Economics Made Easy: Think Friction

This is article from the NYT features some pretty good economic lessons for the novice economist out there.  The focus is really on the constant pursuit of efficiency and how that pursuit can help and hurt companies, individual, and the economy in general.  


Think of friction as something that affects your pace or speed at which something moves.   To much friction you move to slow and you don't reach your destination in time.  To little friction and you move to fast possibly causing a crash.  This analogy is no different than a business or an economy.  Friction can be more or less regulation or it can be more or less efficiency.


Via the NYT piece here 

• It may seem heartless to worship efficiency at any cost, including lost jobs and decimated communities, but it is important to understand that increased efficiency is the only way a society’s standard of living will improve. If your company raises your pay without becoming more efficient, it will have to raise its prices in order to pay you. This is true of all companies. And if all companies raise their prices to allow for higher wages, you will end up just running in place, with your higher wages exactly matched by the higher prices of the things you buy. It is only if your company and others find a way to pay you more without charging more that your living standard goes up. 
• So firms compete to become more efficient, and we as consumers, along with Bain Capital and its like, benefit from this competition. 
• 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. 

 

• So whereas some efficiency is good, more efficiency may not be better. The psychologist Adam Grant and I published an article last year suggesting that the “too much of a good thing” phenomenon may be more general than commonly thought. Some choice is liberating; too much choice is paralyzing. Some motivation produces excellent performance; too much motivation leads to folding under pressure. 
• For an individual company and its shareholders, there is no such thing as too much efficiency. The price of too much efficiency is not paid by the company. It is what economists call a negative externality, paid by the people who lose their jobs and the communities that suffer from job loss. Thus, we can’t expect the free market to find the level of efficiency that keeps firms competitive, provides quality goods at affordable prices and sustains workers and their communities. If we are to find the balance, we must consider stakeholders and not just shareholders. Companies by themselves won’t do this. Sensible regulation might. 
• Life is not as predictable as driving. We don’t always know where we’re going. We’re not always in control. Black ice is everywhere. A little something to slow us down in the uncertain world we inhabit may be a lifesaver.