There is such a thing as a “free lunch” in economics…and it should be shared

By Marc Morgan

“If I have seen a little further, it is by standing on the shoulders of giants.” (Isaac Newton, 1676)

A simple idea, embodied in a proverb, has been at the core of mainstream economic theory since the conservative-libertarian economist Milton Friedman popularised it in 1975. This is that “there is no such thing as a free lunch”. Essentially what this proverb intends to say is that one cannot get “something for nothing”. The first reference to this idea originated in 19th century US saloons whereby free lunches were offered to customers who purchased at least one drink. The foods, being high in salt, would entice customers to consume more drink, usually beer. As such the “free lunch” carried a hidden cost, namely the price paid for each extra unit of drink, which effectively ended up paying for the lunch. In economic terminology “no free lunch” represents the trade off (or opportunity cost) that must be made between two things that one values.

This idea has had such powerful grip on modern economic thought that few have questioned its empirical content. Yet it is only from considering modern economic growth literature and technological history that the “no free lunch” theory proves to be defunct. What one discovers is that inherited knowledge, which forms the basis of technological innovation, proves to be a very nutritious free lunch for the economy as a whole. And because it is made equally available, through inheritance, to all of society it is only reasonable that its fruits should be shared.

In his landmark 1957 paper on economic growth, Nobel-Prize winning economist Robert Solow claimed that it is the progress of knowledge that is the main stimulus to long term economic growth. He calculated that in the first half of the twentieth century, almost 90 percent of productivity growth was attributed to “technical change in the broadest sense”. William Baumol, a contemporary of Solow’s, estimated in the 1960s that “nearly 90 percent…of current GDP was contributed by innovation carried out since 1870”. Stanford economist Paul Romer in his 1990 paper compares a college-educated engineer working today with one working 100 years ago. Both have the same skill level but the engineer working today is far more productive. This is because the engineer today can avail of “all the accumulated knowledge” that went into solving design problems over the last 100 years.

Milton Friedman: formalised the idea of “no free lunch”  into modern economic theory

Two individuals who have had the privilege of a free lunch provide revealing testimonies as to the nature of these lunches. Warren Buffet, the third richest person in the world according to Forbes, recently stated that “society is responsible for a very significant percentage of what I’ve earned”. Bill Gates Sr., the father of the wealthiest person in the United States and the second wealthiest in the world, similarly reported:

Success is a product of having been born in this country, a place where education and research are subsidized, where there is an orderly market, where the private sector reaps enormous benefits from public investment. For someone to assert that he or she has grown wealthy in America without the benefit of substantial public investment is pure hubris.”

History reveals that Gates Jr. himself inherited crucial free knowledge, from Claude Shannon’s sophisticated mathematics of the 1940s to the federal government’s development of the internet as a defence program in the 1960s to the advanced operating system developed by Gary Kildall in the 1970s, to such a point that all he had to do was to lay the ‘next’ piece of this great pyramid of technological innovation. Yet he seems to have received a disproportionate share of the rewards from simply ‘taking part’ in the innovation life cycle. This is largely due to applied free-market theory, which has little regard for anything which doesn’t command a price, thus knowledge which has been passed down through generations often at the expense of national taxpayers, as was the case with the internet. The general consensus among the IT community is that the internet would have emerged anyway, and in the same timeframe had people like Bill Gates or Steve Jobs not been born. The same may be said of social networking sites like Facebook (whose ‘creator’ and CEO Mark Zuckerberg at 28, has to date amounted an estimated fortune of $17.5 billion) and countless industrial and scientific innovations.

Warren Buffett and Bill Gates: receivers of many a “free lunch”

The central moral of all of this is that “the individual genius” is not so important in the innovation process. What is much more fundamental is the development of knowledge which many individuals have contributed to through the ages and which, when they pass away, becomes the common inheritance of the current age. Such knowledge can certainly be classified as a “free lunch” to those that are “in the right place at the right time”. Moreover, since knowledge from previous societies passes down to be the common inheritance of the current society it is only reasonable that these “free lunches” should be more widely shared among the population through redistributive measures, or as C.H. Douglas advocated in the early 20th century, through a “National Dividend” payable to all members of society, like a dividend on shares, independent of income from employment.

