Which friction minimizing invention received a patent in 1999?
Described by Amazon in their application for patent 5,960,411, the purchaser just hits a button that activates the movement of payment information from “the client system” to the”server system.”
Because 1-Click glides the customer through the purchasing process, it fits Swarthmore Professor Barry Schwartz’s definition of friction-free finance. In a NY Times opinion column, Dr. Schwartz explains that transactional friction can be good and bad. With Amazon, 1-Click can help us save time and energy that we can use productively elsewhere.
Sometimes though, as with the subprime mortgage debacle, too much ease can let us forget the reality of the transaction. When mortgage packages and online “paperwork” eliminated time, effort and friction, the number of transactions multiplied. And the rest is history.
Professor Schwartz concludes by asking us if we would all be better off if we increased financial friction.
The Economic Lesson
A synonym for financial friction is transaction cost. When you call a pharmacy and spend 5 minutes moving through a menu before you can place your order, you have incurred a transaction cost. If an unemployed person has to fill out many forms when applying for a job, he or she has experienced a transaction cost. And, in the former Soviet Union, the everyday transaction cost of standing in line for hours to purchase food and clothing might have led to Communism’s demise.
An Economic Question: What transaction cost have you recently encountered?