Is There Such A Thing As A Free Lunch?

It seems like everyone wants stuff for free now-a-days.  Aly and I use "buy one, get one free" coupons all the time.  When I go to Costco, I like to enjoy the free samples available.  Sometimes I find myself doing or eating things that I don't like, just because they are free.

Liberals seem to want the government to provide free health care, free food, a "free" salary to the unemployed, free homes, free birth control, or even free diapers.  But is anything truly free?  There are 2 unseen problems for getting stuff for "free".

1. Nothing is free.  Everything has a cost associated to it.  Someone is always paying.  Those samples at Costco?  Someone paid a worker to produce that sample, the food itself cost something, someone paid to ship it to Costco, and Costco is paying the employee to distribute it.  Free health care?  Someone has to pay the doctor's salary, and if no one repays the doctor for his work, then it comes out of the doctor's pocket.  The doctor pays.  Free salary to the unemployed?  Where does the money come from?  It may be free to someone, but it is costly for someone else.

2. Things that come from the government, don't actually come from the government.  The government is simply an entity that survives on OUR tax dollars.  They have absolutely no income except that which is given to them from its fruitful citizens.  You may think that the government can print money, so it is free money.  Does that sound right?  If the government actually could print unlimited amounts of free money without a reciprocal affect, don't you think we would have already solved the problem of world hunger along with any other problem in our world?  The truth is, every dollar that is printed makes everyone else's dollar less valuable.  It's kind of like cutting a pizza.  If you have a 16" pizza sliced into 8 pieces but there are 12 people, does cutting the pizza more and more make the pizza bigger?

Next time you hear someone say they think health care should be free for everyone, ask yourself, "but who would pay for it?"

Creative Destruction

Creative destruction is the term economists use to describe industries that die due to better technology.  The classic example is the typewriter.  Before people used computers and after people wrote by hand, people used typewriters.  These machines were so great!  The type came out neatly, and people could write much faster with a typewriter than by hand.  Because of the wonderful invention, sellers of typewriters sprung up across the nation - creating thousands of jobs.  Then the computer came along.  Typewriter shops across the nation and world went out of business.  Thousands of jobs were lost.  People demonized the computer industry and labeled it as a job destroying industry.

Laughable, right?  Computers destroying jobs...  Believe it or not, people are making the same argument today.  Newspaper companies complain that news comes free online.  And the President of the United States demonizes ATM machines for taking the place of bank tellers.  Ignorantly he said, "there are some structural issues with our economy where a lot business have learned to become much more efficient with a lot fewer workers."
  

This argument has been made for centuries and will always be made by the people who don't understand the concept of creative destruction.  When industries are replaced by better or more efficient methods because of changing demands of the customers, the jobs seem to disappear.  The fact is though is that it is an ever-revolving cycle.  The jobs don't disappear, they change hands.  And society is better off.  Any product you can imagine probably destroyed an industry, but made the world better.

This post was inspired by George Will's blog post today.

Minimum Wage

You may have heard of supply and demand.  In the labor market, the suppliers of labor (employees) are represented by the "S" curve, and the employers (McDonalds) represent the "D" curve.  The market will naturally, via Smith's "invisible hand", determine the correct wage for the amount of labor being offered in the economy.  This wage is represented by the intersection of the S and D curves (P1 below), or when Supply = Demand.  When the government decides that this wage is not "fair", they mandate a minimum wage that employers must pay.  This sounds great, right!  Now the little guy gets more money!  Not so fast.  Lets say the equilibrium wage represented by P1 is $6.00.  When the government steps in and requires employers to pay $8 (P2), look at where P2 intersects with the supply curve and the demand curve.  Who is willing to supply labor at $8/hour?  A lot more people, right?  But how many employers demand labor at $8/hour?  Quite a bit less (Q2).  What ends up happening is employers become more efficient with the laborers they already employ.  They do this by laying some of their workers off and increasing the productivity of the workers left over, or by employing machines - which don't require wages.  The government's intent was to raise the quality of living for the equilibrium number of workers (Q1), but the effect is that people get laid off, and the people left with the jobs in the end most likely are not the people that the mandate was trying to help.  

You may be saying, "Sure, that's what the graph says, but that's not what really happens."  There are actually many example of this effect.  Walter Williams describes multiple scenarios on his blog, and here, and proves that the law of supply and demand actually does hold even in this scenario.  The law being: The higher the price of something, the less people will take of it; and the lower its price, the more people will take of it.

More from Walter Williams: First here, Second there, Third somewhere.