Raising Rival’s Costs and Reform in the Public Interest
25th August 2013
Alex Tabarrok (a Real Economist)
More than anyone else, Winthrop Aldrich, representative of the Rockefeller banking interests, was responsible for the separation of commercial and investment banking. With the help of other well-connected anti-Morgan bankers like W. Averell Harriman, Aldrich drove the separation of commercial and investment banking through Congress. Although separation raised the costs of banking to the Rockefeller group, separation hurt the House of Morgan disproportionately and gave the Rockefeller group a decisive advantage in their battle with the Morgans.
This is the same reason behind the Crustian .01% cry “Raise my taxes!” — it will ‘hurt’ them in ways that they won’t really notice, while crippling the ‘almost rich’ with whom they compete for luxury goods.
Here’s the big picture. Under certain conditions, free markets channel self-interest towards the social good – that is the meaning of the invisible hand theorem. Unfortunately, there is no invisible hand theorem for politics. There are institutions, such as democracy, checks and balances and an independent judiciary, which help to channel political self-interest if not to the public good then at least away from the public evil. Even given the right macro institutions, however, breaking the iron triangle of politics is difficult. Industry self-interest and the public interest will typically align only accidentally. Universities are not less self-interested than any other actors but support for basic research is (arguably) in the public interest. The usual situation, however, is that industry self-interest pushes well beyond the point of alignment with the public interest. At current spending levels, lobbying by defense firms does not benefit the public even if national defense is a public good.