In Free! Why $0.00 Is the Future of Business, Chris Anderson gives a decent run-down of how and why so many more products are going to be nominally free to consumers — but as editor-in-chief of Wired, I don’t think he had his article edited for content:
Milton Friedman himself reminded us time and time again that “there’s no such thing as a free lunch.“But Friedman was wrong in two ways. First, a free lunch doesn’t necessarily mean the food is being given away or that you’ll pay for it later — it could just mean someone else is picking up the tab. Second, in the digital realm, as we’ve seen, the main feedstocks of the information economy — storage, processing power, and bandwidth — are getting cheaper by the day. Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. It’s as if the restaurant suddenly didn’t have to pay any food or labor costs for that lunch.
Surely economics has something to say about that?
It does. The word is externalities, a concept that holds that money is not the only scarcity in the world. Chief among the others are your time and respect, two factors that we’ve always known about but have only recently been able to measure properly. The “attention economy” and “reputation economy” are too fuzzy to merit an academic department, but there’s something real at the heart of both. Thanks to Google, we now have a handy way to convert from reputation (PageRank) to attention (traffic) to money (ads). Anything you can consistently convert to cash is a form of currency itself, and Google plays the role of central banker for these new economies.
When Milton Friedman said that there’s no such thing as a free lunch, the whole point was that someone pays; it’s just not obvious who — and how. Obviously you can charge $0.00 for something.
Regarding externalities: “You keep using that word. I do not think it means what you think it means.” Externalities are not non-pecuniary costs or benefits; they are costs or benefits to parties outside a transaction. If your neighbor turns his garage into a nightclub and plays deafening house music all night long, he might be happy, and his paying customers might be happy, but you might be miserable. That’s the externality.