The Great Reversal: How America Gave up on Free Markets

"This book is written by an economist who went from France to America when he was young, 20 or 30 years ago. He was amazed and impressed by how competitive America was compared to Europe. But his view is that whereas 30 years ago America had a better antitrust framework and had more competitive markets than Europe, this has now reversed. America now has a weaker antitrust system than Europe. He praises the setup of the antitrust system in the EU in particular. He thinks that the EU has become much more effective in its pursuit of big companies than America. The book is full of evidence. It’s got lots of empirical evidence and charts and data. This idea of a ‘great reversal’ is a very interesting thesis and it’s a very enjoyable read. Get the weekly Five Books newsletter I think he’s a bit on his own, actually, in the way he praises European competition policy. He certainly does that more than the other authors on my list. He relates it to the way in which the two continents work. In Europe, it’s important to ensure that the institutions of the EU are at arm’s length from any kind of lobbying from individual states, so EU competition policy is quite removed from political pressure. That’s the way the treaty structure of the EU works and the way competition policy works. So competition policy is less susceptible to lobbying from big companies and political pressure. That is not the case in the US. He’s got a lot of chapters in his book setting out how susceptible the American antitrust system has become to lobbying. He believes that there’s a lot of lobbying of politicians, which is putting political pressure on the institutions carrying out competition policy in America, which has had the ultimate effect of leading to a much softer competition policy. He does draw some comparisons. This book is full of charts and data but I don’t think he has the share of GDP going to labour comparison. He does compare the amount of investment and other indicators of a healthy economy, including concentration measures, how much markets are dominated by big firms. He says the concentration has risen a lot more in America than in Europe. He argues that profit levels have gone up a lot more in America than Europe. And he also argues that investment levels have gone up less in America. I don’t think his thesis is the consensus. For example, the book that we discussed previously, The Profit Paradox , finds that measures of market power are just as bad for Europe as they are for America. So I think Philippon’s thesis is not one that Eeckhout would agree with."

"In choosing my books around the economics of coronavirus, I felt a little guilty that I hadn’t chosen any recent books. But this one is very recent, published just a few months ago (Philippon is still going around giving talks about it). It’s a book on what was already a very important question before the virus in the US, in Europe, in China and Japan and the advanced economies. It has ceased to be a focus of attention over the last month, and rightfully so because we have had other things to worry about. But, I think the question is going to come back even more strongly six or twelve months from now. The question is going to be crucial at all future elections and in economic policy debates. The question is, ‘How worried should we be that a few companies, like Facebook, Google, Amazon, Apple have such a very large market share and are so powerful in our societies?’ What this author notes very thoroughly is how the extent of competition in the US economy, as measured in a bunch of different ways, has significantly declined in the last 20 years, partly through the influence of these very large companies. They seem to have more market power and with that has come less productivity, less investment, fewer new entrants, less business dynamism and lots of concentration. Get the weekly Five Books newsletter Now, why has that happened? As the author notes, the difficulty here is that by the nature of their businesses and the innovation that’s come with the IT revolution, a lot of them require these network effects that require very large companies. We might not want to have 59 different social networks. But, because of that, our approach to any possible antitrust concerns has been to let them grow in a way that we didn’t let Microsoft grow in the 1990s, or other companies grow before. The question today is whether we have overdone it. Have we put the network effects argument too much ahead of the anti-competition argument? Are we now too much on the opposite side of the curve, where these companies have become too powerful and the network effects, and the scale economies they are generating are actually not quite so relevant any more? This is a very important debate. And, by the way, it’s not obvious to me at all what the right answer is. But the author of this book, even though he clearly has one point of view, does a great job of highlighting the different sides here. Over the past month we have already seen the increasing importance of delivery systems, at which Amazon excels, of online social networks like Facebook, and of online digital collaboration where Google or Apple are more important. That situation has boosted the importance of this debate and has, if anything, brought the urgency of it forward in time. It is going to be a very important one over the next few years. The author suggests that there are many different ways in which we could deal with it. But I think the book’s importance is more general, and lies in how he argues—somewhat controversially, I should say—that antitrust has been much less active in the last 20 years. So, it’s not so much a question of what tools are required, or the ways of operating them, as the extent to which antitrust in the United States has been less active, less willing to intervene. That would be one reason, and the author discusses that. One of the four parts of the book is about the role of money and politics and lobbying. That may have had an impact and I think it’s important to discuss that. But I think the economic debate is more interesting. It is less obvious and less about the ‘bad lobbyists’. Economics says there’s an argument for why Facebook should be a very large company. It’s a network and it doesn’t make sense to have small networks. There are clearly economies of scale in distribution and deliveries, and so, it makes sense that Amazon is a very big company, in the same way that Walmart is a very big company. And these companies are extremely productive and efficient in some ways precisely because they can have such large scale. The question is how to weigh those benefits against the costs in terms of lack of competition, lack of innovation and lack of productivity growth. And it’s looking at those trade-offs, where the picture’s much less obvious and where we need to spend much more time thinking harder about them, discussing them and trying to measure them that I find interesting. Sure, maybe the bad guys went and threw money at it and bought politicians, which may be true, but I find that less interesting. They are, but as Philippon notes, they’re also a disadvantage, because they may explain why the US economy’s productivity growth has been quite dismal over the past 20 years, to give one example."

