The Truth About Markets; By John Kay; Penguin pounds 25.00; MT price pounds 20.00
This landmark book avoids fundamentalism to identify the vital ingredients of a free-market economy. But Will Hutton finds it a patchwork offering of insights.
John Kay is persuasive. The genius of markets, he argues, is not that they are good at doing the things that mainstream economists and right-wing politicians say they are good at - allocating goods and services, promoting efficiency and co-ordinating the otherwise unco-ordinated. Their brilliance is that they allow accountability and feedback, and it's the pluralism with which business organisations respond - some well, some badly - that is at the heart of successful wealth-generation.
Kay is as scathing in his criticism of the over-mighty chief executive who stays too long at the helm of an enterprise as he is with any Soviet planner. Both commit the sin of getting in the way of feedback and of overriding key information.
What counts is pluralism. The strength of capitalism over communism is not that individual capitalist firms make better decisions than individual planners - frequently they do not. It is that, with enough capitalist firms in a market segment, the firms that make bad decisions get weeded out, whereas those that make good decisions can grow. A pluralistic system works better than one where decision-making is concentrated in one individual or organisation. Monopoly is as menacing as state control.
But Kay is not an enthusiast for, say, the US business model over the European. He is a natural iconoclast and worries that the dominant influence of the US's financial markets - which he dismisses as little more than arenas for sophisticated gambling - actively undermines great enterprise, because it gets in the way of what organisations need to do to be successful.
They need to work in a sustained way as groups to understand what the market is telling them and to act upon it - often in opposition to what should be done to support the share price. Organisations are social constructs that acknowledge interdependence and shared aims; too much money-lust wrecks the balance and corrodes the organisation.
The secret of successful business, as of societies, is the capacity to adapt - and adaptation is a social act undermined by individual greed.
Kay notes that Norway and Switzerland are as rich as the US, and that the strength of their companies and societies is rooted in adaptive organisations and strong relationships. What matters is their openness and the effectiveness with which they treat feedback.
Kay is surely right. Most senior businessmen I meet are preoccupied with what they must do to build great organisations. They know that what's required is a combination of shared sense of purpose, adaptability and capacity to read what customers want, and to act on this quickly. An organisation's strength and its capacity to respond intelligently to feedback are key. Most leaders intuitively understand Kay's points.
But while Kay is prepared to let societies and organisations rise and fall by trial and error in a pluralist universe, I've wanted to do more to enact best practice in institutions, laws and codes - especially to redesign the incen- tives in the financial system.
We can do more to be masters of our fate. We need to understand and protect this pluralist process, and that is about constructing the institutions and social capital that we know support organisations, whether it is long-term investing institutions, smarter systems of corporate governance or a better understanding of why teams and devolved decision-making are vital to business success.
Kay's book is a landmark work that moves us away from the primitivism of market fundamentalism. But it would have been better if he'd developed his argument as a systematic theory of how markets work rather than the patchwork style he has adopted. A pity, because Kay, I worry, is right but too few will listen - and even fewer will act on his profound insights.