TISATAAFL

by John Quiggin on July 11, 2015

Another excerpt from my book-in-progress, Economics in Two Lessons. To recap, the Two Lessons are

Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.
Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

In this section, I’m working on Lesson 1, leading up to the point (my restatement of what’s usually called the First Fundamental Theorem of Welfare Economics) that an ideal competitive equilibrium is one in which there are no unexploited potential gains from technical improvements or mutually beneficial exchange. For reasons I’ve spelt out already I don’t want to use the term “Pareto-optimal” to talk about this. I also want to confine “efficient” to its normal meaning of “technically efficient” and avoid the common economist practice of extending this to cover various definitions of “market efficiency”. So, I’m talking about “free lunches” or, more formally, benefits with no opportunity cost.

In Lesson 2, I’ll be looking, among other things, at the Second Welfare Theorem, which says any outcome with no free lunches corresponds to a particular initial allocation of property rights, broadly defined to include taxation obligations and entitlements of all kinds.

Now please comment, criticise and hopefully enjoy

The acronymic adage TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). The saying was popularized, particularly in libertarian circles, by Milton Friedman’s book of that name and, a little earlier by by Robert Heinlein’s science fiction classic, The Moon is A Harsh Mistress. The acronym is derived from a marketing ploy used in 19th century saloons, whereby a ‘free’ lunch was offered to customers, on the assumption that they would wash it down with beer or other drinks. Naturally, the cost of the lunch was incorporated in the price of the drinks.

The key idea may therefore be restated in terms of the broader point that it is opportunity cost, rather than just monetary cost, that matters when making economic decisions. Although there is no explicit charge for the lunch, patrons can only consume it at the opportunity cost of forgoing cheaper beer.

Libertarians commonly use the TANSTAAFL adage to point out that services provided ‘free’ by governments will, in general, have an opportunity cost. ‘Free’ provision of some service must be funded either by higher taxes or by reductions in other areas of public expenditure. The more general point, that it’s necessary to look at the full opportunity cost of any good or service, and not just the immediate price, is yet another version of Lesson 1.

But there is a contradiction here. Most economists think that improved economic policy could yield better outcomes for everyone, even though they may disagree about which policies would yield this result. Libertarians, who extol the benefits of rolling back the state and giving markets free rein, are no exception to this rule. The same is true of technological advances that allow us to do more with less, for example, by producing goods and services with smaller inputs of labor, energy and capital.

A free lunch is ‘something for nothing’, that is a benefit obtained with no opportunity cost. The TANSTAAFL adage embodies an important truth applicable to many apparent ‘free lunches’, in which the true opportunity cost is carefully hidden.

If TANSTAAFL were literally true, however, humanity could never have risen above a subsistence level of existence. 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.

TANSTAAFL holds if and only if there are no free lunches left on the table, which in turn will only happen if all options for technological progress have been exhausted and, in addition, the economic system is functioning perfectly1. So, if outcomes can be improved for everyone, the correct statement is TISATAAFL, that is, There Is Such A Thing As A Free Lunch’.

Economists have understood this point ever since Adam Smith wrote The Wealth of Nations, the first serious study of economic growth, in the 18th century. Even the poorest person in a modern developed economy enjoys a range of goods and services that were unavailable to our ancestors, with less effort and toil and, at least potentially, with less use of resources and damage to the environment.

The improvements in living standards generated by a modern economy are, for us, a free lunch. In fact, economics tells us about two kinds of free lunch, technological innovations and improved allocation of resources.

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.

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.

By contrast, the saloon story underlying TANSTAAFL, in which an apparent bargain turns out to be nothing of the kind, stands in stark opposition to the economic idea of exchange as a bargain in which both parties benefit. It is in line with the pre-modern view of trade as a zero-sum game, in which any gain to one part is a loss for the other.

With the correct economic analysis, the saloon story illustrates TISATAAFL. Suppose that the customer would be willing to pay the saloon’s price for the beer alone. Then the price must less than the opportunity cost of obtaining the beer some other way, for example, through home brewing. On the other hand, assuming the saloon is not operating at a loss, its price must cover the saloon’s opportunity cost of providing both the beer and the lunch. In these circumstances, compared to the situation in the absence of exchange, the lunch really is free.

Under ideal conditions, the market outcome will ensure that there are no free lunches left on the table. More precisely, there are no potential benefits that can be obtained unless an opportunity cost is borne by someone. These are the conditions of perfect competitive equilibrium, the subject of our next section.

——1 More precisely, ‘functioning perfectly, given the initial allocation of wealth’. We will look at this point later in the book.

{ 58 comments }

1

Peter T 07.11.15 at 3:05 am

“and, at least potentially, with less use of resources and damage to the environment”. I would leave this out unless you want to divert attention from your main points (and also leave much on otherwise sympathetic audience ROFL).

A unstated point is that improved material and social technologies typically make costs and benefits less calculable for the sub-units involved, so that choice of unit is crucial to the calculation. If it takes c 1000 people in various roles to achieve some productive end (say, operate a car factory) it is simply not possible to know the worth of their individual contributions with any precision. That, after all, is why it took so long to learn how to build cars, and why the skills of doing so are so hard to transfer. In other words, the more effective a society is, the more its issues are sociological and political rather than ones of accounting.

2

John Quiggin 07.11.15 at 5:39 am

Thanks for this. On the first comment, I meant to anticipate concerns that will be addressed later in the book – I might just footnote a link.

The second point is a good one: I’ll need to think how best to include it.

3

matt wilbert 07.11.15 at 5:50 am

I think this is confusing, or at least it is confusing me:

“Under ideal conditions, the market outcome will ensure that there are no free lunches left on the table. More precisely, there are no potential benefits that can be obtained unless an opportunity cost is borne by someone.”

I tend to think that there are opportunity costs to pretty much anything, so under what circumstances would there not be an opportunity cost borne by someone? I don’t see how you can participate in a market at all without bearing opportunity costs.

4

John Quiggin 07.11.15 at 6:23 am

The point of this section is that technological progress and mutually beneficial exchanges do provide ‘free lunches’, that is gains without (net) opportunity cost.

5

Peter Dorman 07.11.15 at 6:44 am

From an introductory textbook of interest, concluding a section that analyzes production possibility sets:

“It is sometimes said that the most basic lesson of economics is that there ain’t no such thing as a free lunch. Well, perhaps. But if the economy is functioning below its maximum potential, or if there are unrealized opportunities for growth, there are indeed free lunches to be had. We might even say that one of the main purposes of economics is to search out potential free lunches through improvements in efficiency and resource utilization—exactly the opposite of the familiar saying.”

