Frictionless Economy: Too Much of a Good Thing?

Barry Schwartz was onto something when he wrote The Paradox of Choice: Why More is Less.  Reading his insightful book before the near collapse of the global capital markets, I was struck by the ideas that resonated with my own interest in the Buddhist concept of attachment. In fact Schwartz seemed to be saying that by letting go of the  "more" in our modern consumerist society, we'd reduce the noise that short circuits our brains and make better choices. 

Well, Schwartz is at it again.

This time with the concept of the defects inherent in a hyper-liquid, frictionless economy. 

http://www.nytimes.com/2012/02/19/opinion/sunday/the-danger-of-too-much-efficiency.html?pagewanted=all.

In this recent Op-Ed column, he makes the case that the economy may well need a little friction, to prevent what he calls "frictionless" transactions from exceeding the speed of human judgment. In the first piece, the volume of choices makes us miserable by short circuiting our capacity to use good judgment.  In the second, it's the speed at which decisions come at us that gets in the way.

An unrelated piece of interesting work, "Price is a Social Thing: Towards a Material Sociology of Arbitrage" seems to portend this outcome.  In it London School of Economics Professor Daniel Beunza explores the relationship between faster transaction technology and shrinking price differentials.

www.sps.ed.ac.uk/__data/assets/pdf_file/0013/3415/arbitrage.pdf

Whenever perfectly rational people ask, "What good are derivatives anyway? Why not just restrict or even prohibit them now that we've seen what these complex financial innovations can do?" experts answer that they serve to increase market liquidity.  In other words, they reduce friction, keeping money flowing as swiftly as possible. 

We might have learned from the debacle of 2008-9 that no amount of transparency or disaggregation can make up for good old friction.  Perhaps to get back to more sustainable markets it's simply time to step on the brakes and slow down.