- A book review The Great Reversal: How America Gave Up on Free MarketsBy Thomas Philippon.
THe is the opposite of great Defends a provocative and surprising thesis: the United States abandoned free markets while Europe embraced them. As a result, Europeans pay less and earn more in many industries such as telecommunications and air travel. Throughout the book, New York University economist Thomas Philippon explains why the United States is no longer the seat of dynamic, innovative capitalism that it once was.
It resonates with some of my recent experiences. In August, I went to the Center for Political Studies in Copenhagen, Denmark for a week and gave a few lectures. One of my lectures applied some of the insights Deirdre McCloskey and I explored in our 2020 book on the Danish retail sector. I was surprised when I was doing some research for the discussion and learned that according to OECD data, Danish retail shoulder a small Danish land use laws make it so that grocery stores are inefficiently small and Danish consumers pay higher prices, although the regulatory burden is greater than that of American retail.
“Philippines makes a convincing case that we would do well to revise our belief that the American economy is a free market whereas the European economy is not.”
In fifteen clearly written, easy-to-read chapters and an introduction, a conclusion, and a technical appendix, Philippon shows why some of my Danish listeners should have stifled a laugh when I described their country as a free-market paradise. United States. He defends his thesis by exploring numerous data sources, including the database of the Mercatus Center, which works to measure the intensity of regulation in the United States (pp. 94-96). They tell the same story: European markets have been liberalized while American markets have been less liberal. As he explains on occupational licensing, the United States and Europe are moving in opposite directions, with the United States moving toward more tightly regulated labor markets and Europe toward freer labor markets (p. 283). Philippon makes a convincing case that we would do well to revise our belief that the American economy is a free market whereas the European economy is not. He goes industry by industry to explain where and how the European market became freer than the American market. He also looks at the data to see what “new” and “phenomenal” companies like Google, Apple, Facebook, Amazon, and Microsoft look like, and he finds that while they certainly represent important new technologies, they really don’t. that Unlike other superstar firms of the past, compared to the rest of the economy.
Philippon is a self-described “free market liberal” who approaches his subject with arguments and tools that are directly outside the neoclassical mainstream. Philippon clearly writes that by “free markets” he means “markets are free when they are not subject to arbitrary political interference and when incumbents are not artificially protected from competitive new entrants” (p. viii). From what I can gather, he believes, along with most economists, that free markets work wonderfully in most cases, fail miserably in some cases, and can be fixed with appropriate regulations, taxes, and subsidies.
I am less aware of “our” ability to fix markets by relying on experts, however much data they may be able to gather. In 2009, I asked, “Is market definition too important to leave to the market?” In response to the Federal Trade Commission’s attempt to block the Whole Foods-Wild Oats merger. I think Philippon, like many economists, takes FA Hayek’s argument about the use of knowledge in society as seriously as he should. Hayek is not arguing that markets calculate more efficiently than central planners. He argues that the knowledge problem is of a completely different kind than the problems that experts can solve with enough data and powerful enough computers. There is a wealth of often tacit, rarely articulated knowledge about “specific circumstances of time and place” that no expert or regulator can deal with as meaningful. Information. Abandoning the market necessarily replaces the regulator’s imagination with collective but unspoken knowledge embodied in prices and evolving rules.
Political economy takes up about fifty of the book’s three hundred pages, and Philippon concludes that American markets are not as competitive as they would be without lobbying and rent seeking. I am reminded of my late friend Steven Horwitz’s first law of political economy: “Nobody hates capitalism more than capitalists,” and Donald J. Boudreaux once made a point: “If rents can be made, they will be sought.” I think it would be useful to focus more on the supply of the market for economic rent for future construction work in the Philippines per Randall Holcombe Political Capitalism and Fred McChesney Inn Money for Nothing: The Political Economy of Rent Extraction.
It warmed my heart to see Filippon bring Mankur Olson’s analysis into the conversation, but I would have liked him to take his analysis of public choice further and more clearly show how coercion and cooperation serve as the crucibles in which social knowledge is tried and proven. . He argues that ”
Consider antitrust policy, which is theoretically about protecting profits from trade, but which is often about protecting incumbents’ rents. The judge knows the verdict United States v. Alcoa (1945) didactic. Without irony, he spurred Alcoa to innovate, lower prices, and produce more whenever and wherever company executives saw an opportunity. In short, he denounced Alcoa as a monopoly for doing the exact opposite of what monopolies do.
I think Philippon and both would agree that agencies like the Food and Drug Administration and various licensing boards should lose their power to block entry and thwart competition. I for one would love to see a reciprocal approval agreement where any drug approved in (say) any OECD country is automatically approved for sale in the US. It’s less than the free market utopia I’d like to live in, but it’s a definite improvement over stability.
Similarly, Philippon noted that foreign airlines are not allowed to fly US domestic routes. There is no compelling economic or even safety reason for this, and if airlines like Etihad and Ryanair could take passengers from New York to Los Angeles and back, we would see lower prices and better service. I would like to see more reciprocal licensing agreements between professions licensed in the United States, along with allowing those trained in foreign medical schools to practice in the United States. I’m not going to hold my breath given what I know about the dynamics of a rent-seeking society.
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While I have various disagreements about what is otherwise a fine book, it is important not to lose sight of the fact that we fundamentally agree that markets work and that if a government wants to do something, it should work around the margins to create markets. Good job It’s easy to forget that this is a widely shared consensus among professional economists no shared by the general public or many intellectuals and scholars who are not economists. Philippon explains why we should embrace competition and if more people do after reading The Great ReversalHe has done an important job.