Reprinted from EconLib
The great coup He defends a provocative and surprising thesis: the United States has abandoned free markets while Europe has embraced them. As a result, Europeans pay less and get more in a lot of 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 and innovative capitalism as it once was.
It resonated with some of my recent experiences. In August, I visited the Center for Political Studies in Copenhagen, Denmark for a week and gave a few lectures. One of my lectures applied some of the ideas Deirdre McCloskey and I explored in our 2020 book for the Danish retail sector. I was surprised when I was doing some research for the conversation and learned that according to OECD data, Danish retail smallest Regulatory burden outweighs the regulatory burden for retail in America although Danish land use laws make it inefficient to make groceries small and Danish consumers pay higher prices.
In fifteen clearly written, easy-to-read chapters plus an introduction, conclusion, and technical appendix, Philippon explains why some Danish public should have stifled their laughter when she described their country as a free-market paradise compared to the United States. He defends his thesis by exploring several data sources, including the Mercatus database that quantifies the intensity of regulation in the United States (pp. 94–96). They tell the same story: European markets are becoming more free, while American markets become less free. As he explains in connection with occupational licensing, the US and Europe are moving in opposite directions, with the US moving toward tightly controlled labor markets and Europe moving toward freer labor markets (p. 283). Philippon makes a compelling case that we would do well to revise our belief that the US economy is a free market when European economies are not. Each industry goes individually to explain where and how European markets have become freer than American markets. It also looks at the data to see how “new” and “unprecedented” companies such as Google, Apple, Facebook, Amazon and Microsoft are, and finds that while they certainly represent important new technologies, they are not really who – which Different from other supercompanies of the past, relative to the rest of the economy.
Philippon is a self-described “free-market liberal” who approaches his subject with a set of arguments and tools that come straight out of the neoclassical mainstream. Philippon writes explicitly that by “free markets,” he means that “markets are free when they are not subject to arbitrary political interference and when existing firms are not artificially protected from competitive new entrants” (p. 8). From what I can gather, he believes 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’m less optimistic about our ability to fix markets by relying on experts, no matter how much data they can gather. In 2009, I asked, “Is the definition of the market too important to be left to the market?” In response to the Federal Trade Commission’s efforts to prevent the Whole Foods-Wild Oats merger. I think Philippon, like many economists, does not take the implications of F.A. Hayek’s argument about the use of knowledge in society as seriously as it should. Hayek does not argue that markets are calculated more efficiently than central planners. He argues that the problem of knowledge is of a completely different kind than the problems that experts can solve with sufficient data and powerful enough computers. There is a great deal of often tacit knowledge, rarely expressed in the “special circumstances of time and place” which cannot be encountered by an expert or regulator as meaningful data. Abandoning the market necessarily replaces the regulator’s imagination with the common but unelaborated wisdom embodied in evolving prices and rules.
Political economy gets about fifty pages out of the roughly three hundred pages of the book, and Philippon concludes that American markets are not as competitive as they would have been without pressure and rent-seeking. I remember the first law of political economy of my late friend Stephen Horowitz: “No one hates capitalism more than capitalists,” and a point made once by Donald J. Boudreaux: “If rents can be created, they will be sought.” I think it would be beneficial for future work based on the Philippon project to focus more on the supply side of the market for economic rentals. to me Randall Holcomb in political capitalism and Fred McKissney in Money for Nothing: The Political Economy of Rent Extraction.
I was heartened to see Philippon bringing Mancur Olson’s analysis into the conversation, but I would have preferred that he analyze public choice more and more clearly highlight the difference between how coercion and cooperation function as crucibles in which social knowledge is experienced and validated. He argues that ”
Consider antitrust policy, which is theoretically related to protecting gains from trade, but more often to protecting the rents of existing businesses. The judge’s decision to want Hand in United States vs. Alcoa (1945) is useful. Without sarcasm, he criticized Alcoa for seeking to innovate, lower prices, and produce more whenever and wherever company executives saw opportunity. In short, he denounced Alcoa as a monopolist for doing the exact opposite of what monopolists do.
I think Philippon and I agree that organizations like the Food and Drug Administration and the various licensing boards should lose their authority to prevent entry and thwart competition. Personally, I would like to see a mutual consent agreement where (for example) any drug that has been approved in any OECD country in the US is automatically approved for sale. It doesn’t quite live up to the free-market utopia I’d like to live in, but it’s a clear improvement on the status quo.
Similarly, Philippon points out that foreign airlines are not allowed to operate domestic flights in the United States. There is no compelling economic or even security reason for this, and we would see lower fares and better service if airlines like Etihad and Ryanair could get passengers from New York to Los Angeles and back. I would also like to see more cross-licensing agreements between US-licensed professions along with allowing people trained in foreign medical schools to practice in the US. However, I won’t hold my breath, given what I know about the dynamics of a rentier-seeking society.
While I have various disagreements with what is otherwise a good book, it is important not to lose sight of the fact that we basically agree that markets work and that if government is going to do anything, it has to work around the margins to make markets work better. It is easy to forget that this widely shared consensus among professional economists certainly is Not It is shared by the general public or by many non-economic thinkers and scholars. Philippon explains why we should embrace competition, and if more people do it after reading The great coupHe will have done an important job.