In 1989, when the Berlin Wall fell, Douglas Ivester, CEO of Coca-Cola Europe (and later CEO of Coca-Cola Worldwide), made a quick decision. He sent his sales force to Berlin and ordered them to start distributing Coke. In some cases, Coca-Cola representatives actually smuggled bottles of the drink through gaps in the wall. He recalled walking through Alexanderplatz in East Berlin during the uprising, trying to see if there was any awareness of the Coca-Cola brand. “Everywhere we went, we asked people what they were drinking, and if they liked Coca-Cola. But we didn’t even have to mention the name! We just made a Coca-Cola bottle with our hands, and people understood. We decided that we would move as much Coke as possible, as quickly as possible – even before we knew how we would be paid.”[i] The Coca-Cola Company immediately set up a branch in East Germany, handing out free coolers to merchants who started offering the real thing. It was an unprofitable business in the short term: the East German currency was still worthless – pieces of paper to the rest of the world. But it was a brilliant business decision that was made faster than any government agency could have dreamed of. By 1995, per capita consumption of Coca-Cola in the former East Germany had risen to the same level as in West Germany, which was already a large and significant market. In a sense, it was Adam Smith’s invisible hand that moved Coke bottles through the Berlin Wall. Coca-Cola representatives were not making a noble humanitarian gesture when they distributed drinks to free East Germans. Nor was their action a bold statement about the future of communism. They were looking for business opportunities—expanding their global market, increasing profits, and satisfying the desires of their shareholders. And that is the punchline of capitalism: The market creates incentives in such a way that individuals who act in their own best interests—handing out bottles of Coca-Cola, investing years in graduate school, planting a field of soybeans, designing a radio that works in the shower—make possible a comfortable and ever-improving standard of living for most (if not all) of society’s individuals. Economists sometimes ask, “Who feeds Paris?”—a rhetorical way of calling attention to the incredible array of things that happen every moment of every day and make the modern economy work. Somehow, the right amount of fresh tuna from the fishing boats in the South Pacific gets to the restaurant on Rue Rivoli. The neighborhood fruit vendor has exactly what his customers want every morning – from coffee to fresh papaya – even though these products come from ten or fifteen different countries. In short, a modern economy is made up of millions of transactions every day, and the vast majority of them take place without any direct government involvement. And it’s not just that things happen: our lives are gradually getting better as they go. It’s pretty amazing that we can now buy a television set twenty-four hours a day without moving from our armchairs. No less amazing, in 1971, the price of a 25-inch color TV was the equivalent of 174 hours of work for an average worker. Today, a 25-inch color TV—more reliable, with more channels and improved reception—costs the average worker about $23 in labor hours.[ii] If you think that better, cheaper television is not the best measure of social progress (a reasonable claim, I admit), you might be moved by the fact that during the twentieth century, life expectancy in the United States climbed from 47 to 77, infant mortality fell by 93 percent, and among the diseases we have eradicated or brought under control are polio, tuberculosis, typhoid, and whooping cough.[iii] Our market economy deserves much of the credit for this process. There is an old story, dating back to before the Cold War, about a Soviet official visiting a drugstore in the United States.The illuminated shelves are laden with thousands of medicines for every conceivable ailment, from bad breath to athlete's foot. "Very impressive," he says, "but how do you make sure that every store has all these items?" This anecdote is interesting because it reveals a complete lack of understanding of how a market economy works. In the United States, there is no central authority telling stores what items to stock, as there was in the Soviet Union. Stores sell the products people want to buy, and firms in turn produce the items the stores want to stock. The Soviet economy failed largely because government bureaucrats managed and determined everything from the number of soaps produced in a factory in Irkutsk to the number of students who studied electrical engineering in Moscow. Ultimately, this was an impossible task. It is clear that most of us, accustomed to market economies, understand even less about the central planning practiced in communist countries. I recently took part in a delegation from Illinois that visited Cuba. Since the visit was approved by the American government, each member of the delegation was allowed to bring back $100 worth of Cuban goods, including cigars. We had all grown up in an era of discount chains, so we set out to find the