ABSTRACT
This chapter implies that friction and inertia, though perhaps inevitable, are undesirable features of all real economies. Friction is introduced into the system, and greater realism is thereby attained, but only by ignoring most of the teachings of standard price theory. Friction in the capital market compounds the problem. The core assumptions of late twentieth century economics are intended to help us understand how a market economy functions—in short, how capitalism works. The frictionless economy associated with the four core assumptions of late-twentieth-century economics is not just an impossible world; it is probably also a highly unstable world. Friction and inertia evidently can act as obstacles to smooth adjustment and steady progress. In some circumstances, friction in the sense of resistance to relative motion may act as a binding agent, a stabilizing device. This is particularly true of sticky prices.
