Дарон Аджемоглу - Why Nations Fail

there are real and grave evils … and a … widespread conviction in the minds of the American people that the great corporations known as trusts are in certain of their features and tendencies hurtful to the general welfare. This springs from no spirit of envy or un-charitableness, nor lack of pride in the great industrial achievements that have placed this country at the head of the nations struggling for commercial supremacy. It does not rest upon a lack of intelligent appreciation of the necessity of meeting changing and changed conditions of trade with new methods, nor upon ignorance of the fact that combination of capital in the effort to accomplish great things is necessary when the world’s progress demands that great things be done. It is based upon sincere conviction that combination and concentration should be, not prohibited, but supervised and within reasonable limits controlled; and in my judgment this conviction is right.

He continued: “It should be as much the aim of those who seek for social betterment to rid the business world of crimes of cunning as to rid the entire body politic of crimes of violence.” His conclusion was that

in the interest of the whole people, the nation should, without interfering with the power of the states in the matter itself, also assume power of supervision and regulation over all corporations doing an interstate business. This is especially true where the corporation derives a portion of its wealth from the existence of some monopolistic element or tendency in its business.

Roosevelt proposed that Congress establish a federal agency with power to investigate the affairs of the great corporations and that, if necessary, a constitutional amendment could be used to create such an agency. By 1902 Roosevelt had used the Sherman Act to break up the Northern Securities Company, affecting the interests of J.P. Morgan, and subsequent suits had been brought against Du Pont, the American Tobacco Company, and the Standard Oil Company. Roosevelt strengthened the Interstate Commerce Act with the Hepburn Act of 1906, which increased the powers of the Interstate Commerce Commission, particularly allowing it to inspect the financial accounts of railways and extending its authority into new spheres. Roosevelt’s successor, William Taft, prosecuted trusts even more assiduously, the high point of this being the breakup of the Standard Oil Company in 1911. Taft also promoted other important reforms, such as the introduction of a federal income tax, which came with the ratification of the Sixteenth Amendment in 1913.

The apogee of Progressive reforms came with the election of Woodrow Wilson in 1912. Wilson noted in his 1913 book, 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 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 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.

PACKING THE COURT

Franklin D. Roosevelt, the Democratic Party candidate and cousin of Teddy Roosevelt, was elected president in 1932 in the midst of the Great Depression. He came to power with a popular mandate to implement an ambitious set of policies for combating the Great Depression. At the time of his inauguration in early 1933, one-quarter of the labor force was unemployed, with many thrown into poverty. Industrial production had fallen by over half since the Depression hit in 1929, and investment had collapsed. The policies Roosevelt proposed to counteract this situation were collectively known as the New Deal. Roosevelt had won a solid victory, with 57 percent of the popular vote, and the Democratic Party had majorities in both the Congress and Senate, enough to pass New Deal legislation. However, some of the legislation raised constitutional issues and ended up in the Supreme Court, where Roosevelt’s electoral mandate cut much less ice.