“You know, the Two Things. For every subject, there are really only two things you really need to know. Everything else is the application of those two things, or just not important.”
“Oh,” I said. “Okay, here are the Two Things about economics. One: Incentives matter. Two: There’s no such thing as a free lunch.”
I share Arnold’s misgivings, both regarding the meme and the particular application of it to economics. I can’t disagree with the ‘incentives matter’, although a determined pedant might say that this is reducible to simply ‘people do things for a reason’. It’s the ‘no such thing as a free lunch’ chestnut that bothers me.
The term free lunch first appeared in print on 23 November 1854, in Wide West published in San Francisco. It is a reference to the practice of saloons giving free meals to attract clientele. Of course the savings is illusory as the price of the drinks subsidizes the food. The exact phrase, there ain’t no such thing as a free lunch, is also first used in the city by the bay in the 1 June 1949 edition of the San Francisco News (although this is claimed to be a reprint of a 1938 editorial so it may be even older, but the original has not been found).
Economics is all about free lunches. They’re everywhere. Economic exchange only happens because of them. Bilateral transactions, whether they involve goods, money or labour, give each party a little free lunch. When I hand cash over to the nice person at my local tea shop, we are both snacking free-style. I am made better off than I would be were I to keep the money in my pocket; at a further remove, I am better off than I would be had I used the labour implicit to make my own scones. Similarly, the cashier is better off than if he’d stayed at home and grown cabbages.
The economy is not a closed system, at least not when it comes to utility. Unfortunately, the view of it as such is widespread, and informs every single bad economics article you’ll ever read. The Chinese are better off when they give us nicely-made strollers in return for I.O.U.’s in the form of hard currency, so surely we must be worse off? Mexicans seem happy to be here in Chicago, cooking my food and mowing my lawn; the little bastards must be stealing that happiness from somewhere. And as for Wal-Mart, that evil juggernaut must be hoovering the stuff up. CEO Lee Scott is probably smiling beatifically at this very moment, having harvested so much joy from the tears of the worker.
[Aside: that is not to say that particular networks of bilateral transactions don’t give bigger free lunches to some agents than others. Indigenous stroller artisans will temporarily have to be content with smaller free lunches for a while, now that the ricardo family has decided to increase someone else’s happiness. I just feel like neglecting distributional issues today.]