[Guide to the Market Economy] There’s No Such Thing as a Free Lunch!

“There Is No Such Thing as a Free Lunch” Means There Is an “Opportunity Cost”…

The proverb “trying to catch a wild rabbit and losing the tame one at home” means the same thing

The American economist Milton Friedman had a saying he liked to use as if it were a proverb: “There is no such thing as a free lunch.” The idea of a “free lunch” originated in the American West during the frontier era. Back then, some saloons reportedly offered lunch for free if customers drank more than a certain amount.

Milton Friedman’s Free Lunch

At first glance, it sounds like an enticing free service, but the reality was different. To actually get that free lunch, you had to drink a great deal, and naturally pay a lot for alcohol. In the end, the cost of the lunch was effectively included in the price of the drinks. That was the trap hidden in the “free lunch.”

There is nothing free in this world. To gain something, you must always pay a corresponding price. In economics, this is called “opportunity cost.” In the same vein, there is a Russian proverb that says, “Free cheese is found only in a mousetrap,” and in Korea we say, “Trying to catch a wild rabbit, you lose the tame one at home.” All of these expressions convey the idea of hidden costs.

Stories about things that look free but carry hidden costs can also be found in Aesop’s Fables. Let us look at the story of “The Wild Donkey and the House Donkey.” A wild donkey living in the mountains envies the house donkey very much. The wild donkey is always chased by frightening predators in the rough mountains and often goes hungry because food is scarce, while the house donkey lives comfortably in a warm, safe home, eagerly eating the food its owner gives it. To the wild donkey, the house donkey seemed perfectly happy, with no worries about food or predators.

The Wild Donkey and the House Donkey

But before long, the wild donkey witnesses a startling scene. The house donkey is struggling along with a huge load on its back. What is more, its owner is shouting at it at the top of his lungs and mercilessly whipping it. Horrified, the wild donkey backs away. It realizes that the life of the house donkey, which it had only envied, is not in fact one of easy comfort and plenty. Rather, it comes at the price of carrying heavy burdens and being lashed by its owner. Shaking its head, the wild donkey bounds back into the mountains. At that moment, perhaps it thought to itself: “There really is no free meal in this world!” The wild donkey probably never envied the house donkey again.

On the other hand, some meals are incredibly expensive. News stories often appear in the United States about people paying large sums of money to dine with celebrities. We see reports of people donating tens of millions of won to have a meal with the president, or spending hundreds of millions of won to dine with a famous entrepreneur.

The winning bid for “Coffee with Tim Cook” (2013), an auction offering the chance to have coffee with Apple CEO Tim Cook, was $610,000. In Korean currency, that comes to about 680 million won. You might well wonder why anyone would pay such an enormous amount—far more than the price of an apartment—for a single cup of coffee. But no one anywhere in the world would pay $610,000 simply to drink a cup of coffee. Those who participated in the “Coffee with Tim Cook” auction were said to be businesspeople who were already working with Apple or wanted to work with Apple. They believed that, during the time they spent having coffee with Tim Cook, they could create greater profits and better opportunities for themselves. In other words, “Coffee with Tim Cook” carried value far beyond the price of a cup of coffee. The winning bid of $610,000 reflected all of those opportunities and that value.

Why Do Speaking Fees Differ?

Another example is speaking fees. Speakers are usually paid honoraria, and it is common for those fees to differ from one speaker to another. What about the chair of the U.S. Federal Reserve (Fed), often called the president of the world economy? Surprisingly, it is said that a single public lecture can bring in more than 200 million won.

Former Fed Chair Ben Bernanke was paid $250,000 for a lecture after leaving office. That is a large sum, about 270 million won in Korean currency. And Bernanke was not the only one: his predecessor, Alan Greenspan, is also said to have received speaking fees as high as $250,000.

Why are famous figures able to command such enormous speaking fees? Because the value people gain from their lectures is just as great.

■ Please remember

The idea of a “free lunch” originated in the American West during the frontier era. At the time, some saloons reportedly offered lunch for free if customers drank more than a certain amount. At first glance, it sounded like an enticing free service, but the reality was different. To actually get that free lunch, you had to drink a lot, and naturally pay a lot for alcohol.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 세상에 공짜가 어디 있어!

Author: Sung-no Choi

Date: 2020-01-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=10&idx=22301