Greg Mankiw points to a Zingales quote that has more than one thing going against it.

The biggest threat of all to the Big Apple’s financial supremacy, however, comes from Washington. The Founding Fathers wisely decided that the nation’s political capital should be separate from its financial capital (in both senses of the word). Now this splendid segregation has ended. If the outcome of the Chrysler bankruptcy is any indication, Washington is willing to flex its muscle in financial decisions, altering the substance of contracts freely agreed to by private parties. In so doing, the national government has undermined the certainty of the rule of law, which was the American capital market’s strongest asset.

First, is the “decision” to separate financial and political capitals particularly wise. Think of nations where the financial and political capitals are one, the United Kingdom, France, Singapore, South Korea or Japan. Then look at nations where they are separate, the United States, Italy, Germany and China. Is it clear that the latter group of markets operates any more efficiently than the former.

My rough guess from thinking about it causally is that separating the financial and political capitals dilutes free market impulses. Essentially, you have to have pro-market advocates in two places. When you control for the political sentiment of the people my guess is that the group of countries where the financial and political capitals are coterminous are significantly more market friendly.

Second, this wasn’t the founders intention. Obviously at the founding of the country Philadelphia and not New York was the commercial center. However, the moving of the capital from Philadelphia to Washington wasn’t about separating commercial and political interests. It was about good old fashioned pork and backroom politics.

In the Compromise of 1790 Madison and Jefferson agreed to the federal government taking on state war debt, in exchange for locating the nation’s capital in the South.

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