By Deputy Editor, Ekanshi Makheja
With elections around the corner, I believe it is important for people to understand the concept of ‘no free lunch’. It describes the cost of decision making and consumption; it implies someone somewhere has to pay the cost of goods and services being consumed. A free lunch refers to a situation where there is no cost incurred by the individual receiving the goods or services being provided, but economists point out that even if something were truly free, there is an opportunity cost in what is not taken.
It is an important concept to be aware of because it helps us account for indirect and direct costs and externalities. It also describes the opportunity costs of goods not consumed which might have produced some utility. Decision making requires trade-offs and take it as a given that there are no real free commodities in the society.
This concept is not just limited to economics but has its impacts in other fields such as science, where there is a theory of the universe as a closed system. It says that the source of something comes from a resource which will be exhausted. The cost of the supply of matter is the exhaustion of its source. In sports we say ‘no pain, no gain’ which has a lot of contexts, but essentially refers to costs.
In finance we can consider investment. Investors should be cautious while investing in programmes offering seemingly high returns with low risks, as there is no such thing as a free lunch, there is no such investment without hidden fees, some of which may not be fully understood by investors, including the opportunity cost of not investing somewhere else.
Another implicit cost to consider is the exposure to unseen risks. For instance, in the early 2000s, certain brokerages heavily promoted mortgage-backed securities (MBS) as a seemingly risk-free opportunity (free lunch). These investments were portrayed as highly secure, AAA-rated assets backed by a diverse portfolio of mortgages. However, the subsequent housing crisis in the U.S. revealed the true underlying risks of these investments. Additionally, the flawed ratings system falsely labeled pools of loans as AAA, despite many underlying loans carrying significant default risks.
The concept of TANSTAAFL originated in 19th century American saloons where they offered free lunch on the purchase of a drink. We can see why it was, in the first place, NOT FREE because of the cost of the drinks and, on top of that, it was said that there was excess salt in the lunch which induced customers to buy more drinks, hence offsetting the cost of free lunch. The proposal of a free good or service with the purchase of another good or service is an oxymoronic tactic many businesses still use to entice customers.
Lawrence Reed dealt with this concept nearly three decades ago. He wrote:
“The Garden of Eden is a thing of the distant past yet some people (yes, even some economists) occasionally think and act as if economic goods can come with no cost attached. Milton Friedman is one economist who has warned repeatedly, however, that “there is no such thing as a free lunch!”
Every “something for nothing” scheme and most “get rich quick” plans have some element of this fallacy in them. Let there be no mistake about this: if economics is involved, someone pays!
An important note here regards government expenditures. The good economist understands that government, by its very nature, cannot give except what it first takes. A “free” park for Midland, Michigan is a park which millions of taxpaying Americans (including Midlanders) actually do pay for. A friend of mine once told me that all one needs to know about economics is “What is it going to cost and who is going to pay for it?” That little nutshell carries a kernel of advice for the economist: don’t be superficial in your thinking!”
This excerpt excellently sums up the concept implying the effects of free goods and services. Coming back to what we started with, elections and government expenditure, we see many politicians promising us free water, electricity, food, gas, etc during their campaigns. We blindly consider them as free goods and end up voting for people who are just promising us to actually spend the taxes we pay on us.
They present these promises as benevolent acts, appealing directly to voters’ desires for financial relief and security. However, the reality is far from the illusion of something for nothing. In truth, these apparent gifts are funded by taxpayer money, representing a redistribution of resources rather than philanthropy. By voting for candidates who advocate for such policies, voters are essentially endorsing the reallocation of public funds towards specific programs or subsidies.The danger lies in the potential consequences of prioritizing short-term gratification over long-term fiscal responsibility. While it may seem enticing to receive immediate benefits without apparent cost, the sustainability and fairness of such arrangements come into question.
I would like to end this article with Monica Crowley’s famous quote: “Voting is as much an emotional act as it is an intellectual one.”
References :
Arthashastra 