6

Chris Purcell 07.11.15 at 6:47 am

The technical term for “free lunch” is arbitrage, so perhaps you want the term “arbitrage free”?

7

Peter Dorman 07.11.15 at 7:03 am

@6: Arbitrage eliminates a subset of free lunches, hardly all of them. Look at the market failure literature, also macroeconomics.

8

John Quiggin 07.11.15 at 7:13 am

@Peter Dorman Great minds think alike! I’ll be sure to mention you. As with Zombie Economics, I’ll probably have some “further reading” sections.

9

carlos jugo 07.11.15 at 7:53 am

i first read the refutation of ‘no free lunch’ in George Gilder’s Wealth and Poverty (polemic for Supply Side economics). There he wrote: ‘there is such a thing as a free lunch because there are free men’.

10

c 07.11.15 at 10:49 am

John Quiggin @8: ” ‘free lunches’, that is gains without (net) opportunity cost. “

This technical use of “free lunch” (boths Friedman’s and your reuse of the term) strays very far from the everyday meaning of the term (roughly, a lunch that A gives to B without B having to transfer any resources at all to A). Why use it at all and why make such a big point of using it? Why not briefly explain what Friedman meant, point out that he was, even in that technical sense, mistaken and then proceed to make your own arguments with more clear terminology?

I feel the same, BTW, about “moral hazard” and a few other terms.

11

derrida derider 07.11.15 at 11:41 am

Na,c, I think John’s right to follow the traditional pedagogic way of outlining the First Theorem without hammering home at that point the obvious fact that the technical conditions for it never apply in practice; that’s how the argument will develop. For a start it allows the powerful insight that it is the DEVIATIONS from those conditions that generate distribution and change.

Far from economists being obsessed with conditions when we are on the PPF (as so many naive critics of neoclassical economics presume) , it is fair to say they are obsessed with the consequences of it being inherently unattainable.

12

Michael Ossing 07.11.15 at 11:52 am

Doesn’t the cost of implementing (and upgrading) the technology, to take advantage of efficiencies, have to be passed along to the consumer at some point?

Someone has to pay for Widget v2, which works far better than v1, right? And we have v3 on the drawing boards, which we expect to be paid for. R&D never sleeps.

Great article, BTW, for someone like me who doesn’t look much past the cost of a tank of gas for the car when thinking about economics.

Cheers!

13

James O'Keefe 07.11.15 at 12:32 pm

A not insignificant amount of technological change ends up transferring costs to others either through negative externalities (pollution) or deskilling work. Even in the case of negative externalities, corporations sometimes/often will not choose to adopt a technology that reduces those externalities for bureaucratic or ideological reasons, even if the payout has a high return. Who chooses which technologies to adopt matters.

14

RJB 07.11.15 at 12:37 pm

I like this argument a lot, but I worry that many readers will find it confusing. I have found that my students frequently get confused by the term “opportunity cost”, so I use other phrases to communicate the idea. You might do better by placing even more emphasis on technology,though I know your hope is to make opportunity cost a central term, so maybe it is just a matter of setting it up a bit to lead the reader there more gently. My audience is typically Executive MBA students, so your experience may vary. But it sounds like you are hoping to influence policy makers, not just fellow academics, so maybe there’s some overlap. Sorry in advance for the length and self-promotion. Here goes:

I teach managerial reporting, which is basically economic policy writ small. One of my organizing principles is “Of course there is such a thing as a free lunch!” I make the point with the classic joke:

Two economists are walking down the street, and one asks the other, “Is that a twenty-dollar bill I see lying on the street?” The other responds: “Of course not. If it were, someone would have picked it up!” And they walk by the bill, which is promptly snatched up by the next passerby.

I tell my students: “The only reason economists can assume there is no free lunch is because they are counting on you to do your job–sniffing out every every available opportunity to improve performance.” And having read thousands of memos where executives explain how they would improve their organizations, there seems to be no shortage of such opportunities. This is why people get and hire MBAs!

I find it helpful to start by talking about individual economic agents pushing against the frontier of possible performance. “No Free Lunch” analyses work only if everyone has done this to the max, which allows the traditional equilibrium analysis that is such standard fare in economics. But for someone who is trying to improve outcomes, it is much more helpful to think about the free lunches (opportunities) that are out there for the taking.

Years ago, I would talk about opportunity costs, but I ran into two issues. The first is the one that Yoram Bauman pokes fun at in the best economics standup routine ever : if someone offers to give you a $1 snickers bar, you have a profit of a dollar because you don’t have any opportunity cost. But if someone offers you the choice between two snickers bars, your profit is 0, because you have to give up one to get the other. What are students/readers to make of that?

The main source of confusion, I think, is that the opportunity usually turns out to be some vague alternative that can only be understood or even defined in a full equilibrium analysis,and that no individual agent may actually be giving up the opportunity that supposedly generates the cost. (Note how you use opportunity costs to segue immediately to competitive equilibrium at the end of your excerpt.) Technology is more immediate and concrete, and–at least for my EMBA students–helps them understand the opportunity frontier without first having to consider the optimizing actions of everyone in the economy. YMMV for your audience.

Sometimes I get some mileage by kicking off a discussion about whether being able to download my eBook for free counts as a free lunch. If anyone is interested, here’s the title and part of the abstract:

What Counts and What Gets Counted

Management reporting systems are like power tools. They can improve performance quickly and effectively, but one careless moment can cause irreparable damage. For years, my students have been asking my permission to send this book of best practices and safety tips to colleagues, friends and family. I might try to find a publisher someday, but for now it is enough to know that somewhere, someone is using this book to prevent an embarrassing or debilitating reporting injury.

Drawing extensively from current research and classical philosophy, the book encourages both deep skepticism about performance measures and pragmatic recognition of how useful they can be. Thoughtless adherence to performance measures leads many to decry “bean counters,” and emphasize that “Not everything that counts can be counted, and not everything that can be counted counts.” Yet something gets counted whenever we need to make critical decisions throughout the workplace, politics and daily life.

15

Chris Warren 07.11.15 at 2:34 pm

So what is an example of a free lunch that is not;

a product of your own labour or,

a theft from someone else?

I can only think of random, rare, unexpected, windfall gains – but opportunity costs have no relevance here surely.

Are these the only benefits with no opportunity costs? Free gains are windfall gains.

16

Bill Benzon 07.11.15 at 4:40 pm

“If TANSTAAFL were literally true, however, humanity could never have risen above a subsistence level of existence. 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.”

