What Is Economic Cost?
To really understand what economist Milton Friedman meant by the phrase “there’s no such thing as a free lunch”, it helps to look at the idea of economic cost. This doesn’t just include the money spent on something. It also factors in what’s known as opportunity cost — the benefits you miss out on when you choose one option over another (Samuelson, 1980).
In basic terms, economic cost is the total cost of using resources to produce goods or services. That includes all the obvious direct expenses, like raw materials and wages, but also hidden or indirect costs like energy use, time, and missed opportunities.
Real-World Example of Economic Cost
Let’s say someone takes a week off work to attend a training course. They might lose out on a week's wages, say £350, and also pay £200 for the course itself. Although the course fee is a clear cost, the missed income is just as important. So the total economic cost of attending the training is £550. That’s the full picture.
This example shows why economic cost is different from just looking at the price tag. It gives a more realistic view of what something truly costs.
Economic Costs in Business
In a business context, understanding economic cost helps with smarter decision-making. Whether it's launching a new product, training staff, or investing in marketing, every decision has a cost beyond what’s on the invoice.
Take large-scale events, for instance. After Hurricane Irene, the insurance industry estimated $3 billion to $5 billion in insured losses (Dougherty, 2011). That included everything from physical damage to buildings to lost business revenue, like cancelled theatre performances and closed shops.
Another case comes from Thompson et al. (1998), who explored the impact of obesity on the US economy. They estimated it caused around $12.7 billion in damage. That total included billions in sick leave, life insurance and disability cover, as well as rising health insurance costs.
Opportunity Cost: Why It Matters
Opportunity cost is often what makes economic cost more complex, but also more useful. For example, by choosing to spend on one area, you’re giving up the chance to spend that same time, money or effort elsewhere. This is why it’s a key part of decision-making in both personal finance and business strategy.
Conway (2009) noted that constantly weighing up options and costs can feel a bit negative. But it’s part of human nature. We like to know if something is worth it. If you can identify a downside, then there’s a chance to find a solution. For example, if obesity is costing billions, then it's worth investing in prevention to reduce that cost over time.
Key Principles for Understanding Economic Cost
Frank (2010) outlines a few useful guidelines for assessing the true economic value of any choice:
Always consider opportunity cost – if a benefit is missed, that’s a cost.
Ignore sunk costs – they’ve already happened and shouldn’t affect future decisions.
Focus on relevant costs – be aware of all the factors that could influence the outcome.
The Takeaway: Nothing Is Truly Free
When Friedman said “there’s no such thing as a free lunch”, he meant that even if something seems free on the surface, someone, somewhere, is paying for it. Resources are always limited, and choices come with trade-offs.
Understanding economic cost helps you make better choices. Whether you're managing a project, running a business or simply trying to make the most of your time and money, looking beyond the surface cost gives you a clearer picture.