In life and economics, a little friction can smooth things out
Published: Wednesday, May 30, 2012
Updated: Wednesday, May 30, 2012 12:05
What do college applications, financial derivatives and Kentucky fried chicken all have in common?
Friction. Or more accurately, the lack thereof, which is what makes all three so dangerous. A little friction, it turns out, can be a very useful thing.
Take applying to college. In my day, you got yourself a raccoon coat, sent out half a dozen applications and called it a day. Preparing each application was laborious; you had to send away for them, and some were dauntingly elaborate.
But today, thanks in part to innovations such as the Common Application, which makes it easy to apply to many schools at once via the Internet, students apply to lots more places. This generates a lot of needless competition and anxiety. Colleges now get 85 percent of their applications online.
The digital revolution has been the death of friction in other arenas, too. It has facilitated all sorts of financial machinations, such as the complex derivatives (bets on the price of some underlying asset) that played a role in the economic crisis of 2008. It would have been difficult for derivatives to flower in such lethal variety and profusion without networked computers. Digitization has also enabled rapid-fire trading on the stock market, and made it easier for capital to flee one part of the world for another almost instantly. Things that were once difficult have become a bit too easy.
Some people thought such innovations would reduce risk, but instead the financial world seems to have become more volatile. Need I mention the way a single European currency reduced financial friction among nations on the continent? Capital flowed all too easily to Greece, Italy and other countries now in financial trouble. Trade probably got a boost, but too often it was in just one direction: from northern countries to southern ones. A little more friction and Europe might not be in this mess.
Then there's the matter of fried chicken. Once upon a time you had to go and catch your food. Later you could buy a bird, but you still had to pluck it, butcher it, bread it, fry it and then clean up the mess. Now we just stop at a fast-food joint on the way home, our consumption lubricated all too effectively by technology and affluence. The lack of friction is helping make us fat.
Credit cards and the end of blue laws that closed most stores on Sundays have had the same friction-reducing effect. They are examples of ways that making our lives easier has also made them harder. If you had to depend on cash, a streetcar and the limited shopping hours that were available in decades past, you'd spend less.
Some thoughtful people think society actually needs to add a little strategic friction. Several economists have proposed a small tax on financial transactions; one, Edgar Feige, has even suggested an ingeniously simple version that would replace the U.S. income tax. The big impact would be on the financial doings of banks and securities traders, making the tax quite progressive.
But what's interesting here is the idea that friction can be our friend. A well-known academic article argued for a financial-transactions tax to dampen exchange-rate instability between currencies; it was called "Two Cases for Sand in the Wheels of International Finance."
Adding sand to the wheels of the college admissions frenzy might also make sense. Why not limit students to half a dozen applications each, and spare everyone some of the craziness associated with the project, now that a quarter of students submit seven or more? Or, if necessary, just require applications to be prepared by hand, like in the old days.