on 18 June 2003
Professor Kay is one of the leading economists in the UK and writer of one of the best books on corporate strategy (“Foundations of Corporate Success”). In his latest book he aims to explain, describe and justify the requisite framework within which the market economy prospers.
Kay argues, that contrary to common belief, what we refer to as the American Business Model, characterized by unrestrained individualism and minimal government intervention, is not the characteristic framework of successful economies. Indeed the “genius of the market economies to achieve co-ordination without a co-coordinator” works effectively only by being “embedded” in a social, political and cultural context. It is the quality these latter factors which differentiates between poor and rich states. It follows that the principal role of the state should be to allow these conditions to prosper.
Apart from being an authoritative book making a convincing argument this is also an exceptionally well-written and entertaining book, which will appeal to wide range readers. Through a series of “little stories”, he accompanies the reader from the failures of the UK electricity industry to the flower market of San Remo, in order to make each point. This approach brings to life his arguments making it interesting and accessible, even to readers who might lack a background in economics.
Overall, I think this is a very informative and highly rewarding book and would definitely recommend it to people interested in gaining a deeper understanding into the way the markets operate.
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 assent.
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 is 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.
John Kay has little time for the ultra-free market madcaps that seem to have taken a stranglehold on US economic and political ideology arguing, as does John Gray (albeit from a different perspective), that as an ideology it promises to be as destructive of society as Marxism. As he points out, the belief that a company's paramount responsibility is to its shareholders ends in the graveyard marked Enron.
As M&S shareholders were to find, when a CEO decides that his focus should be on the company's share price rather than the product or service it's offering, it's time to sell!: "It is not true that profit is the purpose of a market economy, and the production of goods and services is a means to it: the purpose is the production of goods and services, profit the means." The fact that such a truism needs repeating shows just how completely the lunatics have taken over the asylum.
The promotion of self-interested, self-regarding capitalism at the expense of the other factors that influence human behaviour becomes a self-fulfilling, but ultimately destructive dead-end: "Market economies are not about harnessing greed, and the elevation of greed as their dominant value undermined them." Unfortunately, Kay talks about this in the past tense - as if the `American Business Model' is past its sell-buy date. While this may be true in terms of theory, in practice it remains in the ascendant and is in the process of cutting swathes through the provision of public services.
Kay is very good at presenting the paradox that `market failures' are, in fact, a sign of the triumph of `disciplined pluralism'. It's a kind of `heads I win, tails you lose' argument for those who are not as enamoured of the power of markets. When the dot.com bubble burst, or Enron imploded this was proof of the robust nature of the market. Market failures prove just how invincible the market really is.
As a defence of market capitalism it is well worth reading (and John Kay is an excellent writer with an engaging sense of humour - which is a bonus), but Kay's emphasis on the `small stories' in reaction to the meta-theories of the neoliberal fantasists leaves a lot of questions unanswered. He rightly points out how health insurance will struggle to survive the advent of genetic testing but can't bring himself to endorse a publicly funded service. He rejects comprehensive education but doesn't suggest an alternative. He extols US-style higher education (which he curiously claims remains accessible to those on low incomes), despite the fact that grafting a system from one economy, with its own particular history/culture, onto another seems to run counter to his central thesis.
He seems to accept that unemployment insurance, pensions and the relief of poverty have to be addressed by the state, without quite endorsing it. He rejects state planned energy policy, but accepts that private provision will mean the lights can go out. His optimism convinces him that the market will provide alternatives to fossil fuels. He seems to accept the case for a minimum wage, but argues that the norms and values of a society can never be substituted by statutory controls. It doesn't take much thought to consider instances where statute has proactively shaped the norms and values of a society (slavery, seat belts, drink driving, drugs, homosexuality), just as a minimum wage can both reflect and reinforce acceptable standards.
This is indicative of his downplaying of the role of the state in the emergence of many of the major developments in 19th/20th century economies (road/rail/aircraft/communications/the space programme/information technology/protecting emerging sectors and so on). Certainly, as he argues, history is littered with govt-sponsored failures, but another reading would give more credit to the power of govt. to institute and encourage nascent economic development than he allows.
Ultimately, the author is much better at saying what he's against: neoliberalism, socialism, social democracy, the Third Way, Will Hutton, than what he is for - a kind of woolly laissez-fairism that seems to plump for the rather circular argument that what works is what works! I suppose my gripes are down to the fact that I was hoping the book might, as Joseph Stiglitz claims on the dust cover, tell us what should be the role of the state, it's never quite that clear cut. We are told that there are things the market won't (indeed can't) do, but Kay isn't quite able to advocate state intervention.
Oh... and the answer to why some countries are rich and others poor? That's just the way it is. No need to feel guilty about it. They'd be poor anyway. Dr Pangloss is alive and well!