John: Have you seen Robert Wright’s NonZero: The Logic of Human Destiny (2000)? It argues, in effect, that the long-term of human history has been driven by the discovery of free lunches. From the Wikipedia entry for the book:

Wright argues that as complexity in human society increases, the ability to reap “non-zero-sum gains” increases. For example, electronic communications enable trade at a global level, and allow various societies to trade in items they could not produce or obtain otherwise, resulting in benefits for everyone: new goods. Similarly, global governments allow global solutions to common problems. Were aliens to attack, or the Arctic glaciers to melt, the world would be able to use its communicative technologies to band societies together and defend itself at large. In fact, this view of the world as an organic entity itself is touched upon in the penultimate chapter of the book, and is similar to that of Gaia theory.

Of course, when societies band together to fight a common enemy, that enemy is not always an Arctic glacier, but rather, other human societies. Wright discusses this as well, arguing that war between nations often resulted in technological and cultural evolution. For example, World War II spurred the development of the Manhattan Project and, in turn, nuclear power and related research—a technology that may ultimately benefit the world at large. Further, societies with advanced governments were more likely to succeed in war, spreading government systems as a technology in and of itself.

17

reason 07.11.15 at 8:32 pm

JQ @4
” without (net) opportunity cost.”
I’m sorry John but the (net) gives the gain away.
Let us imagine that my daughter is madly in love with a tree. But that tree takes the light away that other plants need. Now I think there is a net gain in removing the tree. But my daughter is not bribable, cutting down the tree is murder. (You don’t need to be so hypothetical – think about the alledged relationship of Aboriginals to the land and the reuse of the land “more productively”.) You can’t go this way, the “net” is full of value judgements. Where is Sandwichman, I’m sure he would express this better than me.

18

reason 07.11.15 at 8:32 pm

oops
Meant “gives the GAME away”.

19

c 07.11.15 at 8:43 pm

derrida derider @11: “Na,c, I think John’s right to follow the traditional pedagogic way of outlining the First Theorem …”

I think the structure this far sounds good: describe Friedman’s “no free lunch” talk; explain what is wrong with it; proceed to formulate a more correct view.

But here are two alternative ways to go about that last step:
1. formulate a more correct view without using any lunch metaphors.
2. formulate a more correct view by means of confusing and counterintuitiive technical lunch metaphors.

Why go for 2? Economics should rid itself of its most confused metaphors, not spin them out even further.

20

reason 07.11.15 at 8:49 pm

P.S. The story with the tree and my daughter is real, but as you don’t know me or my daughter or the tree, it may as well be hypothetical.

21

Jameson Quinn 07.11.15 at 9:16 pm

Say I am chopping carrots with a dull knife. I can chop 1 carrot per minute. If I spent 5 minutes sharpening the knife, I could chop two carrots per minute.

Is there any opportunity cost to sharpening the knife? Depends how many chopped carrots I want, and when. If I want more than ten and I have no use for any of them in the next ten minutes, then sharpening the knife could be seen as a “free lunch”. But I suspect some of your readers would think about it differently; they’d say that the opportunity cost was (roughly speaking) the chance to put 5 chopped carrots into the pot a mere 5 minutes from now.

Obviously, the same principles apply to your larger point. Even the “free” lunches usually have some temporary “cost”, it’s just that after enough time has passed, they have no net cost.

….

I’d replace “at least potentially,” with “in many cases,”. You may believe the former is true but it’s distracting; the latter gets the essential point without having to argue the harder cases.

….

“To put this point the other way around, additional production entails opportunity costs only if it [was] technically efficient [to begin with].”

22

nitpicker 07.11.15 at 9:34 pm

@c
“most confused” is possible. “more correct” is not. Why not try “more nearly correct”?

23

Bruce Baugh 07.11.15 at 10:00 pm

Chris Warren: “So what is an example of a free lunch that is not; a product of your own labour or, a theft from someone else?”

Herd immunity comes immediately to mind. It’s a genuine general improvement in people’s condition, of which their own effort either in getting vaccinated or not getting vaccinated is an infinitesimal part, and that doesn’t steal anything from anyone else.

Improved access to literature, reproductions of art, and such thanks to improvements in creating, reproducing, and distributing printed material of all kinds, from Gutenberg to Goodreads and Project Gutenberg. People want to give me stuff to read and look at! And you too! And opportunities for them to do so fall out of approaches to making and selling books and stuff that weren’t set up with the idea of giving me, or you, a lot of stuff for free.

For that matter, comment threads like this one. Setting aside the noise and cruft, I get back solid information and leads on how to proceed further vastly out of proportion to the effort I put in, which isn’t substantially different than the effort I’d put into a thread about which artist drew the goofiest yet hottest Cosmic Boy. [1]

1: Mike Grell.

24

Chris Warren 07.12.15 at 2:38 am

Bruce Baugh

In cases such as vaccinations where there are external benefits, I suppose we can expand “free lunch” to mean “free benefit”. Then free riders can get their free lunch, but any consumer surplus can be viewed as “free lunch”.

25

Palindrome 07.12.15 at 2:39 am

At my academic institution, we have events every week where free food is distributed in the hopes of attracting lazy/hungry students to attend whatever lecture or seminar is going on that day. Many times, the lecture is one that I would have attended anyway, but I am more than happy to accept a free sandwich as well! Other times, an event has ended, yet leftovers remain – a truly free lunch, without even the obligation to listen to a potentially boring lecture. I think about Heinlein every time this happens and chuckle to myself.

And of course, some enterprising soul has created an app for finding free food on campuses.

26

greg 07.12.15 at 4:22 am

“Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.
Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.”

Over at Naked Capitalism, (where Yves Smith was kind enough to crosspost it,) I argue that the standard, textbook, definition of money is mistaken: My claim is that money is neither a measure or store of value, but is instead merely a measure and store of demand. It is only as demand on things of value, that money has value in itself.

http://www.nakedcapitalism.com/2015/06/the-standard-definition-of-money-is-in-error.html

Zimbabwe, for instance recently, had a lot of money, but not so much things of value that you could demand with that money.

While this claim (If it is true. I haven’t gotten any feedback from any economists,) may not alter Lesson 1 much, I believe it will seriously affect, and also provide further arguments for, your Lesson 2. The distribution of demand in an economy is not necessarily the distribution of the things that economy might need, contrary to what the standard definition at least suggests.

