The Fallacy of Free Lunch is More Common than you Think

“There is no such thing as free lunch”- This adage basically validates the idea that there are no ‘free exchanges’ i.e. you can never get something for nothing. Whenever a product or service is free, it suddenly looks more appealing to us, whether it be a free coupon for a spa massage or a buy one get one free offer on our favorite packet of noodles. We might even buy more than one packet because of the attractive deal offered to us by the store because we suddenly value it more now. The government announces the construction of a community park in your locality, free for all with swings installed for children and an open gym for adults. Do you actually believe that it is free? The cost is covered by taxes, paid by the very people who will use this recreational facility. Although these might be commonly known facts, the world has its means of tricking us into schemes and hoarding practices by taking advantage of this fallacy of free lunch.


The adage, which saw its origin in the 20th century takes us back to the saloon filled streets of Milwaukee, a city in Wisconsin, USA. American saloons, high-class taverns and hotel bars in the mid-19th century used advertisements of free lunches to attract alcohol drinkers. Such establishments were swarmed with businessmen and clerks coming every day for a beer and a free sausage during lunchtime. Looks like a decent deal at the face of it, but when you look closely you realize that the saloon owners made up for the cost of the food through the money they charged for drinks. Not only this, but it is said that these owners also served highly salty dishes to make people buy more drinks reaping the profits of their ‘free lunch’ scheme.


However, by the beginning of the 20th century, the temperance movement that aimed at moderating alcohol drinking got several laws passed against this practice of ‘free lunch’ saying that it is one of the culprits of increased alcohol drinking and the saloon owners had to forgo of this much profitable deal. The well-formed statement that we hear now got much attention in the late 20th century, when sci-fi writer Robert Heinlein, stated it in his 1966 book, “The Moon Is a Harsh Mistress.” and then when economist Milton Friedman wrote his book “There’s no such thing as a Free Lunch” in 1975. But it got coined way before, through newspaper editorials wherein authors used it to refer to the idea of the absence of free exchanges in the world.


This historically used statement is still a very relevant economic concept used to explain several situations faced by us daily. Taking a very basic example, the decision of buying a pair of shoes in a buy one get one scheme also has a cost attached to it. If one pair of shoes costs the retailer Rs. 100 and he sells it for Rs. 500, he gets a profit of Rs. 400. If he runs a 50%-off sale, he sells one pair for Rs. 250 and gains a profit of Rs. 150. On the other hand, if he offers a buy-one-get-one deal, two pairs cost him Rs. 200 and he sells them for Rs. 500 he still gets a profit of Rs. 300 which is Rs.150 for one pair of shoes. Ultimately, was that extra pair of shoes free? I guess not. The increase in sales of the seller due to this scheme might even get him more overall profit than before. Many would argue here that this was a win-win situation for both parties but what they choose to ignore is the opportunity cost attached to the decision of taking home a second pair of shoes and the fact that a glorified 50% off offer nudged you into buying it.



This example may be talking about something that does not cause a large hole in your pocket but when we talk about the influence of this fallacy of free lunch on your important financial decisions, it will grab your attention. When one does not understand the cost of the opportunity he/she is forgoing in the midst of a decision-making process, or the fact that he/she may be uninformed to take that decision, it can cost him in the long run. For example, based on their future plans, it is a person’s financial decision to invest at a certain time, age, and financial asset of their choice. But when the investment is made on a less- riskier option such as a bond or a treasury bill the no-risk factor becomes the free lunch for them, whereas the opportunity cost here is the gain from a much more responsive, riskier investment. If a person chooses to start saving at a later age with limited information and a wrong investment decision, thinking that certain schemes can get you easy money, in most cases this approach hardly reaps a positive result. This also takes us to the get-rich-quick schemes which are very common nowadays. Not entering into the complicated model of Ponzi schemes, let us take lotteries as an example. In 2018 a headline of the Economic Times read that “GST from lotteries fetch nine state governments nearly Rs 3,950 crore”, and this is just the value of the tax money. People have not even spent this much money on charity, but the idea of free money is so attractive that this lottery system still functions well in nine states of India while many people do not realize the other investment opportunities that they lost in the midst of earning easy money. Such are the situations, where the fallacy of free lunch and ignorance of opportunity cost creep in and influence us.


It is human psychology in this world of scarcity to be attracted by free goods and services, While they look like gold on the surface, scratching them seldom leads to a solid gold interior. As we have established through many examples that nothing in this world comes for free, I urge you to analyze the credibility and the motive behind the deals you found attractive till yesterday. One should question the website that offers to deliver you a free iPhone 10 at your doorstep before giving them your email and home address. The world has learned how to capitalize on economic fallacies and use nudges to sell their products to the common man, but the right knowledge and the ability to question is the only thing standing between you and a transparent world.



Technical Terms-

Adage- A proverb or short statement expressing a general truth (via Oxford Dictionary)


Ponzi Schemes- Ponzi schemes are based on fraudulent investment management services—basically, investors contribute money to the "portfolio manager" who promises them a high return, and then when those investors want their money back, they are paid out with the incoming funds contributed by later investors. (via Investopedia)


Temperance Movement- The Temperance Movement is a social movement which was started to make an alcohol consumption free society during the 19th and early 20th centuries. (via Jagran Josh)


References-

http://oldmilwaukee.net/blog/?p=1187


https://www.phrases.org.uk/meanings/tanstaafl.html


https://fee.org/resources/fallacy-of-the-free-lunch/


https://www.thebalance.com/theres-no-such-thing-as-a-free-lunch-357199


https://www.investopedia.com/terms/t/tanstaafl.asp


https://www.economist.com/finance-and-economics/2017/08/24/the-free-economy-comes-at-a-cost


https://thehustle.co/are-buy-one-get-one-free-deals-worth-it/


https://www.washingtonpost.com/business/get-there/on-the-hunt-for-the-financial-free-lunch-dont/2015/10/22/921b529e-71e5-11e5-8d93-0af317ed58c9_story.html


Further Readings-

Book “There’s no such thing as a Free Lunch”- Milton Friedman


https://economictimes.indiatimes.com/news/economy/finance/gst-from-lotteries-fetch-nine-state-governments-nearly-rs-3950-crore/articleshow/64457641.cms?from=mdr


https://www.moneylife.in/article/how-to-avoid-get-rich-quick-schemes-and-scams/16522.html


https://www.encyclopedia.com/social-sciences-and-law/sociology-and-social-reform/social-reform/temperance-movements


https://www.economist.com/finance-and-economics/2017/08/24/the-free-economy-comes-at-a-cost


- Shruti Bhardwaj (shruti.bhardwaj50@gmail.com)