Why Nations Fail

The New Freedom
, “If monopoly persists,
monopoly will always sit at the helm of government. I do not
expect to see monopoly restrain itself. If there are men in
this country big enough to own the government of the United
States, they are going to own it.”
Wilson worked to pass the Clayton Antitrust Act in 1914,
strengthening the Sherman Act, and he created the Federal
Trade Commission, which enforced the Clayton Act. In
addition, under the impetus of the investigation of the Pujo
Committee, led by Louisiana congressman Arsene Pujo,
into the “money trust,” the spread of monopoly into the
financial industry, Wilson moved to increase regulation of
the financial sector. In 1913 he created the Federal
Reserve Board, which would regulate monopolistic
activities in the financial sector.
The rise of Robber Barons and their monopoly trusts in
the late nineteenth and early twentieth centuries
underscores that, as we already emphasized in 
chapter 3
,
the presence of markets is not by itself a guarantee of
inclusive institutions. Markets can be dominated by a few
firms, charging exorbitant prices and blocking the entry of
more efficient rivals and new technologies. Markets, left to
their own devices, can cease to be inclusive, becoming
increasingly dominated by the economically and politically
powerful. Inclusive economic institutions require not just
markets, but inclusive markets that create a level playing
field and economic opportunities for the majority of the
people. Widespread monopoly, backed by the political
power of the elite, contradicts this. But the reaction to the
monopoly 
trusts 
also 
illustrates that when political
institutions are inclusive, they create a countervailing force
against movements away from inclusive markets. This is
the virtuous circle in action. Inclusive economic institutions
provide foundations upon which inclusive political
institutions can flourish, while inclusive political institutions
restrict deviations away from inclusive economic

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institutions. Trust busting in the United States, in contrast to
what we have seen in Mexico (
this page
–
this page
),
illustrates this facet of the virtuous circle. While there is no
political body in Mexico restricting Carlos Slim’s monopoly,
the Sherman and Clayton Acts have been used repeatedly
in the United States over the past century to restrict trusts,
monopolies, and cartels, and to ensure that markets remain
inclusive.
The U.S. experience in the first half of the twentieth
century also emphasizes the important role of free media in
empowering broad segments of society and thus in the
virtuous circle. In 1906 Roosevelt coined the term
muckraker
, based on a literary character, the man with the
muckrake in Bunyan’s 
Pilgrim’s Progress
, to describe what
he regarded as intrusive journalism. The term stuck and
came to symbolize journalists who were intrusively, but also
effectively, exposing the excesses of Robber Barons as
well as corruption in local and federal politics. Perhaps the
most famous muckraker was Ida Tarbell, whose 1904
book, 
History of the Standard Oil Company
, played a key
role in moving public opinion against Rockefeller and his
business interests, culminating in the breakup of Standard
Oil in 1911. Another key muckraker was lawyer and author
Louis Brandeis, who would later be named Supreme Court
justice by President Wilson. Brandeis outlined a series of
financial scandals in his book 
Other People’s Money and
How Bankers Use It
, and was highly influential on the Pujo
Committee. The newspaper magnate William Randolph
Hearst also played a salient role as muckraker. His
serialization in his magazine 
The Cosmopolitan
in 1906 of
articles by David Graham Phillips, called “The Treason of
the Senate,” galvanized the campaign to introduce direct
elections for the Senate, another key Progressive reform
that happened with the enactment of the Seventeenth
Amendment to the U.S. constitution in 1913.
The muckrakers played a major role in inducing
politicians to take action against the trusts. The Robber
Barons hated the muckrakers, but the political institutions of
the United States made it impossible for them to stamp out
and silence them. Inclusive political institutions allow a free
media to flourish, and a free media, in turn, makes it more
likely that threats against inclusive economic and political

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institutions will be widely known and resisted. In contrast,
such freedom is impossible under extractive political
institutions, under absolutism, or under dictatorships, which
helps extractive regimes to prevent serious opposition from
forming in the first place. The information that the free
media provided was clearly key during the first half of the
twentieth century in the United States. Without this
information, the U.S. public would not have known the true
extent of the power and abuses of the Robber Barons and
would not have mobilized against their trusts.