Why do the choices I make interact with the choices you make? A family could try to take care of all its own needs—growing its own food, sewing its own clothing, providing itself with entertainment, writing its own economics textbooks. But trying to live that way would be very hard.

The key to a much better standard of living for everyone is trade, in which people divide tasks among themselves and each person provides a good or service that other people want in return for different goods and services that he or she wants.

The reason we have an economy, not many self-sufficient individuals, is that there are gains from trade: by dividing tasks and trading, two people (or 6 billion people) can each get more of what they want than they could get by being self-sufficient. This leads us to our fifth principle:

There are gains from trade.

Gains from trade arise from this division of tasks, which economists call specialization—a situation in which different people each engage in a different task, specializing in those tasks that they are good at performing. The advantages of specialization, and the resulting gains from trade, were the starting point for Adam Smith’s 1776 book The Wealth of Nations, which many regard as the beginning of economics as a discipline.

Smith’s book begins with a description of an eighteenth-century pin factory where, rather than each of the 10 workers making a pin from start to finish, each worker specialized in one of the many steps in pin-making:

One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a particular business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations…. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this particular business, they certainly could not each of them have made twenty, perhaps not one pin a day….

The same principle applies when we look at how people divide tasks among themselves and trade in an economy. The economy, as a whole, can produce more when each person specializes in a task and trades with others.

The benefits of specialization are the reason a person typically chooses only one career. It takes many years of study and experience to become a doctor or to become a commercial airline pilot. Many doctors might well have had the potential to become excellent pilots, and vice versa; but it is very unlikely that anyone who decided to pursue both careers would be as good a pilot or as good a doctor as someone who decided at the beginning to specialize in that field. So it is to everyone’s advantage that individuals specialize in their career choices.

Markets are what allow a doctor and a pilot to specialize in their own fields. Because markets for commercial flights and for doctors’ services exist, a doctor is assured that she can find a flight and a pilot is assured that he can find a doctor. As long as individuals know that they can find the goods and services they want in the market, they are willing to forgo self-sufficiency and to specialize. But what assures people that markets will deliver what they want? The answer to that question leads us to our second principle of how individual choices interact.