This future classic was completed in 2002, following the collapse of the Internet stock market bubble and the Enron / WorldCom scandals.
John Kay can be forgiven if he erroneously thought that “The Truth About Markets” would be some sort of epitaph for the failed “market fundamentalism” / “shareholder value” / “greed is good” era. We now know that, alas, he was at best delivering a palate-cleanser of the kind you get served at fancy restaurants after the appetizers.
He perhaps did not fully realise that the widespread direct and indirect ownership of assets had by the turn of the century turned asset prices into a primary target of government policy, and that all asset prices (stocks, bonds, housing, collectibles), by dint of having embedded themselves into the balance sheet of the banking system and the entitlements of an ageing population, would become the object of unprecedented support from central banks and policymakers, alongside Wall Street, the City and the CEOs he blames for their ascent.
Regardless, this book has stood the test of time.
There is a rich literature, chiefly academic literature, which seeks to explain that the most important differentiator between successful and unsuccessful states lies in the existence of robust, pluralistic institutions (some official and some unofficial) that serve to support the functioning of markets and societies. This literature is often convincing, but is usually very narrowly focused and quite often attempts to explain too wide a range of developments along simple axes. Acemoglu and Robinson, for example, wrote a 500 page book about the interplay between inclusive versus extractive political institutions and inclusive versus extractive economic institutions. My favorite Mancur Olson has written extensively on this topic too: he differentiates between spontaneous markets and markets that are fostered by governments, the latter being the ones that make countries rich. And so on. These, otherwise fantastic, contributions, are mere models, however.
John Kay goes one further than these pioneers, in that he dares to make some enemies:
First, he adopts the language of the statists, to unmask the “democratically elected,” state-appointed experts who are meant to take consideration of the long term consequences of their decisions and are meant to internalize the externalities of markets. In truth, he says, they are guaranteed to fail, because once the decision has been made about the best possible plan, centrally-planned systems inherently do not accept criticism. Any failure is attributed to the insufficient implementation of the plan, rather than the plan the experts designed. Democracy is not a sufficient condition for economic success. Direct democracy, in that it undermines specialization, even less so. More to the point, a democratic mandate for a policy does not make it good economic policy. Both the UK and the French approach to energy generation are considered here as examples of how not to do business and they provide truly illuminating “proof by contradiction” of the author’s view.
The opposite view, that markets alone provide the solution, because they represent the result of billions of decisions and billions of adaptations by billions of agents is also unmasked as naïve, among other things because a lot of the most important things in our lives you cannot necessarily buy or sell or insure against. Tradable markets are often a side-show in our life. You cannot buy and sell organs is what our society believes at the moment, for instance. The things we can trade, besides, can become casinos, like the market for foreign exchange which is 300 times larger than the needs that arise from international trade. Perhaps even more importantly, many markets by their very construction will never become perfectly competitive (for example, electricity distribution in a small country) and therefore a market solution may by construction be imperfect.
My favorite analogy, however (and in this case it does not suffer from the “fallacy of composition“ argument that undermines the “Schwabian wife” economics), is that the same way a teacher is fully expected to take his students’ interests in mind, all while he is earning the salary to pay for his own kids’ milk, a corporation must first have a duty to its customers, all while taking care of its employees and shareholders.
Care is additionally taken to tell you how we got here and how we get stuck in the ways we’re doing things: it’s because as economic agents we would be foolish to do anything other than to adapt to our immediate, narrow, environment. When in Rome, do as Romans do. So when in Greece, evade tax, when in Russia, bribe. When in the US, presumably, make a donation to the Clinton foundation (he does not actually say that in the book, I just thought I’d stir the pot)
And no, I have not succeeded in condensing a 300 page tome into 4 paragraphs, you’ll have to buy the book and read it yourself!
The best thing about the book, however, is that it succeeds in defining the terms of the debate.
John Kay recognizes that the answers to economic issues are a matter of taste. Market fundamentalists may prefer the lower overall growth / wealth that will ensue in the absence of government and redistributionists may prefer a lower growth / wealth if it is more equitably distributed. These are not differences that economics will ever resolve and economists should refrain from conflating this debate with economics.
If growth and prosperity is what you want, however, the argument is made very persuasively that it’s best to carve a course down the middle of the road. The lists of countries at the beginning of the book are provided as (very compelling) evidence and the rest of the book successfully explains why it's worth it to do the work, rather than default to a doctrinaire approach.
The book is not perfect. I really wish the author did not refer to the right-wing setup as the “ABM,” which stands for “American Business Model” because it not only dates the book, it actually turns it into a bit of a polemic. Also, the idea of “embedded markets,” which the author sets out as the nirvana we need to reach, is not fully developed. In choosing to explain his favorite set-up of “embedded markets” via the example of higher education, the author has actually made a poor choice (though obviously we have the benefit of 15 years of hindsight in observing US higher education is in crisis, rather than a role model “embedded market”). And, needless to say, in picking a “middle of the road” direction that is not “clear and simple” (yes, I’m quoting Mencken again) he is extremely unlikely to make a set of choices that will match any particular reader’s perfectly. I, for instance, take issue with his attitude toward the markets we are fortunate enough to be able to trade, to say nothing about his scorn for those who participate in them.
Regardless, it takes some doing to generate passion for the middle road.
It is this passion that elevates “The Truth about Markets,” a comprehensive, clear and detailed book, to the status of masterpiece.
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