New York TIMES / February 16, 2012 / opinion Economics Made Easy: Think Friction
By BARRY SCHWARTZ >So firms compete to become more efficient, and we as consumers, along with >Bain Capital and its like, benefit from this competition. > What stands in the way of efficiency is friction. When automobile > manufacturers struggle to squeeze as many miles per gallon as possible out of > their car designs, friction is the enemy. Their aim is to design a vehicle > that uses every ounce of fuel to move the car forward. > And so it is in the world of finance. As the historian Niall Ferguson reminds > us in his book “The Ascent of Money,” hard as it is to imagine, people didn’t > always have money. The invention of money went a long way toward reducing the > friction, the inefficiency, in financial transactions. No longer did the > farmer have to bring sacks of potatoes to the marketplace to trade for eggs > and milk. Money was a medium of exchange that greatly reduced what some have > called the financial coefficient of drag. < > ... ALL these examples tell us that increased efficiency is good, and that > removing friction increases efficiency. But the financial crisis, along with > the activities of the Occupy movement and the criticism being leveled at Mr. > Romney, suggests that maybe there can be too much of a good thing. If loans > weren’t securitized, bankers might have taken the time to assess the > creditworthiness of each applicant. If homeowners had to apply for loans to > improve their houses or buy new cars, instead of writing checks against home > equity, they might have thought harder before making weighty financial > commitments. If people actually had to go into a bank and stand in line to > withdraw cash, they might spend a little less and save a little more. [???] > If credit card companies weren’t allowed to charge outrageous interest, > perhaps not everyone with a pulse would be offered credit cards. And if > people had to pay with cash, rather than plastic, they might keep their hands > in their pockets just a little bit longer. > These are all situations in which a little friction to slow us down would > have enabled both institutions and individuals to make better decisions. And > in the case of individuals, there is the added bonus that using cash more and > credit less would have made it apparent sooner just how much the “booming > ’90s” had left the middle class behind. Credit hid the ever-shrinking > purchasing power of the middle class from view. < > ... Finding the right amount of each of these things — what Aristotle called > the “mean” — is the real challenge we face, both as individuals and as a > society. In my view, the real criticism of capitalism that is implied by the > criticism of Mr. Romney and Bain is that in worshiping efficiency so > single-mindedly, it has ignored the possibility that too much efficiency — > too little friction — might be a bad thing. < An interesting analogy. But I don't understand how anyone could think that zero friction was a good idea. After all, an auto can't be driven if there's no friction between the tires and the road. That example also says that we shouldn't equate "frictionless" with efficiency. Also, it's not a "frictionless" economy that's the lodestar of capitalism. Rather, it's the lust for _profits_ even if it involves increasing friction and/or inefficiency. Another thing about capitalism: its aggressive competitive accumulation of capital prevents the attainment of any kind of "golden mean" except for short periods. It goes to the extremes -- until crisis results. -- Jim Devine / "In science one tries to tell people, in such a way as to be understood by everyone, something that no one ever knew before. But in poetry, it's the exact opposite." -- Paul Dirac _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