27

Peter T 07.12.15 at 5:32 am

Re my second point above: one succinct way to put it might be that outside commodities, most prices are not market prices. This is because first – the prices of the inputs are set sociologically (for wages this is obvious) and second because the unit being priced can be varied almost indefinitely. As an ordinary example, supermarkets set prices not on items but on the baskets of goods bought by different sets of customers.

28

John Quiggin 07.12.15 at 5:37 am

Greg @26 This might be of interest http://crookedtimber.org/2012/02/22/the-unmourned-death-of-the-double-coincidence/

To commenters in general, I’m finding all this very useful, and thinking about how to adjust my text in response. I don’t think a point by point response will be helpful, but please keep the comments coming.

29

Bruce Wilder 07.12.15 at 7:12 am

Trade-off is a related concept that may provide a useful rhetorical bridge. Trade-offs are part of our common experience, yet sometimes a technological innovation allows a escape to a new frontier, where trade-offs again take hold. New opportunities to trade, leveraging comparative advantage, similarly offer a escape from the pattern of trade-offs built into producing for one’s self.

30

c 07.12.15 at 8:31 am

nitpicker @22: I know that some champion an absolute boolean grammatic rule for ‘correct’ but doesn’t actual linguistic practice today contain two senses, one boolean and one gradational? The gradiational use could be seen as merely elliptical for “more near correct” or as a robust separate sense. Anyway, is there any real problem with such ‘more correct’ talk?

31

greg 07.12.15 at 7:07 pm

John Quiggen @28. Thanks. I read the post you referred me to. The origin of money is in debt, both in the past and now. That does come out in the comments to my post at Naked Capitalism. But that does not change my disagreement to the concluding remark you made in the post you referenced, the claim that money is a store of value. Money may be a claim on a store of value, but it is not in itself a store of value. If you take an economy, it has things of value and it produces things of value, and money is a claim on those things of value. It is a token of demand, which can be exchanged for some amount of those things of value.

What is also interesting is that, since its origin is in debt, this suggests that the holder of money is somehow ‘owed’ the real value of the things that money can demand. Inflation, then, would be seen by the holders of money as cheating them of what they are ‘owed.’ We don’t see deflation, though, as cheating the holders of real assets.

But money is not a thing of value in itself. To count money as a thing of value in itself is to exaggerate the real value in the economy, and to devalue the value of the things of real value in that economy.

Now going to check out the comments to that other post.

PS: I believe the belief that money is a store of value has seriously compromised the study of economics.

32

Chris Warren 07.12.15 at 11:56 pm

greg

I sympathise with this:

“The distribution of demand in an economy is not necessarily the distribution of the things that economy might need, contrary to what the standard definition at least suggests.”

However economists have no way of meeting “needs” unless they are expressed as “demand”.

People’s needs are only met when the economy is taxed and the funds are plowed-back as a form of public service/social welfare. This political function is a last resort after the economy has exhausted its potential w.r.t. humanity.

33

greg 07.13.15 at 1:42 am

Chris@32: “However economists have no way of meeting “needs” unless they are expressed as “demand”.”

Um. I think instead of ‘meeting needs, ‘ knowing needs’ would work better in that sentence. Given that wording, this would seem to be a problem with ‘economics,’ so far as economists now understand it. And thinking money has ‘value’ of itself, both obscures this problem, and blocks improvement.

The problem is not insurmountable. But you need some sort of unit for ‘real value’ in an economy, as distinct from the unit of ‘demand’ that a dollar represents. I believe Marx implied such a valuation in his ‘labor theory of value,’ but from what I’ve read, (purely secondary sources, I’m afraid,) I don’t think he quite understood the problem he was trying to address. In any case, I don’t think labor is the ‘value defining input’ in a modern economy. (Although we can make this interesting statement: The monetary value of the production of labor can be expected to be greater than the monetary cost of labor. This has enormous macroeconomic implications.)

I think energy is better used as the value defining input, and that all inputs to a process can be reduced to how much energy is used to produce and assemble all those inputs. (This wouldn’t account for externalized costs, but neither does an accounting using money.) Even the cost of labor can be reduced to how much energy the laborer consumes to support himself.

If you say, “Yes, but the value of energy can be, and usually is, expressed in terms of money,” I will not dispute that. The problem though, is that energy comes in two forms: potential, as in, say, barrels of oil, as measured by their energy content, and spent, as in, say, an “Ipad,” where the price mechanism can be expected to set the value at greater than the price of the energy which went into all of the factors which were consumed in producing it. We could say that the energy content of ‘X’ number of barrels of oil was consumed (that is, destroyed,) in producing the “Ipad.”

The point is that money and the price mechanism of the market cannot distinguish between the two forms of energy. It cannot distinguish between the potential energy in the barrels of oil, (tons of coal, I suppose, actually, since the things are made in China,) which is still available to help drive the economy, and the spent energy which went into the “Ipad,” and is not longer available. Understanding the definition of money as mere demand recognizes this: The price mechanism follows demand, not ‘value,’ and if the distribution of demand, of money, is distorted, these distortions will impact upon the evolution of the economy. Resources flow toward demand, toward the money, not toward those ‘needs’ which are ‘valuable’ to the economy.

And this we see.

34

Bloix 07.13.15 at 3:40 am

It’s worth noting that the 19th century saloon “free lunch” was in fact a free lunch. It was not a con or a cheat, as Heinlein believed.

How did it work? The main commodity a saloon sold was bar stools in the evening hours. It needed to have enough bar stools to accommodate the customers who wanted them at the end of the work day. This left a roomful of empty stools from opening to evening.

Suppose a saloon-keeper could sell a glass of beer for six times what he paid for it by the barrel. The beer sold in the evening had to pay the overhead and profit. He didn’t expect the lunch trade to pay the rent. As long as he sold enough beer to pay the wholesale price of the beer and free food and a bit more, he was satisfied. And so the lunch was genuinely free.

He could of course have slashed his lunch-time beer prices, charged for lunch, and accomplished the same thing in terms of revenue. But that would have led to public drunkenness and municipal laws barring day time hours for saloons. Much better to offer some decent food to workingmen who would happily pay the going rate for a couple of glasses of relatively low-alcohol beer before going back to another six our eight hours of work.

In addition, in bad times saloon owners sometimes were genuine providers of charitable services. As Wikipedia explains:

A number of writers, however, suggest that the free lunch actually performed a social relief function. Reformer William T. Stead commented that in winter in 1894 the suffering of the poor in need of food:

“would have been very much greater had it not been for the help given by the labor unions to their members and for an agency which, without pretending to be of much account from a charitable point of view, nevertheless fed more hungry people in Chicago than all the other agencies, religious, charitable, and municipal, put together. I refer to the Free Lunch of the saloons. There are from six to seven thousand saloons in Chicago. In one half of these a free lunch is provided every day of the week.”

