Economics can be a dry subject. Finding a way to illustrate its principles in a way that is informative and fun is like figuring out a difficult magic trick: Once we figure out the trick, we want to show everyone. Last week, as I prepared to teach a class of high-schoolers a few foundational concepts in American political thought and economics, I came up with an exercise so easy you can teach it to a toddler—with the caveat that you have an exceptionally bright toddler, of course.
The morning of the class, I asked my wife to pick up some assorted snacks and candy. I expected Tootsie Rolls and Skittles, but she decided to go the extra mile and include such items as Star Wars Pez dispensers, boxes of Cheez-Its and one coveted can of Spam.
I assembled all the students and distributed different types and amounts of treats to each one. Some got a lot, others very little. Some got more candy bars, while others got more licorice. I had them each write down their “happiness score” on a scale from 1-100, and then announce their favorite items to the rest of the group. The scores varied.
My instructions were as follows: “You will have three rounds of trading, each lasting one to two minutes, in which you can trade whatever you want, to whomever you want. Upon the conclusion of each round, you will write your new happiness score.”
After the second round, observing that the students were becoming quite excited about their newly acquired wealth, I announced “tax time” and took a random item from each person. During the last round, however, I gave most of it back as “stimulus”—minus administrative costs, of course.
At the end of each trading round, every single person had increased their happiness score substantially. Everyone was at or near 100. All winners; no losers. By the end of the experiment, there were only two exceptions to this: One student lost his favorite item to the tax man, and the other student had simply made a bad strategic move—a sour investment, if you will—in the last moments. Surely he would have recovered with either an additional round or the convenient use of standard currency. Nevertheless, these two students were not worse off, but back where they began.
Aside from nearly everyone becoming wealthier, we noticed that individual preferences had led to an outcome that I—the state in this experiment—would not have arranged. One student decided to acquire almost nothing but cans of Sprite. Another wanted all of the licorice (he found plenty of willing traders). Another had allergies and therefore avoided certain items. They each got what they needed or wanted most, without anyone taking down information or giving orders. Economists call this spontaneous order.
Interestingly, we discovered that several students had an unexpected but rather typical response to the collecting of taxes: They began hiding their goods. Once the game was over, all sorts of items were pouring out of pockets and hats. Next time I will have auditors.
Through this simple trading game, with relatively few instructions, we were able to discover several truths about trade, even in a situation of finite goods.
- Everyone gains because everyone has something of value to someone else.
- Goods are distributed according to needs and preferences, without centralized control.
- Taxes can slow or destroy wealth creation.
- Painful taxes lead to tax evasion, and can push money out of the economy.
- Some investors and entrepreneurs will fail.
- Opportunities come from unexpected places. (Some people actually love licorice.)
Critics of capitalism, who are concerned for the poor, tend to imagine a particular stash of wealth in the universe that has to be shared. We all get one shot to see who can get what, then we have to struggle to get our fair portion. For them, the “disadvantaged” never get ahead. That’s not reality.
The economy is dynamic, responsive to needs and able to grow as long as people are creating and trading value. And everyone has something to contribute.