Fair warning to readers – this post will be quite heavy-handed with the use of metaphors. So I’m going to insert the usual disclaimer here about how all metaphors are imperfect, how they become dysfunctional if stretched too far, etc.
That being said, the following analogy has come to mind recently: Austrian economist More mainstream textbook economic models – from frictions in the economy. This post uses a broad brush when talking about economic frictions, but in general, the term often refers to anything that impedes market activity. Transaction costs, imperfect information, or persistent prices are sometimes characterized as the “friction” that impedes markets. Therefore, why is there no economic friction of any kind in a perfectly competitive model? A perfectly competitive, frictionless market is thus held up as an ideal, and unless the actual market falls short of this ideal, it is failing and, at least in principle, is subject to government redress. There is room for
However, important scholars in the Austrian tradition have resisted this idea. FA Hayekfor example, I wrote“The so-called theory of ‘perfect competition’ provides an adequate model for judging the effectiveness of competition in real life, and to the extent that actual competition differs from that model, it is undesirable and even harmful.” Hayek believed that the theory of perfect competition was of little use, stating that “its conclusions are of little use as a guide to policy.” This problem was not simply limited to the perfect competition model that Hayek had in mind. He also argues that perfect competition’s conceptual flaws “not only underlie analyzes of ‘perfect’ competition, but are similarly assumed in discussions of various ‘imperfect’ or ‘monopoly’ markets.” , argued that these models are also of little use. Value for understanding economic activity or formulating policy.
One of the ideas behind the perfect competition model is that friction impedes progress. But for other thinkers, the existence of these various market “imperfections” or “frictions” not only do not hinder the market, they are essential for the market to function. Therefore, a frictionless situation is not an ideal that we should aspire to or strive for.
The analogy I came up with is: Suppose you are trying to walk from point A to point B. Fortunately, you found yourself on a completely frictionless surface. Isn’t this the perfect environment to achieve your goals? No, no. A frictionless surface cannot generate purchase (oblique pun, only slightly intended.) No matter how hard you try to walk, you cannot make progress toward your goals. In order to move forward, we need friction, something to grab onto and hold on to, something we can use as a means of creating movement.
In some situations, a frictionless surface is ideal. As long as you need to proceed in a straight line without changing speed, you won’t need to adjust your course, it will continue indefinitely and somehow generate momentum. Former NihiroIn that particular situation, traveling on a frictionless surface is ideal. And this, Hayek argues, is more or less what the perfectly competitive model assumes. It simply allows a certain situation to exist, and calls that state “competitionIn practice, if a continuous competitive process is necessary to create a particular situation.
Friction is absolutely necessary when you need to choose your own destinations, generate your own movements, speed up or slow down from time to time, and change course as the surrounding landscape changes. In this understanding, it is important that friction creates movement, not prevents it. (If you want to extend this metaphor further, add another tangent: in this way of thinking, the real obstacle is friction, not friction. barrier. However, I’ll leave this thread unpulled for now. )