[T]he saloon keepers fed 60,000 people a day … a contribution of about $18,000 a week toward the relief of the destitute in Chicago.

https://en.wikipedia.org/wiki/Free_lunch

35

Peter T 07.13.15 at 9:07 am

The saloon free lunch illustrates my second point @1. Heinlein (or other believers in “no free lunch”) think that saloons are selling units of beer one by one, priced according to the market. Saloon owners know they are selling a number of hours of saloon time (fixed by law and custom), with the main inputs (beer and staff costs) priced by contract, law and custom. Their issue is not matching supply to meet demand, but raising demand to cover fixed costs (with anything above being a freebie). Pretty much true of any modern business.

36

Phil 07.13.15 at 11:36 am

Under ideal conditions, the market outcome will ensure that there are no free lunches left on the table.

B/c competition drives down the rate of profit, profit being the only ‘cost’ that can be reduced to zero? And if that’s the mechanism, is there are an political case for stopping history some time in the late 1960s, when the social democratic settlement offered to damp down competition enough to keep some of the lunches free while also controlling their distribution? Are Friedman and his followers asking for two things that actually undermine each other – the free and innovative development of human society (hurrah!) and free competition over the ever-dwindling margin of profit? Is a perfect market like the pavement that the economist never looks down at, because if there was any money there somebody would have picked it up already? Are there no free lunches because somebody’s already eaten them?

Sorry if this is economically illiterate, and/or sounds like the free-associative ravings of somebody who read a bit of Marx at secondary school and then gave up. (Actually I read a bit of Marx while I was doing my MA, and then gave up.)

37

nb 07.13.15 at 12:23 pm

It’s not quite right to say that “Technological innovations are the most obvious kind of free lunch”, is it? Such innovation itself takes investment of resources in R&D, commercialization of new technologies etc, as the endogenous growth literature argues. There’s likely too little such investment because of the public good characteristics of new knowledge.

When you introduced this project I (maybe mistakenly) thought your intention might be a critique of welfare economics, similar to your attack on zombie macroeconomics. It seems to be emerging more as an interesting restatement than a critique, which is fine too. If you’ve not already seen it, you might find useful Massimo Florio’s recent book “Applied Welfare Economics”.

38

RJB 07.13.15 at 9:23 pm

Bliox and Peter T’s point about fixed costs is a great example of why I prefer to talk about opportunities, before (and often simply instead of) opportunity costs. People pretty readily understand the idea of unused capacity–whether it’s a saloon stool or an MRI machine, if you’ve paid for it already and it’s just an opportunity sitting there, finding a way to use it is the quintessential free lunch.

As a second step, you can point out that the opportunity cost is 0 because you don’t have an alternative use, but step one is to realize the opportunity itself. If you then want to delve into how things play out in some equilibrium setting, with competitive prices, firms with multiple opportunities for their capacity, and so on, you have set the problem up.

But then you run into the problem that equilibrium models with fixed costs are really problematic! There are often no stable stationary equilibria, or there are many, which brings out the next problem with the whole ‘no free lunch’ approach. Do you really want to say there’s no free lunch when there are two equilibria, one which strictly pareto dominates the other? Sure, no one can deviate unilaterally and do better (so no free lunch), but policy or collective action can make everyone better off. Free lunch after all?

39

js. 07.14.15 at 3:07 am

To put this point the other way around, additional production entails opportunity costs only if it is technically efficient.

Do you mean technically inefficient or am I completely misreading this? Or is the idea that production is technically efficient prior to the additional bit? (Sorry about going all copy editor on you; I just don’t understand what’s being said.)

40

js. 07.14.15 at 3:29 am

And of course, some enterprising soul has created an app for finding free food on campuses.

Some ten-ish years ago, there was a website devoted to cataloging open bars in NYC every night. And seriously, people are obsessed with free lunches for some reason, but I’m thinking we should be talking about open bars a lot more. There exist, and they are great!

41

Bruce Wilder 07.14.15 at 4:05 pm

A family I know likes to tell a story about the family matriarch, who passed away recently (and has also been the subject of a major motion picture, as we like to say in Hollywood). I have forgotten the details of the problem that the matriarch wished the family to cooperate in solving — something to do, maybe, with the immigration problems of a family housekeeper. Anyway, she called the family together — four grown children, spouses and significant others, grandchildren — and carefully explained the nature of the problem. When she was satisfied everyone understood the nature of the problem, she paused for dramatic effect, and to signal that she was about to outline her proposed solution, in which family members would be expected to cooperate. She began: “First, we need to make up a true story . . . “

42

bianca steele 07.14.15 at 4:51 pm

There used to be a poster of fish poised to eat one another, captioned “There’s no such thing as a free lunch,” but I can’t find it on the Internet. It never made sense anyway. It could just as well have been titled “Carpe diem.” Or from the big fish’s perspective, let your lunch do some of the work for you.”

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Bruce Wilder 07.14.15 at 5:23 pm

The insight that greg seems to me to be edging toward is that money is a fiction. The whole money economy is a web of fictions. Not falsities, necessarily, but made-up “true stories” competing for our cooperation. Not an original idea on my part, certainly — see the Nietzsche thread. Or, consider this TED talk:
http://ideas.ted.com/why-humans-run-the-world/

Lesson 1, as proposed by Hazlitt (and Bastiat and Mises and Friedman), is such a made-up “true story” that tries to make sense of the world, of the seen and unseen system that we seem to be embedded in. Lesson 1 itself promises to both make sense of common experience, and to refute common illusions, to reveal the system and the true consequences of action and reaction in that system.

Lesson 1 embodies an interesting epistemic claim: that things are so simple that their essential nature can be taught in one lesson, and that this simplicity is hidden from us, by a fog of complexity and delusive common sense.

Lesson 2, as the antithesis of Lesson 1 (leading presumably to synthesis), must make a contrary to Lesson 1 in some way, but what way?

One foundational “truth” of economics claimed by market fundamentalists is that the scarcity of resources implies that there are always trade-offs, and hence opportunity costs, pertaining to any choice. The particular formula for this claim that you chose to challenge was “There is no such thing as a free lunch”. This particular formulation of the general claim that resources are scarce leads with an aggressive variation on the epistemic claim: the insight that resources are scare is a stick with a pointy end, and the pointy end is to be useful in penetrating illusion and fraud.

