There Is Such a Thing As a Free Lunch

On Crooked Timber, John Quiggin has been rehearsing the arguments from an upcoming book called "Economics in Two Lessons," and the latest installment asks why, if there's no such thing as a "free lunch," we're not all still living in caves?

"There Ain't No Such Thing As a Free Lunch" (TANSTAAFL) is a Heinleinien aphorism that is a darling of the libertarian right -- Milton Friedman used it as a book title. It suggests that anything offered "free" by the state comes at an opportunity cost. But economists, including libertarian economists, argue that efficient markets produce better outcomes for everyone on all sides of a buy/sell deal -- that there are benefits that arise without opportunity costs.

Quiggin's argument starts with "Every technological advance since people first learned how to make flint tools and control fire has provided a potential free lunch, literally and metaphorically, for humanity as a whole. The same is true of improvements in social and economic organization that have allowed larger and larger groups to co-operate in mutually beneficial ways."

Technological innovations are the most obvious kind of free lunch. Technological innovations that allow us to produce a given output with less of every kind of input, including labour, provide us with the classic example of free lunch. Adopting the new technology allows us to increase output without using any additional resources. So, the opportunity cost of the additional output is zero. To put this point the other way around, additional production entails opportunity costs only if it is technically efficient.

The second kind of free lunch, the core concern of economics, arises from improved allocation of resources. Lesson 1 leads us to think about improvements that can be generated by allowing markets to work. Lesson 2 shows how public policy can yield improved resource allocation when markets fail to match prices and social opportunity costs. ,p> In this section we will look at Lesson 1, and the gains from exchange discussed earlier. Exchange through trade and markets can generate benefits for everyone, compared to a situation where everyone relies on themselves. When Crusoe trades fish for Friday’s goat, each obtains a meal that would have had a higher opportunity cost in the absence of trade. The improvement is a (partly) free lunch, or maybe a free dinner.

TISATAAFL [John Quiggin/Crooked Timber]