Philippon - The great reversal: how America gave up on free markets

THE QUESTION that spurred me to write this book is surprisingly mundane. Its something that virtually everyone in the United States has probably asked themselves at one point or another: 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?

Asking this seemingly simple question was my first step on a journey through some of the most hotly debated issues in modern economics. Looking for the answer led me to investigate wage stagnation, corporate lobbying, special interests, governance of large financial funds, money in politics, free trade, technology, and innovation.

It also led to some surprising revelations about the relative prices of goods and services in the US and Europe, overturning common assumptionsincluding my ownabout the status of consumers in the two largest economic markets on the planet.

How did I wind up here? Believe or not, this was not my intention. Its the datas fault. I started with a precise, well-defined question, and then I followed the facts. All the facts. Nothing more, but nothing less. And Ill admit freely that I was as surprised as anyone by the outcome.

My aim is to retrace some of these steps, taking you along with me. If you follow, youll find out why youre paying an arm and a leg for your cell phone every month, but youll also learn a lot about economics. In fact, the book could serve as an introduction to modern economics, though in an unconventional format.

A quick note about my approach. Unlike some who write about controversial topics in economics or in other fields, I readily admit that I dont have all the answers. In much of the writing on economics and society today, the tone is certain and prescriptive. The problems are obvious and, predictably, so are the solutions.

I would suggest, however, that such prescriptions be taken with a (large) grain of salt. When you read an author or commentator who tells you something is obvious, take your time and do the math. Almost every time, youll discover that it wasnt really obvious at all.

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 dont really know what they are talking about.

So be skepticalalways. Most people simply repeat what they have heard without checking the data. In fact, there is often a negative correlation between outward certainty and factual information. The first thing anyone should discover when they research an interesting question is always the limits of their knowledge. Mancur Olson put it eloquently in The Rise and Decline of Nations: The reader should accordingly not accept the argument in this book simply because he or she finds it plausible and consistent with known facts. Many plausible stories have been told before and often also widely believed, yet they failed to stand up.

This brings me to another important note about this book. I plan to enable your skepticism by showing you how the work is done. That research informs much of this book, and where I rely on it to reach conclusions, I provide enough background on the data to allow you to make your own judgment about my findings. I will present all the facts as simply and transparently as possible, refraining from making any claim that is not backed by at least some data. In doing so, I hope to reduce the risk of imposing my own subjective views.

But I am certainly going to fail, at least to some extent, so it is probably useful for you to know a bit about my beliefs, which in economic jargon we call our priors to emphasize our willingness to change them if new facts emerge. As John Maynard Keynes is often credited with saying to a critic, When the facts change, I change my mind. What do you do, sir?

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 dont 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 are my prior beliefs as I write this book. They should be debated, and they can certainly be challenged. I will try not to let them interfere with my thinking, but I will not ignore the potential value in the belt-and-suspenders approach.

Data! data! data! he cried impatiently. I cant make bricks without clay.

ARTHUR CONAN DOYLE, T HE A DVENTURE OF THE C OPPER B EECHES

I should like to close by citing a well-recognized clich in scientific circles: In God we trust, others must provide data.

EDWIN R. FISHER, PROFESSOR OF PATHOLOGY, ADDRESSING A SUBCOMMITTEE OF THE US HOUSE OF REPRESENTATIVES IN 1978

If economists are to be of any use to societya big if, some critics might addthen at the very least they should be able to challenge common wisdom, to take a contrarian perspective, and to avoid repeating what everyone else is saying. This is what I find so remarkably refreshing in Robert Gordons