Gar Alperovitz, NY Times - If regulation was likely to fail to solve problems like those involved in the Madoff scheme, what then might be done with very large institutions? An alternative — now being urged by several Senators is that very large institutions be broken up. The problem here, a number of the Chicago School leaders pointed out, was that the anti-trust process was also commonly taken over by the large institutions. Milton Friedman later came to the same basic judgment. Furthermore, once broken up, significant institutions have a way of reconsolidating power, and are commonly soon back operating at the same scale or larger (as anti-trust efforts in connection with Standard Oil and AT&T also demonstrate.)
Friedman’s revered teacher H.C. Simons, one of the most important leaders of the Chicago School, faced the dilemma squarely very early on: In cases where neither regulation nor breaking up large entities offered a genuine solution, he argued, “in general…the state should face the necessity of actually taking over, owning, and managing directly…industries in which it is impossible to maintain effectively competitive conditions.”
The essential logic of the Chicago School position is demanding but almost certainly correct, as anyone who has watched how large banks and major corporations work the lobbying process in Washington knows. Clearly, however, to achieve the recommended solution would probably take at least another Madoff failure, and one or more larger financial crises — and would likely be possible after the break-them-up half-way option also failed to offer a solution and public anger could not be managed in any other way.