‘Friction-Free’ Economy Rhetoric Holds a Time Bomb

Share via

A new buzz phrase preoccupying many would-be technology visionaries and free-market economists is “the friction-free economy.” Bill Gates’ new book, “The Road Ahead,” features a chapter titled “Friction-Free Capitalism.” This new slogan was the subject of a lot of discussion at last summer’s Aspen, Colo., meeting called “Cyberspace and the American Dream,” sponsored by the Progress and Freedom Foundation, Newt Gingrich’s think tank.

What does a “friction-free” economy mean?

Imagine that it’s 2025. The world is thoroughly wired with a vast, high-capacity telecommunications network, and just about every home in America has a digital “telecosm” device. You want to watch your favorite sitcom. You don’t have to wait until it comes up in a weekly schedule, and you won’t have to get it from a TV company or even a TV network. Instead, you’ll tap into a digital feed from the sitcom producers themselves.

Say you want to buy a new refrigerator. Instead of driving to nearby stores and looking at the various models and prices or scouring newspaper ads for sales, you’ll just whip up a special little software program and send it off to scour the global Net for refrigerators that match your needs and price range. When it finds sources that match your requirements, it’ll let you know where they are. You might wind up buying a refrigerator directly from a manufacturer in northwest China.


The idea of a friction-free economy, then, is one cleared of middlemen. Academics, in their typically opaque style, call it “disintermediation.” But whatever the name, and whatever benefits this new world might bring, it raises a frightening problem: What will all the millions of onetime middlemen do for a living?

Already, we’ve seen automated teller machines decimate the ranks of bank tellers. The future information highway will do away with video stores and, eventually, TV networks. Retail stores will be challenged by home shopping. Manufacturers will move from “just in time” manufacturing to “right on time” production, meaning that many products--like Levis jeans today--will be virtually custom-made. The robotic production line will charge into action, and reconfigure itself, when an order comes in.

There are a lot of benefits to this concept. Gates says it can “bring to realization Adam Smith’s ideal market, at last.” With more distributed “knowledge” in the marketplace, markets for goods could clear faster and inventory buildups could be avoided, thus smoothing out the “boom-and-bust” cycles that are typical of market economies.

The environmental benefits of this digital economy could also be significant. If computer users download their software from a network, instead of getting it on the nearly 1 billion floppy diskettes we use every year, the software industry could approach the “zero impact” standard of environmental quality.

But we can’t all be TV stars or producers, or music video extras, or even World Wide Web publishers, and thus the employment impact of the friction-free economy could be catastrophic. Remember, only 20% of Americans have a college education, and there is no sign that this number will rise significantly in the years ahead.

In the 1980s, the U.S. lost nearly 2 million manufacturing jobs because of technological modernization and job migration overseas. Manufacturing employment has fallen from 20% of the work force 20 years ago to 16% today, and that number remains in a free fall. As in agriculture, we’re looking at a future economy in which only 5% or fewer of our fellow citizens will actually make things, even though our stores will be chock-full of goods.


Thus far, unemployment in the U.S. has nonetheless remained relatively low, around 6% (or perhaps a little higher because of counting difficulties). What’s happened is that the service sector has absorbed most manufacturing workers, albeit at lower wages and with fewer benefits and less job security.

Now the inexorable march of “market rationalization” is about to steamroll these service-sector workers too. Technology is becoming available to boost productivity in that sector and move us to a friction-free economy, which may throw as many people out of work from services as were ejected from manufacturing 10 years ago. But there is no new sector to absorb these people, even at lower wages. What will they do?

Gates blithely says in his book, “[A]s long as society needs help, there will definitely be plenty for everyone to do.” What he neglects to mention, in his catalog of how technology will do nearly everything for us in the future, is that the “help” that most people may be asked to provide is likely to be in the form of jobs of the “dog-washing” variety. This is already happening. Los Angeles, for example, is witnessing a boom in valet parking, bathroom attendants and similar jobs that barely existed 30 years ago.

Beneath the celebratory rhetoric about the coming “friction-free” economy is a ticking time bomb: the explosive idea that tens of millions of workers can be summed up, and shunted aside, as mere friction.