cheapest price for Cohiba cigars to make the most of our pocket money. After wasting a few hours, we discovered the point of communism: the price of cigars was the same everywhere. There was no competition between stores, because there was no profit in the sense we know. Each store sold cigars—and everything else, for that matter—at the price set by Fidel. And each store owner who sold cigars received the government’s wage for selling cigars—a wage that did not depend on the number of cigars he sold. Gary Becker, a professor of economics at the University of Chicago who won the Nobel Prize in 1992, said (quoting George Bernard Shaw) “Economy is the art of making the most of life.” Economics is the study of how we do this. There is a limited supply of everything of value: coconut milk, a perfect body, clean water, people who can fix broken photocopiers, and so on. How do we allocate these things? Why does Bill Gates have a private jet and you don’t? You might say that he is rich. But why is he rich? Why does he have a greater right to the world’s limited resources than any of us? At the same time, how is it possible that in a country as rich as the United States—a place where you can pay Alex Rodriguez $250 million to play baseball—one in five children is poor, and there are adults who have to dig through garbage cans to find food? Near my home in Chicago, the Three Dogs Bakery sells cakes and pastries only for dogs. Rich people pay $16 for birthday cakes for their pets. Meanwhile, the Chicago Homeless Association estimates that 50,000 people sleep homeless on any given night in that city. Such disparities are even more stark when we look outside the United States. Three-quarters of Chadians have no access to clean drinking water, let alone baked goods for their dogs. The World Bank estimates that more than half the world’s population lives on less than $2 a day. How does all this work—or, in some cases, not work? Economic theory makes a very important assumption: individuals act to make themselves as good as possible. In the jargon of the industry, individuals try to maximize utility—a concept similar to happiness, but broader. I benefit from getting a typhoid vaccine and paying taxes. Neither of these actions makes me particularly happy, but they protect me from prison and death from typhoid. And that, in the long run, makes me better off. Economists don't care what benefits us.They simply accept that each of us has our own “preferences.” I like coffee, old houses, classic movies, dogs, cycling, and many other things. Everyone else in the world has preferences, which may or may not have something in common with mine. Indeed, the fairly simple insight that different people have different preferences sometimes eludes sophisticated decision makers. For example, rich people have different preferences than poor people. Similarly, our personal preferences may change over the course of our lives if and when we get richer. The term “luxury good” has a technical meaning in economics: it is a good that we buy in larger quantities as we get richer—goods like sports cars and French wines. Environmental care is also a luxury good, even if we are less aware of it. Wealthy Americans are willing to pay more money relative to their income to protect the environment than less wealthy Americans. A similar situation exists among countries: rich countries devote a larger share of their resources to environmental protection than poor countries. The reason is quite simple: we care about the fate of the Bengal tiger because we can afford it. We have a house and a job and clean water and birthday cakes for our dogs. Here is a troubling question: Is it fair for people like us, living comfortably, to impose our preferences on people in the developing world? Economists say it is not fair, even though we do it all the time. When I read an article in the Sunday New York Times about farmers in South America cutting down virgin rainforests and destroying rare ecosystems, I almost drop the latte I bought at Starbucks in surprise and anger. But I am not them. My children are not hungry and are not in danger of dying from malaria. If it were different, and if to feed them or to buy mosquito nets I had to destroy vital wildlife habitat, I would sharpen my axe and start chopping. I wouldn't care how many butterflies or spotted weasels I killed. This is not to say that the environment in the developing world doesn't matter. It does. In fact, there are many examples of environmental damage that will make poor countries poorer in the long run. And of course, if the developing world had been more generous, farmers in Brazil might not have to choose between destroying the rainforest and buying mosquito nets. The point here is more fundamental: it is not economically right to impose our preferences on individuals whose lives are completely different from our own. This is a very important point that we will focus on when we talk about globalization and global trade. Let me try to formulate another important point about our personal preferences: maximizing utility is not synonymous with selfishness. In 1999, the New York Times published the