The Great Reversal: How America Gave Up on Free Markets

This has been the year when the reading public was deemed ready to deal with the topic of market power. A wide variety of great books have come out, like Tim Wu’s treatise on Bigness, Uwe Reinhardt’s posthumous book on American health care, a full legal manual on antitrust by Jonathan Baker and of course the two books that hatched from Barry Lynn’s Open Market Institute: Rana Faroohar’s polemic against the FANGs, “Don’t be Evil” and Matt Stoller’s very readable and comprehensive history of 20th century American populism, the appropriately named “Goliath.”It’s also been the year of tremendous popular Economics books like Shleifer and Gennaioli’s “Crisis of Beliefs,” Alesina, Favero and Giavazzi’s “Austerity” and blockbuster sequels from both Acemoglu & Robinson and the prolific Thomas Piketty.Thomas Philippon trumps them all. He’s written the book of the year. The Great Reversal succeeds at so many levels, it’s impossible you will not find something to like about it.It’s in five parts (even if they are labelled as four):1. The Economics of market power in America2. The European Experience of increasing competition3. Corruption of the US political system as a potential explanation of market power4. Industry examples in the US5. What’s to be doneComfortably the best, and worth buying the book for, is the first part, which is itself split into five chapters.In the first chapter Philippon explains that the essence of capitalism is competition. Competition for resources allows us to discover prices (p.22) and prices drive the allocation of resources. Free competition allows new companies to enter a profitable field and allows us employees to quit our jobs and go work for a competitor of our employer. Philippon quotes my favorite author, Mancur Olson, here, to ominously add that spontaneous defense of competition is unlikely, because the interests who stand to lose from competition are far more concentrated than all of us are, who stand to benefit.In the second chapter he defines the opposite of competition, market power. He tells us where to look for it (high concentration, high profits and high prices are the tell-tales) and lays out the economic ills it entails:1. inequality, as consumer surplus becomes economic rent that accrues to the much more concentrated managers and owners of corporations2. dead weight losses, shown on a chart, amounting to profits neither the producers nor the consumers make when oligopoly leads to cuts in production relative to output under competitionPhilippon also explains what’s good about market power: super-efficient producers like Walmart can often channel profits into even more efficient production, from which we all benefit.In the third chapter he establishes that over the past two decades market power has soared in the US. He does the math first, to account for all sorts of issues, including that1. some markets are local, some national and some international2. efficiency in some industries has increased due to the concentration among market leaders3. we enjoy more free goods than we used to4. there was no escaping domestic consolidation in industries facing foreign competitionand still arrives at the inescapable conclusion that the US is much less of a free market than it used to be. There are fewer companies than before, profits have soared as a percent of GDP, and companies make much bigger distributions to their owners as a percent of the assets they control.In the fourth chapter he lists the evidence regarding the decline in corporate American investment and productivity: relative to what went before, the past two decades have seen unmistakable overall declines in net investment as a part of corporate profits, and even larger declines for high concentration industries. The decline also holds for investment in intangible assets such as patents.The conclusion is clear: yes, we cannot a priori know if market power will lead to more or less investment. Sensible arguments can be made both ways. The evidence, however, is of (i) significantly higher concentration having gone hand-in-hand with (ii) significantly higher payouts to the owners of capital and (iii) significantly lower investment. That’s the way it’s gone, period. And that’s bad for long-term growth.The fifth chapter about America shows a potential source for this lack of dynamism over the past two decades: any way you care to measure things, there’s fewer young firms in the US. Additionally, the number of IPOs is a shadow of its former self and there’s fewer listed companies as well, with mergers among existing companies running at twice the levels experienced today than when Michael Douglas starred in Wall Street. What’s stopping free entry? The author argues that increased regulation probably has a lot to answer for.Next, Philippon moves on to Europe, which, remarkably, has travelled in the opposite direction! First, he shows conclusively that Europe has not suffered from the same increases in profit margins, rises in industry concentration or fall in the labor share of income as the US. Next, he shows that prices have risen a lot slower in Europe than in the US over the past two decades, with at most half of the difference being potentially attributable to differences in income growth.From there, the author hazards an explanation: clearly, the competition authorities in Europe have more teeth than their US counterparts; perhaps that is because it’s more important to Germany, for example, that they be independent from French influence, than it is that they accommodate occasional German interests. So Europe has had more success running the American model than America itself. And then again, Philippon argues, maybe we need to wait a bit longer and regulatory capture will also make it to the East coast of the Atlantic. But for now, it resolutely hasn’t and the benefits are there for all to see.The next part of the book, regarding lobbying, money and politics in the US was, quite simply, sickening. The math is laid out and (astonishingly clever!) research is listed that proves beyond a shadow of a doubt that lobbying (i) is targeted very well and (ii) bears results. The numbers actually are not enormous, but a very strong argument is made that money spent to buy influence is an “endogenous” variable, and thus impossible to measure correctly. This observation apart, however, there’s nothing Philippon notes that you cannot read elsewhere. Regardless, many people will read here first that the prime occupation of a US representative is to raise money. Not good.Chapters follow on how these findings relate to Banking, Healthcare and the FANGS. I found all three rather facile and not to the standard of the rest of the book. The observations made are of the kind you’d make from 10,000ft: finance still takes the same vig out of the economy as it did a century ago; US healthcare delivers poor results for money that is not explainable by observing that the US is a rich country that should consume more of high-end stuff (like healthcare) and the FANGS are no bigger a part of the S&P 500 than GM once was but are less well-integrated in the economy because they hardly employ anybody. Yawn. And the connections are not made to the front of the book.Next comes a chapter about the monopsony power our employers exercise on us when there’s so few of them left and this leads to the conclusions.The book does get the strong closing chapter it deserves. The author first expresses his astonishment at the fact that free markets have turned out to be rather fragile. The idea that they were inevitable seems to be at odds with the facts, basically. Next, he puts a number on how much money we’ve all lost due to the rise of market power. (Buy the book and read it, it’s on page 293)Philippon closes with three recommendations:1. we must fight for free entry: we must protect new entrants from incumbents, and we must be very afraid of incumbents who remain perennially profitable2. if the government is never guilty of over-regulating, then it’s not regulating enough3. protect transparency, privacy and data ownershipamen

