A fair warning to the readers – this post is going to be pretty heavy handed with metaphors. So insert the usual disclaimer here about how all metaphors are imperfect, break down when extended too far, etc.
With that out of the way, a metaphor recently occurred to me that helps highlight something that separates the thinking of Austrian economists from more mainstream textbook economic models – friction in the economy. For this post, I’m using a broad brush when talking about economic frictions, but in general, this word is often used to describe anything that impedes market activity. Transaction costs, imperfect information, or sticky prices are sometimes characterized as “frictions” that impede the market. Hence why in the model of perfect competition, there is a complete absence of economic frictions of any kind. Perfectly competitive, frictionless markets are thus held up as an ideal, and to the extent that real-work markets fall short of this ideal, markets have failed and are at least in principle open to government correction.
But important scholars in the Austrian tradition have resisted this way of thinking. F. A. Hayek, for example, wrote, “It appears to be generally held that the so-called theory of ‘perfect competition’ provides the appropriate model for judging the effectiveness of competition in real life and that, to the extent that real competition differs from that model, it is undesirable and even harmful.” Hayek, for his part, considered the theory of perfect competition to be all but useless, and “its conclusions are of little use as guides to policy.” This problem wasn’t simply limited to the model of perfect competition in Hayek’s mind. He also argued the conceptual failings of perfect competition “not only underlie the analysis of ‘perfect’ competition but are equally assumed in the discussion of the various ‘imperfect’ or ‘monopolistic’ markets,” and thus those models, too, were of little value for understanding economic activity or for crafting policy.
In one way of thinking, the kind of thinking behind the model of perfect competition, friction is something that impedes progress. But to other thinkers, the existence of these various market “imperfections” or “frictions” not only don’t hamper markets, they are crucial for markets to function. A frictionless state of affairs is thus not an ideal we should hope or strive for.
The analogy that occurred to me is as follows. Suppose you’re trying to walk from point A to point B. Luckily for you, you have found yourself on a completely frictionless surface! This is the ideal environment for reaching your goal, right? Well, no. A frictionless surface can’t generate any purchase (oblique pun only slightly intended.) No matter how hard you tried to walk, you wouldn’t be able to make any progress to your goal. In order to be able to carry yourself forward, you need friction – something to grip onto or hold, something that can be used as a means of generating movement.
A frictionless surface would be ideal in one circumstance. As long as you needed to go in a straight line, with no changes to your speed, no need to ever adjust course, continuing indefinitely, and you somehow had momentum generated for you ex nihilo, then in that specific situation, it would be ideal to be moving across a surface free of any friction. And this, Hayek argues, is more or less what the model of perfect competition assumes to be the case. It simply assumes into existence a specific state of affairs and calls that state “competition,” when in reality you need an ongoing competitive process to generate a given state of affairs.
If you have to pick your own destination, generate your own movement, speed up or slow down from time to time, and change course as the landscape around you changes, you absolutely need friction. In this understanding, friction doesn’t impede movement – it is critical to generate movement. (If I wanted to stretch this metaphor even further, I’d add another tangent about how in this way of thinking, the real impediment isn’t friction – it’s barriers. But I’ll leave that thread un-pulled for now.)
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