Two decades ago, Thomas Philippon came to the United States from France to study economics. He was pleasantly surprised to discover how inexpensive consumer goods were here. But then, over time, the situation reversed. From 2000 to 2017, average prices increased by 15% more in America than in Europe. Broadband prices in America are now about twice European prices. “How did Europe, of all places, become more of a ‘free market’ than the U.S.?” Philippon asks.

Now a finance professor at New York University, he decided to answer that question. His research (often done jointly with his colleague Germán Gutiérrez) and conclusions are summarized in his recent book The Great Reversal.

Europe v. America / The answer, he argues, is that industries have become more concentrated and the economy less competitive in the United States while they have moved the other way in the European Union. “Competition,” he observes, “has declined in most U.S. industries over the past twenty years.” Like for telecoms, passenger air fares have dropped faster in Europe. As regulatory restrictions on market entry have grown in the American economy, they have been accompanied by a reduction in the rate of new business entries in markets. Not surprisingly, in sectors open to foreign trade, competition has not decreased or has decreased less.

Philippon finds that two factors explain this divergence: deregulation and antitrust. Product markets (not necessarily labor markets) have been deregulated in the European single market while regulation has increased in America. He shows how the growth of market restrictions in the United States—measured by use of words such as “shall” and “must” in the Code of Federal Regulations as computed by the Mercatus Center’s RegData database—correlates neatly with a growth in market concentration. As for antitrust laws, they have been enforced more stringently by the EU’s independent supranational agencies while the number of antitrust cases has decreased in America.

The author writes:

To be clear, I don’t think antitrust is necessarily the main channel through which Europe has freed its markets. The broad Single Market agenda goes beyond antitrust, and the lifting of entry restrictions has probably had more impact than merger reviews.

Still, he concludes that more stringent merger control is needed in America.

One objection to antitrust is that large technology firms demonstrate that concentration can coexist with competition and efficiency. Think of the “GAFAMs”: Google, Amazon, Facebook, Apple, and Microsoft. Philippon provides evidence that the GAFAMs minus Amazon are smaller than the “star” companies of previous decades. He also argues that their effect on productivity is small because they are less “integrated” in the economy.

This integration argument, based on using total economic activity instead of value added, I find weak. Philippon underappreciation of the GAFAMs (and their future equivalents) is illustrated by his comment that “if Facebook’s productivity were to double overnight, you would not notice much difference.” In the same vein, he writes, “The iPhone makes it more convenient to access digital content while traveling. It is nice, but if that’s all it does, it will not move the needle of aggregate productivity.” There must be something wrong here, either in the data or in the theory. Imagine the loss of consumer utility and the increase in business costs if smartphones disappeared.

Data and values / Perhaps Philippon entertains a too-mechanistic view of competition. As Austrian economists have pointed out, competition is more a process than a result or an equilibrium—even if the concept of equilibrium is a useful heuristic device. It is not obvious that counting the number of firms in a market or their market shares tells us much about whether the market is or isn’t contestable by new entrants.

Philippon does economics the way it is mostly done these days: with data. He quotes the saying, “In God we trust, others must provide data.” “My generation of economists,” he writes, “is less interested in ideology, and we have a lot more data. That is not a sufficient condition for success, but it’s a better starting point, in my opinion.” I would argue that the starting point is a theory that suggests which data to look for. It is good to follow the facts, but how does one choose which facts to follow?

It is too easy to attack quantitative or empirical economics. Philippon does admit that the degree of competition is difficult to measure. With concentration indexes? Prices? Profits? But it is also difficult to determine what is good and what is bad, as any public policy recommendation requires.

In the 1990s, Philippon argues, competition by Walmart led to lower prices. But, he claims, Amazon did not have the same effect, at least for anybody other than “high-earning households” that saved a lot in travel costs. What’s wrong with high-earning households getting benefits from market exchange? And what’s wrong with “predatory pricing,” which in a truly free market can only be profitable if the competitor doing it can create more value that way? Philippon tends to think that this sort of interrogation “shows that regulators must remain vigilant” and that “we need data, more data!” Why isn’t it simply more market freedom that is needed?

Quantitatively minded economists tend to forget that moral judgments—what economists call “value judgments”—are required to make policy proposals, as the old field of “new welfare economics” demonstrated in the first half of the 20th century. Philippon does reveal his own value judgments, which seem to be in the middle of mainstream economics. “I am a free market liberal,” he writes. But he simultaneously claims that he favors “equality,” which does not say much until you define what kind and along what dimension. He also claims that “keeping the markets free sometimes requires government interventions.” Regulate in order to keep an unregulated economic system?

Different sorts of lobbying / The Great Reversal is full of good explanations of basic economic concepts—financial intermediation, for example. The student of economics with some preliminary formal knowledge will learn a lot.

Philippon also emphasizes an important result of public choice theory: regulatory capture—the idea that regulated firms will often capture their regulators and use regulation to block their potential competitors and earn anticompetitive rents. He explains how competition is threatened because its benefits are dispersed (among all consumers and potential competitors), while the advantages of limiting competition are concentrated among a few players who thus have a much stronger interest to lobby and capture government.

