Tuesday, May 13, 2008

Free lunch and Freeconomics

Chris Anderson, the editor-in-chief of Wired Magazine wrote this very interesting piece based on his forthcoming book "FREE" where he argues that following the pattern of the Web that $0.00 will be the future of business. My beef with the article at the time was this section,
Milton Friedman himself reminded us time and time again that "there's no such thing as a free lunch.

"But Friedman was wrong in two ways. First, a free lunch doesn't necessarily mean the food is being given away or that you'll pay for it later — it could just mean someone else is picking up the tab. Second, in the digital realm, as we've seen, the main feedstocks of the information economy — storage, processing power, and bandwidth — are getting cheaper by the day. Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. It's as if the restaurant suddenly didn't have to pay any food or labor costs for that lunch.

Surely economics has something to say about that?

It does. The word is externalities, a concept that holds that money is not the only scarcity in the world. Chief among the others are your time and respect, two factors that we've always known about but have only recently been able to measure properly. The "attention economy" and "reputation economy" are too fuzzy to merit an academic department, but there's something real at the heart of both. [link]
In fact, the word isn't externalities. Chris is really missing the point about the phrase "there ain't no such thing as free lunch. Friedman didn't mean you won't get to have free lunch in the literal sense. What Friedman meant had more to do with opportunity costs rather than "externalities". Any economist would tell you that "cost" is simply what you have to give up to get something (reputation economy, etc. like Chris suggests) and not necessarily monetary. Even if your aunt invites you for lunch, there's still the cost of the time which you could have used to say, read something (opportunity cost) and of course your aunt, or at least someone along the line is footing the bill. So no, there ain't no such thing as a free lunch.

I've blogged about this in the past. Chris is featured this week on EconTalk with Russ Roberts in which he discusses the no free lunch concept, which Russ rebuts, quite accurately. Do listen to the podcast, it's interesting overall.

I'd be sure to pick up Chris' book when it arrives, especially since it's priced at $0.00. More on freeconomics and the economics of "free" later.

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