Where Is the Utopian Free Market?

A Book Review of Thomas Philippon’s The Great Reversal: How America Gave Up on Free Markets.
The main argument of The Great Reversal is that the US has given up on free markets, while Europe has embraced them. Because of this, Europeans pay less and get more in many areas, such as telecommunications and air travel. In the book, Thomas Philippon, an economist at New York University, explains why the United States is no longer the center of innovative, dynamic capitalism that it used to be.

It reminded me of things I’ve been through recently. In August, I went to Copenhagen, Denmark, to spend a week at the Center for Political Studies and give a few lectures. In one of my talks, I talked about how some of the ideas Deirdre McCloskey and I talked about in our 2020 book2 could be used in the Danish retail sector. When I was doing research for the talk, I was surprised to learn that, according to OECD data, Danish retail is less regulated than American retail, even though Danish land use laws make grocery stores there too small and cause Danish consumers to pay more.

“Philippon makes a strong case for why we should stop thinking that the American economy is a free market and the European economies are not.”
Philippon shows in fifteen clear, easy-to-read chapters, plus an introduction, a conclusion, and a technical appendix, why some of my Danish audiences should not have laughed when I called their country a free-market paradise compared to the United States. He proves his point by looking at a lot of data, like the Mercatus Center’s database4, which tries to measure how much regulation there is in the U.S. (pp. 94-96). They both say that American markets have become less free while European markets have become more free. As he says, the United States and Europe are going in opposite directions when it comes to occupational licensing. The United States is moving toward more tightly controlled labor markets, while Europe is moving toward freer labor markets (p. 283). Philippon makes a strong case for why we should stop thinking that the American economy is a free market and the European economies are not. He goes through each industry to show where and how European markets have become more free than American markets. He also looks at the data to see how “new” and “unprecedented” companies like Google, Apple, Facebook, Amazon, and Microsoft are. He finds that, while they do represent important new technologies, they aren’t that different from other superstar companies in the past, compared to the rest of the economy.

Philippon calls himself a “free market liberal,” and he approaches his topic with arguments and tools that come straight from the mainstream of neoclassical economics. Philippon makes it clear in his writing that when he talks about “free markets,” he means “markets that are not subject to arbitrary political interference and where incumbents are not artificially protected from new competitors” (p. viii). From what I can tell, he agrees with most economists that free markets work great most of the time, fail horribly sometimes, and can be fixed with the right rules, taxes, and subsidies.

I’m not as sure that “we” can fix markets by relying on experts, no matter how much information they can gather. In 2009, when the FTC tried to stop the merger between Whole Foods and Wild Oats, I asked, “Is the definition of the market too important to be left up to the market?” 5 I think Philippon, like a lot of economists, doesn’t take F.A. Hayek’s argument about how society uses knowledge as seriously as he should. Hayek isn’t making the case that markets are better at figuring things out than central planners. He says that the knowledge problem is very different from problems that experts can solve if they have enough information and good computers. There is a lot of knowledge that is often unspoken and rarely put into words about “the particular circumstances of time and place” that an expert or regulator can’t use as data. If you don’t use the market, you have to use the regulator’s imagination instead of the unspoken wisdom that is built into prices and rules over time.

About fifty of the book’s roughly three hundred pages are about political economy. Philippon comes to the conclusion that lobbying and rent-seeking have made American markets less competitive than they would have been otherwise. “No one hates capitalism more than capitalists,” said my late friend Steven Horwitz’s first law of political economy. Donald J. Boudreaux once said, “If rents can be made, they will be sought.” I think it would be helpful for future work that builds on Philippon to focus more on the supply side of the market for economic rents, like what Randall Holcombe and Fred McChesney did in their books Political Capitalism and Money for Nothing: The Political Economy of Rent Extraction.

It warmed my heart to see Philippon bring up Mancur Olson’s analysis, but I would have liked him to go further with the public choice analysis and show how coercion and cooperation work differently as crucibles where social knowledge is tested and proven. He says that “(t)olerating well-intentioned mistakes is therefore part of good regulation, as long as there is due process and a way to learn from these mistakes” (p. 4). However, there is nothing in the regulatory world that is like profits and losses, and those who make the rules don’t have much “skin in the game.” Since they don’t get a lot of money for being right or lose a lot of money for being wrong, they are probably more likely to make mistakes.

