The Great Reversal: How America Gave Up on Free Markets

by Thomas Philippon

We have always known that competition lowers prices and increases real wages and standards of living. But the evidence also shows that competition is good for investment and suggests that it fosters innovation and productivity growth. In theory, however, competition can be excessive. We should expect, then, to find at least some industry at some time period in some country where competition has had a negative impact on innovation. But we find hardly any. Why is that? This is the story of the dog who did not bark. I have seen and discussed many papers showing that competition is good for growth (Buccirossi et al., 2013). I have not seen a paper that convincingly shows that protecting incumbents through patents, barriers to entry, or any other stratagem leads to an increase in productivity. It is highly unlikely that no researcher would have found this effect if it was in the data. The dog did not bark; that is the key piece of evidence. But why is it so difficult to find any such example? I think the answer is actually quite simple. The standard theory is incomplete because it ignores the political incentives of incumbents who lobby to weaken competition and erect barriers to entry. They often succeed for the wrong reasons, and this is why free markets are fragile. But in the rare instances in which their arguments have merit, their success is almost assured. As a result, the empirical distribution of industries is biased toward insufficient competition, and we almost never...