minister Jean Baptiste Colbert. They added the idea of importing skilled workers from other countries and investing royal funds to establish the most advanced cloth, glass, and other industries in Europe. French workers were prohibited from emigrating. They also chartered monopolistic companies for trade with other lands and with colonies.

All the profits from such investments and from increasingly oppressive taxation vanished into the maw of war. In the first half of the seventeenth century, France was surrounded by hostile Hapsburgs in Austria and Spain. Richelieu and Mazarin played double and triple games of diplomacy during the Thirty Years War, sometimes allying France to Protestants in an effort to exhaust Spanish power.

It’s impossible to tell if French mercantilism worked as an economic system. Perhaps it did, but only at the price of slower growth, monopolistic business practices, high prices, and low wages for workers. Colbert did leave behind one fine epigram that sums up his attitude to commerce: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” It is certain that French national wealth was not enhanced by the mercantile combination of subsidized production at home, protectionist tariffs, foreign adventures, and absolute monarchical rule.

The mercantile system in every country tended to increase the probability of war, and with war, the centralization of government, because the mercantile system worked only with absolute power behind it. Mercantilists wondered where the money went and passed laws to keep it in their countries. They could not see that their laws actually promoted exporting capital to places where it could find higher returns.

David Hume of Edinburgh, Scotland, was among the first philosophers to reject mercantilism and the accumulation of gold and silver as the ends of statecraft. He noted how the surplus of precious metal simply drove up prices. In a 1752 essay, Of Commerce, he recommended that governments support foreign trade in both directions:

“By its imports [it] furnishes material for new manufactures and by its exports, it produces labour in particular commodities, which could not be consumed at home. In short, a kingdom that has a large import and export, must abound more with industry, and that employed upon delicacies and luxuries, than a kingdom which rests contended with its native commodities. It is, therefore, more powerful, as well as richer and happier.”

David Ricardo’s role as a politician was to argue for free trade at a time when England was protectionist. The Corn Laws set high prices for imported grain of all kinds; the government defended this as a matter of national security to a nation just finished with a quarter century of war. Ricardo built on Adam Smith’s advice that every country and every region should specialize in what it can do better than anyone else. Smith’s Principle of Absolute Advantage showed that, for example, England should raise sheep, make woolens, and import wine; France should raise grapes, make wine, and import woolens.

Fine as far as it went, but what if a nation is not better at anything? Or what if a nation is better at so many things that it cannot fully use its abilities for all of them? Ricardo took Smith’s Principle of Absolute Advantage and created his Principle of Comparative Advantage: Potential competitors should specialize in whatever they are best at, relative to all other things they might be able to do. They should follow the lures of maximum profit and least cost because doing so leaves them with the maximum possible means to buy everything they don’t make for themselves. The means of determining this is the “opportunity cost,” which is the lost income from not making any of the other possible products.

If a French farmer is growing 10,000 francs’ worth of vegetables at a cost of 5,000 francs and could grow 50,000 francs’ worth of wine at a cost of 10,000 francs, 40,000 francs is the opportunity cost of growing vegetables. Obviously he would be better off reversing the field. But he must also be aware that he needs to make a one-time capital investment of 70,000 francs to plant grape vines, and the vines will not be productive for five years. Assuming he has the capital to make the investment, or that he can borrow it, he must ask what his opportunity cost might be for that cash. Could he invest it and earn more during the five years than his deferred profit from changing his fields over to grapes?

If he could, then Ricardo had another lesson for us: The amount he can earn over and above what it takes to stay in business is what he called “economic rent.” It is a measure of the strong demand for the land’s product and the strength of the producer’s market position.

In the long run, if open competition exists, a producer’s economic rent will be reduced to nothing as more competitors arrive on the scene and put more supply into the market, driving down prices. The farmer may eventually get no more than 15,000 francs for his wine—yielding the same profit as the vegetables.

People should concentrate on doing what they are good at and can afford to do and use the money they earn to buy the other things they need. It’s not so easy, however, to counsel an entire nation to do what it’s best suited to do. Nations are full of people who don’t like doing those things or who have been trained to do something else that isn’t as profitable. English winemakers and French sheep farmers will be put out of work if Ricardo is allowed to rule. Or, in Ricardo’s time, English grain farmers and their peasant employees would be displaced from the land if Parliament repealed the Corn Laws.

The grain farmers’ solution was to campaign for the preservation of the Corn Laws, just as the American steel industry, auto industry, machine tool industry, and even the microchip industry have agitated for import quotas when their businesses were beset by foreign competition; just as Main Street retailers try to keep Wal-Mart out of their towns. Indeed, Parliament did not repeal the 1815 Corn Laws until 1846. In response to a wave of civil unrest and hunger, the English government at last perceived that saving jobs on the land was not as useful as lowering the cost of bread for the entire nation.

Free trade helps everyone in the long run and almost everyone all along, but the benefits may be small until they are added up across the whole society. Protection is almost always good for a small segment of society and bad for the protected society as a whole. Thus, the Principle of Comparative Advantage, however well known and understood, frequently falls before the onslaught of political economics. It often happens that a large amount of suffering visited on a small number of people commands more attention than a little bit of suffering widely distributed. Responding to the needs of one group of workers displaced by foreign competition is politically more attractive than keeping taxes low for the general population.