obituary of Ozola McCarthy, a woman who had died at the age of ninety-one after working her entire life as a laundress in Hattiesburg, Mississippi. She lived alone in a small, modestly furnished house with a black-and-white television that received only one channel. What made Mrs. McCarthy special was that she was not poor at all. In fact, four years before her death, she had donated $150,000 to the University of Southern Mississippi—a university she had never attended—to provide scholarships for poor students. Does Ozola McCarthy’s behavior turn the science of economics upside down? Are Nobel Prize winners required to return their prizes to Stockholm? No. Mrs. McCarthy simply benefited more from saving her money, and ultimately donating it, than she would have from buying a big-screen television or a luxurious apartment. We all make these kinds of decisions in our daily lives, even if they're on a smaller scale. We might pay a few cents more for tuna that doesn't harm dolphins,Or we donate money to our favorite charity. Both of these actions can benefit us, but neither is considered selfish. Americans donate over $200 billion to charity each year. We open our doors to strangers. We perform amazing acts of kindness for others. There is no contradiction between these actions and the basic assumption that individuals act to improve their own situation as best they can, as they define it. Nor does this assumption imply that we always make perfect—or even good—decisions. That is not true. But each of us tries to make the best possible decision, given the information we have at that moment. And so, in just a few pages, we have the answer to the age-old philosophical question: Why did the chicken cross the road? To maximize its utility. Keep in mind that maximizing utility is not a simple assumption. Life is complex and uncertain. There are an infinite number of things we could be doing at any given moment. In fact, every decision we make involves some kind of trade-off. It could be a trade-off between utility today and utility in the future. For example, you might benefit from hitting your boss over the head with a boat oar at the annual company picnic. But that momentary burst of utility would probably be outweighed by the loss of utility you would incur in years in prison. (But maybe that’s just my preference.) Seriously, many of our important decisions involve finding a balance between consumption today and consumption in the future. You might spend years in college eating cheap noodles to significantly increase your standard of living later. Or, conversely, you might use your credit card to buy a big-screen TV today even though the interest on the credit will reduce the amount you can spend on consumption in the future. Similarly, we balance work and leisure [i] M. Douglas Ivester, Remarks to the Economic Club of Chicago, February 25, 1999. [ii] Peter Passell, "Spending It: Every Second Counts Even More", New York Time, June 28, 1998, p. C9. [iii] Stephen Moore and Julian Simon, The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years, Cato Institute Policy Analysis, No. 364 (Washington, DC: Cato Institute, December 15, 1999).But that momentary burst of utility will probably be outweighed by the loss of utility you will incur in years of imprisonment. (But maybe that’s just my preference.) Seriously, many of our important decisions involve finding a balance between consumption today and consumption in the future. You might spend years in college eating cheap noodles to significantly increase your standard of living later. Or, conversely, you might use your credit card to buy a big-screen TV today even though the interest on the credit will reduce the amount you can spend on consumption in the future. Similarly, we balance work and leisure [i] M. Douglas Ivester, Remarks to the Economic Club of Chicago, February 25, 1999. [ii] Peter Passell, “Spending It: Every Second Counts Even More,” New York Time, June 28, 1998, p. C9. [iii] Stephen Moore and Julian Simon, The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years, Cato Institute Policy Analysis, No. 364 (Washington, DC: Cato Institute, December 15, 1999).But that momentary burst of utility will probably be outweighed by the loss of utility you will incur in years of imprisonment. (But maybe that’s just my preference.) Seriously, many of our important decisions involve finding a balance between consumption today and consumption in the future. You might spend years in college eating cheap noodles to significantly increase your standard of living later. Or, conversely, you might use your credit card to buy a big-screen TV today even though the interest on the credit will reduce the amount you can spend on consumption in the future. Similarly, we balance work and leisure [i] M. Douglas Ivester, Remarks to the Economic Club of Chicago, February 25, 1999. [ii] Peter Passell, “Spending It: Every Second Counts Even More,” New York Time, June 28, 1998, p. C9. [iii] Stephen Moore and Julian Simon, The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years, Cato Institute Policy Analysis, No. 364 (Washington, DC: Cato Institute, December 15, 1999).