It is isn’t enough that the market fundamentalist would beat us with the stick, insisting that the bar must use resources to provide a lunch. (duh) The market fundamentalist must go further and use the pointy end of the stick to puncture the advertising claim that the lunch is “free”.

The advertising claim is that patrons, who buy a beer, are not charged for partaking in the lunch — it is a superficially true description of the offer made to potential customers by the bar.

Market fundamentalists seem to regard refuting the claim of a “free lunch” as somehow a stronger or more meaningful form of the general claim that resources are scarce. It is important somehow — maybe in a way Nietzsche could explain? — that the insight of market fundamentalism be instrumental in penetrating a fraud. The market fundamentalist story must produce a story not just obviously true (resources are used to produce the lunch, whether a price is attached to the distribution of the lunch or not), but superior to the fiction (“free lunch”) proposed in advertising by the bar.

My own view is that the confident assertion, “There is no such thing as a free lunch” is a kind of magician’s trick to misdirect attention. The important thing to note is that there is no market, so a narrative analysis built up from a model of a market economy is irrelevant at best. A bar that tries to draw in customers by offering a free lunch is organized economically around some set of principles and constraints strange to the model of an auction, strange to a world where allocational efficiency dominates and the law of diminishing returns rules in detail. Best to stop there in presenting an antithesis to market fundamentalism. Let the market fundamentalist explain why such frauds are such commonplace features of the actual manifestation of his pure and precious “market economy”.

44

greg 07.14.15 at 11:06 pm

If the definition of ‘money’ is suspect, then so are an undetermined number of economic
‘truths.’

45

Peter T 07.14.15 at 11:27 pm

The definition of money is not so much suspect as contested. Classical economics is perhaps the apotheosis of the classical liberal ambition to take the politics out of politics – to have social outcomes come down to “objective” reasons, dispassionate argument and the firmly established laws of nature. Not an ignoble ambition, but that this is not possible forces a retreat into abstraction (or outright fiction). Money evolves from debt, is a form of generalised debt, and the contest is over whose debts shall be admitted as money, on what terms. When the monetarists were insisting that money was a real thing they tried to catalogue it with precision. Starting with M1 (cash) and going on from there. They gave up at M17.

46

John Quiggin 07.15.15 at 12:11 am

js @39 If production is technically inefficient, then we can produce more, with no additional input, by adopting more efficient methods.

Don’t apologize for misunderstanding, or for proposing copy edits. The whole point of the exercise is to find points where the draft is either unclear or wrong.

47

js. 07.15.15 at 1:34 am

If production is technically inefficient, then we can produce more, with no additional input, by adopting more efficient methods.

Yes. This makes sense, and this is what I thought you were intending to say. I just wasn’t getting that from the wording in the OP because I was reading this: “additional production entails opportunity costs only if it is technically efficient”, with the stress on “additional”. That is, I take it what you’re saying is: if production is (already) technically efficient, then additional production entails opportunity costs. But the way the sentence is written, it leaves open the possibility that production is (beforehand) not technically efficient, which makes it (the sentence) slightly confusing. (Definitely into copy editor mode here. In any case, content-wise, I think this is great.)

48

greg 07.15.15 at 11:52 am

Peter T @45:

OK. Money is a ‘thing,’ and it has ‘properties.’ I think economists’ understanding of that ‘thing’ is defective. Because economists’ understanding of that ‘thing’ is defective, theory based on that defective understanding is almost certainly also defective. Defective theory will be erratic at modeling real phenomena, in particular, at modeling causal relationships in real phenomena.

If a ‘definition’ of a thing is suspect, or contested, it is the understanding of that thing that is suspect, or contested, not the real nature of that thing itself.

This is the very real distinction between the idea of a thing, in this case money, and the thing itself. Our idea of a thing, an image of the thing, can only approximately model the thing itself. But if our idea of that thing is a poor one, our attempts to extend that idea and to try and represent a larger reality in part based on that idea, will also be poor.

So, yes, I think that ‘economics’ is a ‘fact of nature,’ like physics, but economists’ understanding of that ‘fact of nature’ is flawed at its foundation. And this is the reason there is so much in its theory that is contested. That so much of it is contested, and that so much remains unexplained, especially after so much effort, are in themselves evidence of serious defects in the theory.

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Bruce Wilder 07.15.15 at 5:27 pm

greg @ 48: This is the very real distinction between the idea of a thing, in this case money, and the thing itself.

Except in this case, the case of money, the thing-itself *is* the idea of the thing. That’s what I meant when I claimed above that money is a fiction, or rather a set of fictions. The institutional economy creates a kind of virtual reality, and we are led to social cooperation by joining in social consensus in manipulating the apparent levers of that virtual reality and accepting, more or less, the scorekeeping.

So, money is an idea of money. There’s no thing with an existence apart from the idea of the thing. (Well, unless, of course, your story about money is that it is at some base level, a thing apart from the idea of the thing, e.g. gold. I’m being parenthetically sarcastic.) And, telling conflicting stories is part of the political contest over the governance of the economy.

50

Bruce Wilder 07.15.15 at 5:37 pm

Also, there’s no single, authoritative and undisputed dogma with a claim to be economics. Economics is a discipline, a traditional collection of methods as well as related, but disputed doctrines.

If you are completely outside economics and economics training, you may be inclined to dump the whole thing in the rubbish bin, but those of us mired in economics by education, training or experience, even if critics, are condemned to struggle with it: whether the thinker is to be master of the thought, or the system of thought is to master the thinker.

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Bruce Wilder 07.15.15 at 7:54 pm

I keep coming back to this thread and worrying over the argument, because I think what Quiggin is trying to do could be important. Hazlitt’s little pamphlet is an example of how a system of thought can master the thinker.

I don’t believe that arguments should be treated as purely logical proofs. The roots of a persuasive argument are better understood as psychological, and even the form of an argument is better understood as an hypnotic trance induction than as a theorem. Logic comes into it at all, only because apparently valid logic is experienced as psychologically compelling, so even an opponent may be forced to yield, on the one hand, and, on the other hand, because the mechanics of any system, even human psychology, follows its own logic we can trace the compulsion of logic back to the acceptance of assumptions, which may be brought into question in ways that can free us from compulsion.

