Revealing the Reality: There are Free Lunches Everywhere
Free Lunch vs. Production Possibility Frontier & Inflation.
In economics there is a cliche, "there is no such thing as a free lunch" The term means the loss of potential gain from other possible alternatives when one specific alternative is chosen and this is called the opportunity cost.
For example, if an individual chooses to spend their income on going to the movies, it is a sacrifice of spending on other things – or reduced savings. Though at the societal level, the concept of "no free lunch" applies only when all resources are fully and appropriately utilised. The issue with the current economic paradigm is it treats money as a scarce resource and doesn’t focus on the real resources. Another example is if all the construction workers in our labour market were working on private projects, and as a community, we needed to build more hospitals, the opportunity cost of using construction workers on private projects is fewer hospitals.
In Australia, we have approximately 8% of the working-age population looking for paid work or more paid hours to work. That is hardly an efficient use of willing and available labour resources. We also know from the National Australia Bank business surveys that spare business capacity sits between 20 & 30 per cent. The opportunity costs of unproductive assets are huge - Lost income, precarious work and the social ills unemployment and poverty bring forth.
Today technical advances, computing power, and machinery in all industries as vastly increased our society's productivity compared to 50 or even 100 years ago. Today, we can produce much more at much less cost. This is known as the production possibility frontier and every time we make a productivity advancement through a technological breakthrough, we have a free lunch. It means we are using less of our labour to make more stuff.
So when a famed Australian economic journalist writes "… there being no free lunches" they are mistaken. They are referring specifically to the concept of needing to ensure we balance budgets and adhere to traditional tax and spending rules. Individually, if you choose one activity, you are foregoing the opportunity to do another. However, at the macro-level or societal level, the government does not face a financial constraint; it faces opportunity costs as a result of what we choose to do with our collective labour power.
That same journalist writes:
"Who said the shortfall between what a government spends and what it raises in taxes must be covered by borrowing from the public? That's just a rule someone made up."
Thankfully, this journalist says there is a lot of truth to MMT. In my opinion, more than he cares to admit. There is more to MMT than governments issuing currency. The journalist describes inflation as the risk of MMT. The funny thing is MMT also describes inflation as the risk. In case you haven't figured it out yet, the journalist is Ross Gittins and he strongly suggests that inflation is the "… pragmatic reason most economists disapprove of MMT".
So, it becomes a question of what do we mean by inflation? The definition used by the Gittins is reasonable. "Inflation is caused when the demand for real (that is, tangible) resources runs ahead of the supply of real resources, thereby causing prices to rise." How this political and economic journalist arrives at the cause of inflation is questionable.
Gittins writes:
"So, even though people spending the money you've created will add to the demand for real resources, this won't cause inflation provided you do it when demand is weak. "
Gittins is mistaken. When we have idle and unused resources in businesses, these are productive resources we can bring into use. According to NAB surveys, they typically operate at 70-80% capacity. The Australian workforce has 1.3 million people looking for work or more work, and we have not even touched on inefficient use of businesses and the people working in those businesses. So there are free lunches to be had.
Just because we have idle productive capacity in business, it does not necessarily mean that demand is weak. Nor does it mean when there is politically unacceptable inflation that it is driven by workers. There are many causes of inflation. It is important to remember there are also two broad classes of inflation. Demand-pull relates to workers and wages and cost-push relates to productive capacity and supply. Cost-push can be broken down into two more types. They are cost-push market power and cost-push natural disasters.
Modern money economist, Pavlina Tcherneva tweets a good account of several causes of inflation.
She also says to slay the inflation beast. By this, she means to use the most appropriate action to address the specific inflation. The best choice is highly unlikely to be fine-tuning interest rates.
All of these events, leave out one very important event and that is money creation is endogenous. That means the events within the overall system create the money. When someone takes out a loan, that creates money, when the government spends, that creates money.
It is like the weather, when it rains, it occurs naturally, and you cannot make it happen. Sure, you can start a process, just as we sometimes seed clouds with silver iodide attempting to induce rain, but the system in place determines the conclusion of that process.
We need to focus on ensuring our labour serves the interest of our communities and tackles the climate crisis challenge that lies before us. The opportunity costs of allowing idle labour and burning fossil fuels are a hotter planet and impoverished communities.
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