"Yes, very explicitly. He gives you all the metrics of corporate concentration and asks why it’s happening. As I mentioned, in economics there are two schools of thought. There is the Chicago school, call it the right wing, if you want. They see large companies as ‘superstar’ companies, who have more and more new technologies and can take advantage of economies of scale that allow them to lower their unit costs as they get bigger. In microeconomic theory, if your costs are mostly fixed, then the more you sell, the more you can spread these costs out and the lower your price. In technology, this becomes what we call the network effect. So the value of Facebook is proportional to the number of people who are on Facebook. If it’s 100 million, that’s great. If it’s a billion, it’s even better. It becomes what we call ‘a natural monopoly’ in that the optimal economic situation is where there’s only one, because then you can lower your costs massively. In technology, we have more and more of these fixed costs and these network effects, which makes it natural that these companies get bigger and bigger, and more and more concentrated. But with that comes market power. In turn, these companies will then spend money to create barriers to entry, to pass all kinds of laws to make it difficult for other companies to enter. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . Thomas Philippon asks, ‘What is the big difference between Europe and US?’ In the US antitrust is a political process. It’s about campaign financing laws. Apparently 70% of the time someone spends in the House or the Senate is involved in raising money! 20 years ago, the financing of electoral campaigns was changed to allow more corporate money to finance politicians. All these big corporate lobbyists are saying, ‘Here’s a big check for your election campaign, I need this and this.’ And if you don’t do that, you have no money and you don’t get reelected. In Europe, a lot of the antitrust regulations come from the European Commission, who are not elected politicians, but bureaucrats. That was part of the issue with Brexit. They are not representing the people, they’re appointed. But, as a result, they can’t be bought. There’s no election campaign for them. So, in Europe, the competition department is run by Margrethe Vestager, who is Danish. She cannot be bought so she is going to make sure that we don’t have excessive corporate power and concentration and abusive pricing. That’s why we have more competitive markets in Europe than we have in the US. That’s Thomas Philippon’s main insight. Every European country has one. The UK has one, in Germany it’s called the Bundeskartellamt. One country where it is extremely powerful and effective is China. China has had its own Anti-Monopoly Law only since 2007, but last year strengthened it to deal with tech companies. It’s not really a question of pricing or economics, it’s about political power. You have the Chinese Communist Party, and you have the corporates. The Communist Party is saying, ‘We’re in charge, not you.’ They’re recognizing that they have to do this, and I can’t disagree with them."