Though Hazlitt relied for inspiration on more elaborate arguments by Mises and others, as well as on the literary example of Bastiat and others, the appeal of his One Lesson must surely be related to how well it fits the contours and needs of reactionary prejudice, including accommodation for reactionary prejudice’s self-contradictory impulses. There’s a strong element of Doctor Pangloss implicitly present: that the World Extant is very nearly the Best of All Possible Worlds, and any meddling with the System of the World as it is, is likely to have bad, untoward (and “unintended” by meddling do-gooders) consequences. Still, this is a dark, dionysian Pangloss, who sees the rust consuming our Age of Iron, and draws strength from cynical penetration of the illusions that comfort others. It is that dark cynicism and smug confidence, I think, that is fed by “There is no such thing as a free lunch.”

As ought to be clear from an earlier comment, I appreciate the irony of juxtaposing “There Ain’t No Such Thing As A Free Lunch” with “There Is Such A Thing As A Free Lunch” asking, with logical and apollonian optimism, how else could there be progress?

I am not satisfied, though, that the argument — or the part related in the OP — lands a punch.

Part of my unease is that no one is going to be surprised to learn that the world is imperfect. Market fundamentalism, though it may make use of a Platonic Idea as its theory, is not so naive, and recasting it as if it were, isn’t refuting it.

“There Ain’t No Such Thing As A Free Lunch” is a psychologically aggressive pose — a way of restating an anodyne thesis as if it were a revelation, a dispelling of illusion. But, the fallback is simply the anodyne thesis that whatever we do, uses resources, as matt wilbert observed. The objections raised by c, Chris Warren and others follow.

The analogy between the “free lunch” offered by a saloon and technological progress or the gains from increased specialization and trade isn’t strong enough or sharply drawn enough to carry the initial force of ironical juxtaposition home. The second and third to the last paragraphs of the OP wave over too many links in the logic chain.

Several commenters have offered explanations for why saloons might offer a free lunch. I am not sure it would help to endorse any one of them, but they do raise the question of whether you intend to make an empirical question out of whether the glass is half-full or half-empty. The imperfection of the world is not in dispute between you and Hazlitt. What one makes of the deviations or discrepancies between Ideal and Real ought to amount to more than whether one takes an optimistic or pessimistic view of shortcomings. Is the reader really supposed to imagine that the saloon-keeper offering a free lunch is an entrepreneur in the process of innovation as opposed to a hustler hoping to warm his bar stools and fill his coffers?

I understand that you want to keep the idea simple, and that it is a struggle to avoid extraneous discursions. Ultimately, I imagine that you want to keep the clarity of contrast between price=opportunity cost and price≠opportunity cost, but I’m not sure that it can be as clear a contrast as you would like, as long it remains ambiguous whether price, right or wrong, can ever be enough.

52

greg 07.15.15 at 9:39 pm

Bruce@49

If the idea of the thing is the thing, then the thing must act according to our idea of the thing. But money does not. Money does not act according to our idea of money. Money acts according to its own principles, and we have to adjust our idea of money to understand those principles. (Or, perhaps we can claim that we don’t understand our own idea of money. But- the idea is the expression of our understanding.)

If money was the idea of the thing, it would act according to the idea of the thing, and we would understand how it acts. But we don’t. Or do you claim we do?

Everybody has a different idea of money. Are all ideas equally valid? Are all ideas of money equally useful for basing an explanation of the dynamics of money in an economy, and how those dynamics affect the evolution of that economy?

Or are some ideas better than others? And is there some ‘best’ idea, or, at least some limited set of ‘best’ ideas, of money, that if we improve our understanding of this idea, or these ideas, if our understanding approaches this best idea, or these best ideas, we have a better chance of improving our understanding of economics?

And we may reiterate these arguments with ‘economics’ itself.

Everybody, and every economist, has a different idea of economics. But that is because everybody, and every economist, has taken a unique path through the many understandings of economics. (And some of these understandings may be incomplete or in error. If so, there will be conflicts.) Each economist’s understanding of economics is path dependent. But does this imply that the whole of economics, that the whole of the understanding of society offered by economics, the truth itself offered by economics, is dependent on the path one pursues through the field? Or does there exist some thing, some ‘economics,’ of which any of us only has an incomplete, and yes, likely distorted idea?

Of course, it is almost a tautology that each of our understandings is dependent on our path, and the peculiar evidences offered by that path. But does this imply that we should be satisfied with the limits imposed by that path and its understandings? Or should we ever seek to expand those limits?

This is, of course, a particular instance of the larger thought: Is the reality of ‘Truth’ dependent on our path? Or is it merely our idea of Truth, that is dependent on our path?

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Bruce Wilder 07.15.15 at 11:13 pm

If the idea of the thing is the thing, then the thing must act according to our idea of the thing. But . . . Money does not act according to our idea of money. Money acts according to its own principles, and we have to adjust our idea of money to understand those principles. (Or, perhaps we can claim that we don’t understand our own idea of money. But- the idea is the expression of our understanding

Money doesn’t act. We act. Money is just a convention that allows us to coordinate our actions. In that way, it is somewhat like language, and like a language may evolve through interactions among people and peoples. The English Language doesn’t speak or write; it does not articulate its own thoughts. Still, we adjust our ideas of the language to accommodate our experience of it; no one defines a word alone. I can write this comment, but I can control how you will understand it only very imperfectly, if at all. And, people innovate, inventing new words, phrases, accents . . . even grammars.

If anything, Money is more under deliberate control than language, because there are institutions to deliberately regulate money and credit, and the evolving ideas of economists, among others, feed into the design and administration of these institutions. The nature of money has changed radically several times in modern history. The industrializing world has been on and off the gold standard, on and off bi-metallism, invented the Central Bank and the national debt, created the Euro and so on. The U.S. has had several radically different monetary regimes — there’s a theory of American political anacyclosis that proposes a coincidence between political regime and monetary regime, and marks off the inflection points every 18, 36, 72 years, like ticks on a measuring stick. In no case that I know of, did Money ever have its own Idea of Itself, nor did it (re-)invent Itself.

Most of us just use money to get along about our daily lives. We have no experience of administering money as an institution and are likely to be suspicious of those who do. An institution would not be an effective institution if most people questioned it constantly; you have to accept it as a given, accept its rules, so that you can get on with using money as a tool, something you can use to manipulate your world and be regulated by, but not something you can manipulate.

The integrity of the institution will be undermined by the gradual increase in the number of people, who learn to manipulate the institution. This is in the nature of institutions in general, that strategic play within the institution’s bounds and according to the rules tends to evolve into changing the rules and the norms that make the rules work predictably to constrain or channel behavior. And, so it is with money and monetary institutions: a political anacyclosis and evolution takes place, and the institutions have to be re-invented and re-instituted in revolution or reform, periodically.

