Money, Power and the Rule of Law

Courtesy of Jaime Falcon.

Money, Power and the Rule of Law

By SIMON JOHNSON

Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

Economic policy is always torn between helping the broader social interest – lots of ordinary people – and favoring particular special interests. Unfortunately, special interests typically win out in the kind of situation we have in America in 2012, when it’s all about spending money to win friends and influence people.

The most effective way to push back against powerful special interests is to have the same rules for everyone – and to enforce those rules fairly, even when they are broken by the richest and most politically connected people in the land. Attorney General Eric Schneiderman of New York took a major step toward restoring the rule of law this week, by bringing a case against JPMorgan Chase. But it will be an uphill battle; the forces against him are incredibly strong, including some within the Obama administration.

Special interests always want to take over and organize society for their own benefit. In the terminology of economics, there are always some “rents” to be had – meaning some form of extra compensation that you get from tilting the playing field in your favor. Powerful people are always “rent-seeking,” another way of saying that they would like to feather their own nests. And such activities impose costs on society, lowering incomes and limiting opportunities for everyone else.

When money is the primary source of power, the special interests win hands down. They can create advantages for themselves. One way is through the market mechanism – as monopolists did with railroads and industrial sectors at the end of the 19th century.

Or they can capture the government and use state policies to help themselves – for example, by deregulating the financial sector and allowing excessive risk-taking in big banks. The ability to take such risks hurts all consumers and taxpayers while helping the special interests who get this advantage.

In a brilliant satire, Steven Pearlstein recently put his finger on a central problem: powerful people want one set of rules for themselves and different, less advantageous rules for everyone else. In modern America, Mr. Pearlstein points out, the rich and powerful also like to complain a lot.

Democracy can be a countervailing force. But if this is only about holding elections, and money buys votes, it is not much of a constraint on powerful people. At the beginning of the 20th century, the Senate was known as the “millionaires’ club” for a reason – most of its members were rich or very close to rich people.

In his classic book “The Logic of Collective Action: Public Goods and the Theory of Groups,” Mancur Olson articulated another central problem: it is hard to organize people around broader social interests, while special interests know exactly what they want and coalesce much more readily.

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