Much of the skewed distribution of the fruits of what is a common inheritance is due to a dogmatic belief that the free-market justly rewards individual effort and invention, and that free-market mechanisms like intellectual property rights serve to encourage societal innovation. This belief proves to be self-righteous as well as self-interested for those that have benefited disproportionately from it. As outlined here, no recognition is made of where innovative knowledge comes from and who has contributed to its development in all of its dimensions. As Newton recognised of himself, certain individuals may ‘see a little further’ than their peers, but this distance is minutely small as compared to what was seen by all the individuals that came before them. And their next-of-kin was society as a whole. A new social will certainly needs to be considered, in light of persistent wealth inequalities within and between countries.*

* To further enlighten the evidence on the matter, what I have written here also forms part of this “free lunch”. It is inherited from two scholars, Gar Alperovitz and Lew Daly, who in turn were preceded in the more primitive elements of the theory by a previous generation of scholars, philosophers and social thinkers, which included the British engineer-cum-economic theorist Clifford Hugh Douglas, mentioned above, writing in the first quarter of the 20th century.

  1. senex72 said:

    Absolutely! Well said!
    A simple example is “Tetris” – a Russian childhood puzzle-game put on computer by a Soviet State employee in his spare time. This was then later “acquired” by brisk dealing by a games company (with no initial payments to him) and turned into a multimillion dollar profit grab which would no doubt be claimed as “private intellectual property” by the companies concerned. Or even worse, USA GM companies are trying to patent not just new gene-patterns (which is bad enough considering their debt to Mendel) but the entire natural cotton plant, for example so as to levy a charge on seed-saving by small growers..

    The “no free lunch” concept is strongly supported not because of its feeble intellectual content but because it opens the door to rip-off enterprises like that;and of course is conveniently ignored by bankers gorging on the free meals they extract from taxpayers!

  2. Chinmaya said:

    I agree with all that is said above and am quite appreciative of it. Rather than tempering with the free market (because government monopoly is far worse) we should work on the cost side. If you are filing a patent, then a formula should be worked out depending on your reliance on the elders according to which you will have to contribute to something like ‘knowledge fund’ that can be used for the welfare of the society at large.

  3. ark said:

    The author has misunderstood the ‘no free lunch’ idea. It is not that an individual or group within society cannot obtain something for nothing. Rather, society as a whole does not obtain something for nothing – of course, as long as there aren’t major inefficiencies in the utilization of resources. Entrepreneurs definitely do obtain many ‘free’ lunches, such as subsidized education, but the key is to recognize that those subsidies were paid for by others. They didn’t come from nowhere.

    Innovation does kind of provide a free lunch in the sense that it moves the production frontier outward, allowing us to do more with the same or less. But, again, this is why the free lunch principle applies only when there is efficient use of resources given our knowledge at the time. As soon as we’re up against that frontier, you can’t suddenly get something for nothing without again moving the frontier outward through innovation.

    • senex72 said:

      But banks create money simply b y entering debit amounts in their books: banker’s debts are costless money and they destroy the monetary-system by creating credit without control: they live on one long free lunch. Put simply the policy failure is to leave this free cash in their hands, so they drive up land, house and share prices without any real productive effect. The policy remedy is to take back this power and use democratic State control to direct the new cash flow to national productive effort – take work to the workers, control capital outflows etc.

      • ATboy said:

        But, once again, you are forgetting one very important thing that ark already stated, senex72. Even if these bankers are getting a “free lunch,” do not the people who have to pay for the driven up land, house, and share prices have to pay for the bankers’ free lunch?
        So, although the bankers may after all get what you call a free lunch, I would beg you to reconsider, because someone else is paying for that banker’s lunch.
        And also, since you say the remedy is to is to “use democratic State control to direct the new cash flow,” doesn’t the state have some expenses in moving all that extra money?
        My point is, even if the bankers get a free lunch, somebody else, namely in the buyer’s position, payed for it.
        Tanstaafl is not a thing to be ignored. Somebody, somewhere, somehow, paid for that lunch.
        Guys like Warren Buffet and Bill Gates had to work for their free lunches, didn’t they?

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