How to save capitalism from itself

Review - The Great Reversal: How America gave up on free markets, by Thomas Philippon

BY Declan Ganley | tweet declanganley   /  14 December 2019

Free-market capitalism is often contrasted with “crony capitalism” – the latter dominated by big businesses that control the levers of power, squash new entrants with the help of compliant regulator cronies and claim to support economic liberty while relentlessly pursuing self-enrichment. But “crony corporatism” has long seemed a better term for this, as it bears so little resemblance to actual capitalism – the sort based on open competition, level playing fields and secure property rights.

Far from being a close relation, crony corporatism is the arch enemy and polar opposite of free market capitalism. Thomas Philippon’s The Great Reversal describes in forensic detail the efforts of the cronyists to limit economic freedom. Philippon, a professor of finance at NYU’s Stern Business School, also details the costs to us all of the rise of crony corporatism – his calculations suggest that the decline in competition has deprived American workers of $1.5 trillion in income. He points out “This is more than the entire cumulative growth of real compensation between 2012 and 2018. The lack of competition has cost American workers a full six years of growth.”

As an entrepreneur, I found The Great Reversal hard to put down. The book’s lessons and recommendations are drawn from a broad range of industries, but it perfectly captured what I have encountered up close over the past 20 years in my own industry, the wireless sector.

The Great Reversal isn’t a political book. It is a thorough yet readable presentation of well-researched and presented evidence, data, methodology, analysis and a conclusion based on the past several decades of economic activity in both the U.S. and Europe. The Great Reversal is in a sense the economic and political counterpart of Timothy P. Carney’s Alienated America and J.D. Vance’s Hillbilly Elegy. While Carney and Vance focus on questions of culture and its role in the current state of America, Philippon follows the money, seeking the economic and financial roots of America’s current condition.

Philippon’s findings make for some uncomfortable reading but are much needed. The book presents broad-based evidence that competition has declined in most US industries over the past 20 years. Right in the Preface, Philippon poses the question: “Why on earth are US cell phone plans so expensive? Or, to broaden it a little further, why do consumers in Europe or in Asia pay less for cellular service and, on average, get much more?” He notes the transformation he has personally experienced since coming to live and work in the US in 1999. “Access to the internet, monthly cell phone plans and plane tickets have become much cheaper in Europe and Asia than in the US.”

Philippon makes the case that US prices are too high, showing that since 2000 prices in the US increased 15% more than prices in Europe, but wages only increased by about 7% more than in Europe. The evidence is that increasing concentration in the US has led to excessive price increases. Consumption and growth would be markedly higher if competition had remained at the levels that existed in 2000. Philippon shows that in contrast – and perhaps by accident rather than design – Europe copied what were some of the best elements of the older U.S. model and put a strong emphasis on ensuring competition and preventing over-concentration. He is not an apologist for Europe’s other problems but does show that they’ve had more success tackling the economic threats to competition and have done better at thwarting the problem of over-concentration.

The book exposes how consolidation (primarily due to mergers and acquisitions) and productivity growth from 1989 to 1999 were good for the overall economy. Industries with larger increases in concentration had larger productivity gains. Between 2000 and 2015, that turned negative. The number of listed firms began shrinking – listings peaked in 1997. Since then the number of listed firms has fallen by half. Some of this is because of mergers between listed companies, some because of a decline in new listings.

Philippon also turns his gaze toward the financial sector to underline that while it has been good for itself, it has not reduced the price gap between savers and borrowers by much since the early stages of the 20th century. Concentration in finance not only led to a “too big to fail” culture but has also made the industry less efficient at getting capital to stimulate the bottom up growth that feeds the cycle from start up to small, to medium, to large and so on. The evidence in the book is that this churn rate has very significantly declined and the finance sector has some share in that failure.

Perhaps the most revealing part of The Great Reversal comes when the Professor exposes the depth and rot of regulatory capture. “Capture,” he explains, “can be direct (quid pro quo) or intellectual (ideological).” He details how revolving doors and a particular sort of lobbying have been exploited and abused by powerful vested interests to raise the bar against competition, protect prices, undermine labour and smaller suppliers and generally rig the system to a point where it is becoming almost anti-free market. Some of those that employ the language of the free market are the worst offenders.

Philippon also delves into the health care sector and shows a strong link between regulatory capture and the opioid epidemic, where regulatory capture has fostered over prescription.

Monopoly power and monopsony power (monopsony power is when a firm can exert power on its suppliers and employees because they have limited options to go elsewhere) are also well explained. Monopsony, which in my own industry I have personally experienced but never before had a name for (at least not a name I could politely write down here) is shown to have become even more pronounced within the US.

On regulations, he says that he agrees when conservatives argue that the US needs fewer regulations but qualifies this position that the target should be “regulations that hinder the entry or growth of small firms.” He argues there is a need to be much tougher on incumbents. “Competition and antitrust remedies are not punishments for moral wrongdoing, at least most of the time. They represent economic solutions that make the broader economic system more efficient. Firms have a right to beat their competitors and even drive them out of business. Regulators have a duty to make sure they do not impede free markets.”

In his own conclusion he says he was surprised to find how fragile free markets really are. “We take them for granted, but history demonstrates that they are more the exception than the rule. Free markets are supposed to discipline private companies but today, many private companies have grown so dominant that they can get away with bad service, high prices, and deficient privacy safeguards.”

The crux of Philippon’s argument is that for markets to remain free we must constantly adapt, that great powers become complacent and greedy. The Roman and Chinese empires, Florence, the Spanish empire and the Dutch are all examples of such decline. America should not fall into the same trap.

He cautions: “Returning to a high-competition economy will not be easy. Those who benefit from the lack of competition will fight to protect their vested interests.” He encourages more boldness and risk taking in challenging entrenched monopolies and oligopolies, most especially those that are the most costly, obvious and egregious abusers.

There is a happy ending though. Philippon makes it very clear that US markets can and should regain their freedom. I humbly suggest that reading his book might be a good way to start.

Declan Ganley is Chairman and CEO of Rivada Networks, a telecommunications company


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