In above model, the innovation falls from heaven like manna. The innovation is the free lunch. One may see the tautology: If you accept the model, then there is a free lunch; and you accept the model if you see innovation as a free lunch.
One may hold that above model is incomplete. One would want to introduce a separate R&D sector, and then there will be a balancing of R&D costs and the expected increase in national income. As an economist, I’m very much in favour of developing such models. However, actually doing this only moves the question one station further, and does not answer the proper question. For, it is possible that an economy spends 99% of its resources to R&D, and still does not come up with innovations. Good ideas remain like manna from heaven.
You may hold the view that agents already expect economic growth, so that they will not regard it as a free lunch. This reminds of the attitude of some children of rich parents who expect a rich inheritance and who don’t show gratitude for their daily bread. The point to note, though, is that the concept of a free lunch is not an expectational variable, but one of circumstance. There is a free lunch or not, whatever one expects. Indeed, as another example, our wealth is a cumulation of free lunches in the past. That we don’t experience this as a free lunch anymore, is more a sign that we are spoiled, rather than a sign of our dynastic rationality.
And even if we would design a revised expectational concept of a free lunch: then perfect foresight or rational expectations are only assumptions. There is always the possibility of a surprise idea. The future is uncertain (though predictable) - even though our scientific predisposition is deterministic.
Let me rephrase the point that I want to make here. There are data (exogenes or endowments such as soil, sun, technical relations and the like), the economy depends on the use of these, and the development of the economy can be described in terms of the developments in these data. The data are for free. Ideas are part of these data, and the (major) source of uncertainty. In this terminology, there are free lunches by definition. That is the crux. When economists better deal with their definitions, we get better economics.
Conclusion
Our discussion on the consumers surplus showed that much may be a matter of words. However, using an abstract argument and a concrete small general equilibrium model, we showed that innovation and economic growth are an example of a free lunch for the whole economy. Our intention was to refute the attitude of “there aint no such thing as a free lunch”. Hopefully, this refutation creates more room for discussion of proposals concerning the present immense inefficiency on the labour market. The latter discussion is especially important, since the major proposals for solving the inefficiency concern ideas by impartial economists.
Note 1999: I was afraid that I would clash with Paul Krugman on this issue, since he has a Fortune column ‘No Free Lunch’. To my great relief, Krugman (1999:167) however writes: “And this brings us to the deepest sense in which depression economics has returned. The quitessential economic sentence is supposed to be “There is no free lunch.”; it says that there are limited resources, that to have more of one thing you must accept less of another, that there is no gain without pain. Depression economics, however, is the study of situations where there is a free lunch, if we can only figure out how to get our hands on it, because there are unemployed resources that could be put to work. In 1930 John Maynard Keynes wrote that “we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.” The true scarcity in his world - and ours - was therefor not of resources, or even of virtue, but of understanding.” Hurray!