As for the academic or intellectual discipline of economics, many policy economists are engaged in putting on a clown show for the rubes. This is human nature and part of politics. The kind of economics that is used to generate political rhetoric to motivate or legitimize policy is not necessarily identical with more technical idealistic sorts of inquiry, but not always neatly separated either. Some of the smartest economists in the business do this clown show work, because it can pay really well and they do not like to concede their reputational places to men, with poorer credentials and lesser talents, who can and will do the same bad job, given half a chance. Greg Mankiw never got over the prominence accorded to Arthur Laffer. Larry Summers is a slut; he plays the whore because there are those, who will willingly play the John, and hand him millions. Milton Friedman, who surely knew better, loved talking to conventions of goldbugs, because they would applaud him, not because they understood any of his ideas.

The actual work of instituting and administering Money in whatever form never takes place very far from the clown show, though sometimes the serious thinking may be quite isolated from the thinking that feeds the clown show. (And, sometimes not so isolated.) Sometimes, it depends on whether political necessity comes somewhat randomly to think it can make use of technical expertise. That’s in the nature of being subject to political contest.

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William Berry 07.16.15 at 8:43 pm

“I don’t believe that arguments should be treated as purely logical proofs. The roots of a persuasive argument are better understood as psychological, and even the form of an argument is better understood as an hypnotic trance induction than as a theorem. Logic comes into it at all, only because apparently valid logic is experienced as psychologically compelling, so even an opponent may be forced to yield, on the one hand, and, on the other hand, because the mechanics of any system, even human psychology, follows its own logic we can trace the compulsion of logic back to the acceptance of assumptions, which may be brought into question in ways that can free us from compulsion.”

Bruce the Dour FTW.

55

greg 07.17.15 at 1:14 am

Bruce@53: The integrity of the institution will be undermined by the gradual increase in the number of people, who learn to manipulate the institution. This is in the nature of institutions in general, that strategic play within the institution’s bounds and according to the rules tends to evolve into changing the rules and the norms that make the rules work predictably to constrain or channel behavior. And, so it is with money and monetary institutions: a political anacyclosis and evolution takes place, and the institutions have to be re-invented and re-instituted in revolution or reform, periodically.

Ah, yes, the eventual evolution of institutions, (and empires,) into ineffectualness.

One thing I think happens is that once an institution secures its place, ability to effectively manipulate the external environment the institution finds itself in becomes ever more irrelevant to the increasingly competitive internal tournament for advancement to leadership that characterizes every institution. The winners are those most schooled in , capable of, and desirous of, manipulating the interior conditions of the institution, but, because of the extreme demands and efforts required for winning that tournament, necessarily among the least schooled in the effective operation of that institution in its environment. This ignorance is twofold: Ignorance of the mechanisms of operation of the institution in its environment, (although these mechanisms may by this time have also been compromised, perhaps because of the costs imposed on the institution by the tournament itself, ) and ignorance of the character of that environment.

Besides ignorance, the winning of the internal tournament may also require a different set of capabilities than are needed to effectively operate the institution.

And also, of course, a different set of values.

Hmm. There also seems to be a tendency for institutions to fracture horizontally.
And vertically, and thus to fragment. One really has to respect the Catholic Church, just for being able to hold itself together for so long. Some sort of record. Anyway…

As to the notion of money, while I have prepared refutation, because of its- nature I am not prepared to share it at this time. However, I will refer you to my post at Naked
Capitalism, where I presented an alternative to the standard textbook definition.

http://www.nakedcapitalism.com/2015/06/the-standard-definition-of-money-is-in-error.html

Of course, if money is a mere idea, it would seem the ‘standard’ definition is, by definition, correct, and cannot be disputed.

Some of the comments, where the origins of money as debt are also discussed, are also important.

Below I will present a (probably incomplete) list of some of the things that money does, or seems to do, or least encourages and enables its users to do, which seem largely independent of any notion of money as just the ‘idea itself’, and so more easily regarded, and I think more usefully regarded, as characteristic of the idea of money as a thing in itself.

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Bruce Wilder 07.17.15 at 1:47 am

greg: Of course, if money is a mere idea, it would seem the ‘standard’ definition is, by definition, correct, and cannot be disputed.

I do not see how that follows from money as an idea, at all, and I did not say “mere” — I said, “convention”.

I think seeing money as what money allows people to do — as you put it, money as demand, is a useful way to think about money. And, thinking about money — changing the idea of money — may facilitate useful reform of the institutions of money.

Cheers.

57

greg 07.17.15 at 1:53 am

A probably incomplete list of the things I think money does in and to an economy that are more easily understood if we think of money as a thing in itself, and not as merely an idea shared by the participants in that economy. (It is, of course, not necessary to grant money itself animate properties. Well, I don’t think so. Inanimate objects also have properties, and resultant behaviors.)

Money enables.
Money connects.
Money concentrates.
Money expands its influence.
Money attracts.
Money divides.
Money favors consumption over production.
Money dilutes real value.
Money favors itself.

The cautious might want to rephrase these actions with the mitigating phrase “tends to,” as in: Money “tends to” enable, etc. Globally, a tendency will have consequences. There also seem to be other derived actions, which I am not including here.

JOHN QUIGGIN: Hi. I do think this discussion I’m having with Bruce bears on the original post. Or, well , maybe at least Lesson 2.. If you think it a distraction, I apologize. But I do hope you and some of your readers at least find it interesting. Thanks.

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greg 07.17.15 at 2:53 am

Bruce@56: I do not see how that follows from money as an idea, at all, and I did not say “mere” — I said, “convention”.

Ah, I may have overstated the matter, there. OK. But. I think the problem with money being considered as a “convention,” as you say, is that it is at least more difficult to argue any new definition of a “convention” might be an ‘improvement.’ There doesn’t seem to me, at least, any ‘preferred direction’ to argue for in a debate about a “convention.” What more can money as convention tell us? Your thoughts?

But if instead we consider money as a thing in itself, whose properties, which may be poorly understood, and some of which properties may operate independently of ‘convention,’ I think we are in a better position to improve our understanding. Of course, money may indeed bejust convention. The idea of money as a thing in itself may be mistaken. In many respects, especially locally, money seems to operate as “just” convention, and to consider it a thing in itself mere philosophical digression; an appeal to ‘existence’ in some ‘Platonic’ universe.

But I think money is more than shared idea. Indeed, the fact that locally money may operate purely as convention I would consider an important property of money as the thing in itself. But just that.

Well, on further thought, convention does seem to enable money’s activity globally, also. But convention doesn’t describe the distortions and forces I observe.

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