Large firms spend a lot more on lobbying in the United States than similar firms in the EU. American steel manufacturers boosted their lobbying expenditures by 20% between 2017 and 2018, just before the Trump administration granted them protective tariffs. It appears, writes Philippon, that “lobbying and regulations explain much of the decline in entry rates over time and across industries.” He argues that increases in lobbying also account for a decrease in antitrust enforcement in the United States. But do lobbying to constrain your market competitors and lobbying to prevent government interference in your peaceful exchange activities have the same moral value? Quantitative economists don’t have a comparative advantage in answering that sort of question.

Philippon observes that “lobbying increases when the stakes are higher,” but he seems to believe that the solution lies in independent bureaucratic agencies like in Europe. He does not consider the real liberal solution, which is to reduce the stakes by limiting government power so that there would be little to lobby for.

Philippon engages in the popular European sport of blaming “too much money” in American politics. According to this criticism, the freedom of individuals and private groups to spend their own money to promote their political opinions during electoral campaigns should be tightly controlled just like in Europe. He quotes George Mason economist Thomas Stratmann who argues that no consensus has developed among researchers about the role of campaign expenditures in the winning of elections. More recently, billionaire Michael Bloomberg’s campaign for the Democratic presidential nomination, on which he may have spent more than $900 million of his own money, suggests that money alone does not win elections.

Dangerous regulations / Regulation often goes wrong. Philippon recognizes this. Entry in financial markets is often limited by “heavy—and sometimes biased—regulations.” He cites the case of Walmart, which was denied a banking license “as if debit cards and savings accounts were magical products that a retail firm could not possibly provide.” Because of barriers to entry, the price of financial intermediation is roughly the same (200 basis points) as it was at the end of the 19th century, despite all the technological progress since then.

He argues that the American health care system is concentrated, very expensive, and produces worse infant mortality and life expectancy rates than in many rich countries. He admits that there are behavioral factors and that “medical care accounts for less than 20 percent of the observed variations in morbidity and mortality.” He does not consider the possibility that medical care in the United States is expensive because of the size of both public expenditures and voluntary private expenditures, each contributing about half of total expenditures. When demand increases, prices increase too. In the difficult problem of health care financing, data are not everything: some normative theory is also necessary to offer policy advice.

Philippon explains that, in 2006, Whirlpool was allowed by antitrust authorities to buy Maytag after it quelled antitrust concerns by arguing that foreign competitors would prevent concentration. Yet, a decade later, the same company lobbied for protective tariffs against foreign competition. (See “Putting 97 Million Households through the Wringer,” Spring 2018.) He seems to conclude that “this example shows the danger of relying on foreign competition to discipline domestic firms,” instead of concluding that it shows the danger of government’s power to reduce foreign competition.

In his chapter titled “To Regulate or Not to Regulate, That Is the Question,” Philippon sometimes sounds like Adam Smith’s “the man of system,” who

is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. … He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.

Philippon speaks of the “real economy” and of “markets that really matter,” seemingly forgetting that productivity is defined in terms of what consumers want. He attacks corporate tax avoidance, which he seems to confuse with tax evasion. Against the GAFAMs he proposes tough antitrust and antimerger surveillance. He strangely claims that “Google, Amazon, Facebook, and Apple in some sense owe their present success to the [U.S. Department of Justice], which prevented Microsoft from monopolizing the internet in the late 1990s.” Really? How do the data show that? Suppose that the Justice Department had won its protracted proceedings that started in 1969 against IBM for monopolizing business computers and had broken up the company. Could we now say that the GAFAMs owe their success to the federal assault on IBM?

Philippon also proposes the strange idea that governments should be allowed to “make mistakes too,” as if they were private entrepreneurs taking risks with their own money in a marketplace of competitors. Couldn’t we say that regulatory capture or occupational licensure (which Philippon correctly criticizes) are mere mistakes of governments? Why believe that Leviathan will increase competition instead of extending crony capitalism?

When a government makes mistakes, which is not rare, it often makes them on a grand scale. As public choice analysis suggests, government failures are usually much worse than “market failures.” I would suggest that Leviathan also “create[s] political and democratic issues” much more than the GAFAMs ever will.

Markets and the state / Philippon is “surprised how fragile markets really are.” This may depend on how “fragile” and “markets” are defined. It can be argued that, to the extent that markets are fragile, it is because of regulation and control, not because of a lack of it.

Many economists have argued that, left alone, free markets are not fragile at all. Smith wrote that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” In a similar vein, Mancur Olson argued that economic development is the natural trend and that, on the contrary, “it takes an enormous amount of stupid policies or bad or unstable institutions to prevent economic development.” Bad institutions are often built on and by government power. And think about how solid black markets are.

How could we have come to believe that what needs to be economically and morally justified is the existence of Google, with which individuals exchange voluntarily, instead of the existence of the state, on which an individual has no discernable influence? As far as the danger of politics is concerned, more data are probably not needed: during the 20th century, according to University of Hawaii political scientist Rudolph Rummel’s count, some 169 million individuals were killed by their own governments outside of interstate wars.

The Great Reversal is an interesting book, mainly for the first part of its thesis, that mounting regulation in America explains why markets are now often freer in Europe.