The Great Reversal: How America Gave Up on Free Markets

by Thomas Philippon

I have found that people who tell you that the answers to the big questions in economics are obvious are telling you only half of the story. More often than not, they think the answers are obvious either because they have an agenda or because they don’t really know what they are talking about.

The best summary of my priors is probably that I am a free market liberal. I believe that free markets work best, provided that we agree on what we mean by “free” markets. I believe that markets are free when they are not subject to arbitrary political interference and when incumbents are not artificially protected from competitive new entrants. Keeping the markets free sometimes requires government interventions, but markets are certainly not free when governments expropriate private property, when incumbents are allowed to suppress competition, or when they successfully lobby to protect their rents. I am also liberal in the sense that I believe that reducing inequality is a worthwhile goal. I don’t believe that inequality is evil. Inequality is necessary to reward success and punish failure, and it would be pointless to argue against that. But I believe that, on balance, there are more forces in our economic system pushing toward excessive, unjust, or inefficient inequality than there are forces pushing toward excessive equality. These

Contrary to the techno-optimists arguing that innovation has never been faster, Bob argues that our current wave of innovation is not nearly as transformative as previous waves have been.

Turnover in the labor market, the story goes, is higher than ever. And while that story may feel true, it’s not. Data from the Bureau of Labor Statistics show that employees stay a bit longer with a company today than they did thirty years ago.

An economy can grow in exactly two ways: its labor force can expand, or its output per worker can increase.

Robert Gordon, an economist at Northwestern University, argues that the remarkable growth in productivity from 1870 to 1970 is unlikely to repeat itself. The benefits of the Second Industrial Revolution, associated with electricity and the internal combustion engine, were deep and wide. In his view, computers and communication technologies are simply less important.

Lyon and Waugh show that an effective way to compensate workers for reduced earnings and lost employment opportunities is through a progressive tax policy.

concentrated special interests are likely to organize and fight to protect their rents, while diffuse majority interests are trumped. The essence of the problem is free-riding and the fact that free-riding incentives grow with the size of the group.

For instance, Erik Brynjolfsson and his co-authors (2019) have recently argued that properly accounting for Facebook’s free services could add between 5 and 10 basis points (0.05 to 0.1 percent) to our measure of growth for the US economy.

The economic understanding of antitrust has evolved significantly over time. Early lawmakers were interventionist. Their doctrine was supported by the structure-performance-conduct paradigm of Edward Chamberlin and Joan Robinson in the 1930s. It viewed the market as a structure influencing the conduct of businesses and the performance of the industry. This set of ideas and principles came to be known as the Harvard School of antitrust.

The Chicago School brought a counterrevolution in the 1970s which tried to put economic efficiency at the center of antitrust policy. Robert Bork’s highly influential book, The Antitrust Paradox, marked a shift in policy in 1978.

The cost of a haircut basically depends on the wages of hairdressers. According to United Bank of Switzerland (UBS) analysts, who used data from 2015, haircuts for women cost $95.04 in Oslo, Norway; $83.97 in Geneva, Switzerland, but only $4.63 in Jakarta, Indonesia, and $9.27 in Beijing, China. Hairdressers are paid more in rich countries. Hence, haircuts cost more in rich countries than in poor countries. That’s pretty obvious, but it has deep implications, as we shall see. It even has a name: the Balassa-Samuelson effect, after Hungarian economist Béla Balassa and Nobel Prize winner Paul Samuelson, who described the phenomenon in the 1960s.

Starting around 2000, profit rates and concentration ratios increased in the US but remained stable or decreased in Europe. Prices relative to wages increased by 8 percent more in the US than in Europe despite similar productivity growth. As US markets experienced a continuous decline in competition, European markets did not. Today many European markets appear to be more competitive than their American counterparts.

The GDPR is bold and ambitious. It is also a big mess.