Think about antitrust policy, which is supposed to protect gains from trade but is often used to protect the rents of companies that are already in place. In United States v. Alcoa (1945), Judge Learned Hand’s decision can teach us something. He criticized Alcoa for trying hard to come up with new ideas, lower prices, and make more products whenever and wherever the company’s leaders saw a chance. In short, he denounced Alcoa as a monopolist for doing the exact opposite of what monopolists do.

I think Philippon and I would both agree that organizations 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 an agreement where any drug that is approved in any OECD country is also automatically approved for sale in the US. It’s not as good as the free market utopia I’d like to live in, but it’s better than what we have now.

Similarly, Philippon points out that foreign airlines are not allowed to fly U.S. domestic routes. There is no strong economic or even security reason for this. If airlines like Etihad and RyanAir could take people from New York to Los Angeles and back, prices would go down and service would get better. I would also like to see more reciprocal licensing agreements between licensed professions in the U.S., as well as a way for people who went to medical school outside of the U.S. to practice medicine in the U.S. But based on what I know about how the rent-seeking society works, I’m not going to hold my breath.

See for more on these subjects.

By S. David Young: “Occupational Licensing.” Concise Encyclopedia of Economics.
Arnold Kling wrote a book called “The Regulator’s Calculation Problem.” Library of Economics and Liberty, Apr. 6, 2015.
Podcast episode Michael Munger on Antitrust. EconTalk.
Even though I disagree with different parts of what is otherwise a good book, it is important to remember that we agree that markets work and that if the government does anything, it should try to make markets work better. It’s easy to forget that the general public and many intellectuals and scholars who are not economists do not agree with this widely held belief among economists. Philippon explains why we should welcome competition, and if more people do so after reading The Great Reversal, he will have done an important job.

Where Is the Utopian Free Market?

A Book Review of Thomas Philippon’s The Great Reversal: How America Gave Up on Free Markets.
The main argument of The Great Reversal is that the US has given up on free markets, while Europe has embraced them. Because of this, Europeans pay less and get more in many areas, such as telecommunications and air travel. In the book, Thomas Philippon, an economist at New York University, explains why the United States is no longer the center of innovative, dynamic capitalism that it used to be.

It reminded me of things I’ve been through recently. In August, I went to Copenhagen, Denmark, to spend a week at the Center for Political Studies and give a few lectures. In one of my talks, I talked about how some of the ideas Deirdre McCloskey and I talked about in our 2020 book2 could be used in the Danish retail sector. When I was doing research for the talk, I was surprised to learn that, according to OECD data, Danish retail is less regulated than American retail, even though Danish land use laws make grocery stores there too small and cause Danish consumers to pay more. 3

“Philippon makes a strong case for why we should stop thinking that the American economy is a free market and the European economies are not.”
Philippon shows in fifteen clear, easy-to-read chapters, plus an introduction, a conclusion, and a technical appendix, why some of my Danish audiences should not have laughed when I called their country a free-market paradise compared to the United States. He proves his point by looking at a lot of data, like the Mercatus Center’s database4, which tries to measure how much regulation there is in the U.S. (pp. 94-96). They both say that American markets have become less free while European markets have become more free. As he says, the United States and Europe are going in opposite directions when it comes to occupational licensing. The United States is moving toward more tightly controlled labor markets, while Europe is moving toward freer labor markets (p. 283). Philippon makes a strong case for why we should stop thinking that the American economy is a free market and the European economies are not. He goes through each industry to show where and how European markets have become more free than American markets. He also looks at the data to see how “new” and “unprecedented” companies like Google, Apple, Facebook, Amazon, and Microsoft are. He finds that, while they do represent important new technologies, they aren’t that different from other superstar companies in the past, compared to the rest of the economy.