A lot of information to back up the author's final conclusion as to the source of the vanished free markets in the U.S. Highly recommended for anyone wondering where we in the U.S. are going and why we're in this handbasket. A must read for anyone who thinks there's any real difference in the ultimate goals of the two major political parties today.

This is a great and important book. Deeply empirical, the author shows how competition has declined in major sectors of the U.S. Economy over the last 25 years resulting in lower investment, lower wages, lower productivity and lower growth while also generating more inequality. An especially innovative chapter shows the tech giants to be rather shallow in terms of their economic footprint and is thus supportive Robert Gordon's book, The Rise and Fall of American Growth.The book does have some minor shortcomings. First, one wishes that there had been greater discussion about the growing monopsonistic influence in our labor markets. Second, the author is surely correct when he writes about the growing economic concentration in the hospital sector, but neglects the same problems in the insurance industry. Even worse, he overlooks the critical role that the American Medical Association has played, for over a 100 years and since the Flexner Report, in restricting the supply of physicians in the United States through onerous and often needless training requirements. Third, the author neglects the critical role that Robert Bork's book, The Antitrust Paradox, played in allowing right of center economists to minimize antitrust enforcement beginning in the 1980s.Finally, and most important, what is the impact of this growing economic concentration on monetary and fiscal policy and on macroeconomic theory in general? Current macroeconomic theory largely assumes that the economy is basically competitive; indeed, the logic of the macro tools relys on this assumption. But if the economy is oligopolistic, the existing macro tools may not work as intended and may even be counterproductive. But what a new macro theory, based on oligopoly, might look like is not entertained.Despite all this, however, the book is timely and important. Readers that wish for more policy prescriptions may want to read Robert Reich's Saving Capitalism as a supplementary text.

I found this to be an important book providing scholarly research in a lucid manner on one of the most topical issues of our times, namely, the lack of adequate consumer surplus/welfare and low overall productivity in the United States for past two-three decades in spite of, and perhaps because of (as Thomas Philippon explains), the high profitability of businesses. The book argues that this coincidence is because free competition in the United States has given way to market concentration, a reversal that can be attributed to a number of factors such as lobbying, reduction in the ease of doing business, lack of adequate anti-trust protections against the span of corporate tech giants, etc. The book offers a variety of examples for different sectors that are easy to understand and relate to, which is a part of the beauty of how the book is written.Thomas has the knack of identifying BIG issues facing economics and finance that also have significant policy relevance. Given his deep understanding of Europe, he is also able to present to the American experience a European mirror. While a clear comparison is rendered difficult by the relatively different macroeconomic outcomes for the United States and Europe (a difficulty that is natural in such settings and is perhaps better resolved by comparing outcomes for the United States with just Germany), the overall set and tenor of facts provided by Thomas deserve a serious and deep introspection by the policy makers.This will turn out to be an influential book! Go and read it!!

Well researched and written timely book. But comparative analysis was a little underwhelming.

In these days it's rare to find a book on economics worth to be read and which is not something like an article diluted into a book. Written by an author who clearly knows well both the European and the American economic context and how it developed in the last 20-30 years. Interesting assumptions, rigorous analysis, lots of data, clever conclusions. A book to be read

Generally, I'd say this is well worth a read for those interested in the causes and effects of monopoly. It's good on discussing the economic concepts relating to monopoly, but tends to over-emphasize the economic explanation (for obvious reasons - the author is an economist) at the expense of others

Lecture fort instructrice qui permet de comprendre pourquoi l'Europe, qui n'a pas de licorne, fait payer moins cher ses productions que les Etats-Unis qui en comptent au moins quatre. S'appuyant sur des données de terrain, un excellent économiste français ose expliquer aux Américains que "bigger" n'est pas forcément "better" et que le capitalisme ne doit pas obligatoirement chercher son salut dans la concentration.

Answers the question “If the US economy has done so well compared to that of Europe, as most economic commentators seem to imply, how come most Americans live so badly compared to Europeans when observing reality in Europe and in the US?”