Economics Dictionary of ArgumentsHome
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| Free lunch: In economics, "free lunch" refers to the idea that it's impossible to get something for nothing—every choice has a cost. The phrase critiques claims of costless benefits, emphasizing opportunity costs and trade-offs in resource allocation. See also Decisions, Decision-making processes, Rational Choice, Costs, Opportunity cost._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Harold Demsetz on Free Lunch - Dictionary of Arguments
Henderson I 54 Free Lunch Fallacy/DemsetzVsArrow/Demsetz/Henderson/Globerman: Risks/inventions/Arrow: Arrow(1) argued that for private enterprise to yield optimal invention, there must be "commodity-options" so that inventors can redirect risk to other people who are willing to bear it.* Arrow wrote that a commodity-option is a contract "in which buyers pay an agreed sum and sellers agree to deliver prescribed quantities of a given commodity if a certain state of nature prevails and nothing if that state of nature does not occur". Arrow argued that "the real economic system does not possess markets for commodity-options" (1962(1): 610-611). DemsetzVsArrow: Demsetz took issue, noting that commodity-options did exist. Imagine how much stronger Demsetz's empirical case would have been if he had written it in 1974, just after the Chicago Board Options Exchange had come into existence in 1973: commodity options are traded on that exchange. But Demsetz noted an important reason that they didn't exist as fully as Arrow would have liked: the cost of creating them. Free lunch/DemsetzVsArrow: „Arrow here has slipped into the fallacy of the free lunch. The word "nonoptimal" is misleading and ambiguous. Does it mean that free enterprise can be improved upon? Henderson I 55 Let me suppose that the cost of marketing commodity options exceeds the gain from adjustment to risk. This would account for their presumed absence. Can it be said that free enterprise results in a nonoptimal adjustment to risk? To make this assertion is to deny that scarcity is relevant to optimality, a strange position for an economist. In suggesting that free enterprise generates incomplete adjustments to risk, the nirvana approach, by comparing these adjustments with the ideal, is led further to equate incomplete to nonoptimal. This would be correct only if commodity-options or other ways of adjusting to risk are free. In this way, the nirvana approach relies on an implicit assumption of nonscarcity, but since risk shifting or risk reduction cannot generally be accomplished freely the demonstration of nonoptimality is false. (1969(2): 3-4) >Nirvana fallacy/Demsetz. In short, the fact that many commodity-options do not exist is, far from being a market failure, a market success. Markets weed out goods and services whose costs exceed their value. Arrow: Even if there were commodity-options, argued Arrow, the free market would still underinvest in information. Arrow gave two reasons: risk aversion and moral hazard. >Risk aversion, >Moral hazard, >Free-rider problem. DemsetzVsArrrow: Demsetz pointed out the “people could be different” fallacy in each. ((s) i.e., this a is a pure assumption and not a proof.) >Risk aversion/Demsetz, >Moral hazard/Demsetz. 1. Arrow, Kenneth (1962). Economic Welfare and the Allocation of Resources for Innovation. In The Rate and Direction of Inventive Activity: Economic and Social Factors, National Bureau Committee for Economic Research (Princeton University Press). 2. Demsetz, Harold (1969). Information and Efficiency: Another Viewpoint. Journal of Law and Economics 12, 1 (April): 1-22._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconDems I Harold Demsetz Toward a theory of property rights 1967 Henderson I David R. Henderson Steven Globerman The Essential UCLA School of Economics Vancouver: Fraser Institute. 2019 |
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