Philippon calls himself a “free market liberal,” and he approaches his topic with arguments and tools that come straight from the mainstream of neoclassical economics. Philippon makes it clear in his writing that when he talks about “free markets,” he means “markets that are not subject to arbitrary political interference and where incumbents are not artificially protected from new competitors” (p. viii). From what I can tell, he agrees with most economists that free markets work great most of the time, fail horribly sometimes, and can be fixed with the right rules, taxes, and subsidies.

I’m not as sure that “we” can fix markets by relying on experts, no matter how much information they can gather. In 2009, when the FTC tried to stop the merger between Whole Foods and Wild Oats, I asked, “Is the definition of the market too important to be left up to the market?” 5 I think Philippon, like a lot of economists, doesn’t take F.A. Hayek’s argument about how society uses knowledge as seriously as he should. Hayek isn’t making the case that markets are better at figuring things out than central planners. He says that the knowledge problem is very different from problems that experts can solve if they have enough information and good computers. There is a lot of knowledge that is often unspoken and rarely put into words about “the particular circumstances of time and place” that an expert or regulator can’t use as data. If you don’t use the market, you have to use the regulator’s imagination instead of the unspoken wisdom that is built into prices and rules over time.

About fifty of the book’s roughly three hundred pages are about political economy. Philippon comes to the conclusion that lobbying and rent-seeking have made American markets less competitive than they would have been otherwise. “No one hates capitalism more than capitalists,” said my late friend Steven Horwitz’s first law of political economy. Donald J. Boudreaux once said, “If rents can be made, they will be sought.” I think it would be helpful for future work that builds on Philippon to focus more on the supply side of the market for economic rents, like what Randall Holcombe and Fred McChesney did in their books Political Capitalism and Money for Nothing: The Political Economy of Rent Extraction.

It warmed my heart to see Philippon bring up Mancur Olson’s analysis, but I would have liked him to go further with the public choice analysis and show how coercion and cooperation work differently as crucibles where social knowledge is tested and proven. He says that “(t)olerating well-intentioned mistakes is therefore part of good regulation, as long as there is due process and a way to learn from these mistakes” (p. 4). However, there is nothing in the regulatory world that is like profits and losses, and those who make the rules don’t have much “skin in the game.” Since they don’t get a lot of money for being right or lose a lot of money for being wrong, they are probably more likely to make mistakes.

Think about antitrust policy, which is supposed to protect gains from trade but is often used to protect the rents of companies that are already in place. In United States v. Alcoa (1945), Judge Learned Hand’s decision can teach us something. He criticized Alcoa for trying hard to come up with new ideas, lower prices, and make more products whenever and wherever the company’s leaders saw a chance. In short, he denounced Alcoa as a monopolist for doing the exact opposite of what monopolists do.

I think Philippon and I would both agree that organizations 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 an agreement where any drug that is approved in any OECD country is also automatically approved for sale in the US. It’s not as good as the free market utopia I’d like to live in, but it’s better than what we have now.

Similarly, Philippon points out that foreign airlines are not allowed to fly U.S. domestic routes. There is no strong economic or even security reason for this. If airlines like Etihad and RyanAir could take people from New York to Los Angeles and back, prices would go down and service would get better. I would also like to see more reciprocal licensing agreements between licensed professions in the U.S., as well as a way for people who went to medical school outside of the U.S. to practice medicine in the U.S. But based on what I know about how the rent-seeking society works, I’m not going to hold my breath.

See for more on these subjects.

By S. David Young: “Occupational Licensing.” Concise Encyclopedia of Economics.
Arnold Kling wrote a book called “The Regulator’s Calculation Problem.” Library of Economics and Liberty, Apr. 6, 2015.
Podcast episode Michael Munger on Antitrust. EconTalk.
Even though I disagree with different parts of what is otherwise a good book, it is important to remember that we agree that markets work and that if the government does anything, it should try to make markets work better. It’s easy to forget that the general public and many intellectuals and scholars who are not economists do not agree with this widely held belief among economists. Philippon explains why we should welcome competition, and if more people do so after reading The Great Reversal, he will have done an important job.

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