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Maxwell's Demon and the Frictionless Economy

November 29, 2011, 9:39 PM

The great promise of the Internet has always been the ability to create truly "frictionless" markets, where buyers and sellers, producers and consumers, are able to do business directly with one another. Fifteen years after Bill Gates first coined the term friction-free capitalism, a new generation of Internet companies are innovating to find ways of reducing friction within the Internet economy. Most famously, Facebook's Mark Zuckerberg recently outlined his vision for “frictionless sharing” for social networking users. Mobile payments provider Square has touted its system of "frictionless payments," while Task Rabbit and Zaarly are starting to gain a foothold as a way to create "frictionless labor markets." Is it possible that we are finally starting to see the appearance of the Frictionless Economy?

Back in 1996, when the Internet was just starting to burst into prominence, Bill Gates outlined his vision for "friction-free capitalism." As envisioned by people like Gates, this meant the removal of sources of friction in our economy - from burdensome regulations to imperfect information (i.e. buyers and sellers knowing different amounts about a product). Talk to any economist for more than 15 minutes, and you’ll inevitably start hearing about sources of “friction” in the economy. Sometimes, these sources of friction are so difficult to measure that many economic models just throw them out the window for the sake of simplicity. 

The latest source of “friction” in the news is imperfect labor markets, where highly skilled workers exist -- just not where you want them. Take, for example, the $200,000 per year mining jobs that are only available in Australia at a time when unemployment in the U.S. still is close to 9%. That’s where new micro-task sites like TaskRabbit, Zaarly and Coffee & Power show the greatest potential. They essentially match talent seekers and talent providers within a very specific geographic location. In a recent feature article on TaskRabbit, the Wall Street Journal highlighted a few of the amazing things that can happen when friction gets removed from the labor market – like a 27-year-old guy showing up at your doorstep within an hour with the proper equipment to fish your lost house keys out of the gutter. For its part, Zaarly claims to be processing 1,000 micro-jobs a week, at an average cost of $50 each.

This same idea of reducing friction within the economy can also apply to payments. Think about all the financial middlemen involved in our economic system, all of them gladly taking a cut for the right to handle your money, even if only instantaneously and even if only as an endless series of 1's and 0's. What if you could cut out these middlemen entirely? That's the idea behind the Square Card Case payment app, which promises to make it possible for buyers to pay sellers directly using mobile devices, without the need for a middleman like a credit card company. Square, founded by Twitter’s Jack Dorsey, has been touting “frictionless payments" through its new Square Card Case app, where you simply walk into a store and use your voice to make a payment, without the need to even pull out a physical credit card of your wallet. Yes, it's just like magic.

On one hand, the new "frictionless" economy could mean means cheaper transactions, lower unemployment rates and more perfect information for buyers and sellers. Yes, if you remove sources of friction in the economy, the potential is endless - the ability to make calls anywhere on the planet for free, the ability to receive packages overnight from anywhere on the globe, the appearance of e-storefronts offering an almost endless selection of products.

On the other hand, there's a price to be paid for all this frictionless activity. Remember Maxwell's Demon and the Second Law of Thermodynamics? Simply stated (perhaps too simply), there is always a cost to reducing the entropy of a system. As James Gleick suggests in his wonderful book The Information (see Chapter 9: "Entropy and Its Demons"), the cost might just be the price of information. There is a link between information and entropy. Maxwell's Demon requires information in order to go to work, sorting out all the buyers and sellers in a market, reducing all the entropy in the marketplace. The more frictionless things become, the more information that's required. Think about it for a moment: there has to be a cost to getting a guy to show up at your door within an hour, willing to fish your keys out of the sewer, at a price that's entirely fair and rational.

And that's where Facebook enters the picture again, with Zuckerberg's vision of "frictionless sharing." After all, the goal of Facebook's "frictionless sharing" is about users effortlessly sharing their consumption patterns with everyone around them - including brands and companies. When companies know more about your tastes in music or media or television or just about any other activity, it helps to reduce the friction within the economy. There's less waste in trying to figure out what consumers really want.

The frictionless economy needs two types of participants - individual consumers ready and willing to give up their personal information and a new generation of startups ready and willing to create new innovations that reduce the sources of friction in markets. We may never reach the goal of friction-free capitalism, but the ultimate goal is slowly starting to emerge in the distance: a perfectly competitive economy where you can get what you want, when you want it, at a price that's fair -- just as long as you're willing to give up your personal info.


Maxwell's Demon and the Fri...

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