John Kay talked with strategy+business in his London office.
S+B: Your most recent work attempts to separate the truths about markets and market economies from the myths. What prompted you to tackle this subject now?
KAY: The idea for this book was conceived really in 1999. At that time I said to myself, and my publisher, I need a Wall Street crash to provide the background for this, and I’m confident that we will get one. So it was planned in that sense. Quite what I’d have done if the Nasdaq was still soaring, I don’t know. But I never thought that was likely.
S+B: Executives already feel chastened by their acceptance of irrational thinking during that period. What else is left to learn about that “era”?
KAY: The key message for businesspeople is that during the 1990s they were offered a very facile and oversimplified description of how market-economy systems work. That model is not only wrong, but the attempt to act on it has actually made business and markets work worse. That’s true if you’re talking about the attempts to introduce a market economy into Russia, or if you look at the damage that has been done to the long-term position of companies by excessive focus on financial markets and short-term shareholder value.
S+B: Your book describes and dismantles what you call myths about markets. What are some of them?
KAY: There are four central myths behind what I call the American business model, or ABM. The first is that greed is overwhelmingly the most important motivation in economic affairs. Of course, it is a motivation, but it is not overwhelming for most people. Most people work because they want to do a good job, because they enjoy the respect of their friends, and so on. If you ignore these other motivations, you actually undermine the relationships that make corporations effective.
False premise two is market fundamentalism. It says you should impose as few restrictions and limitations as possible in the operation of markets. But this doesn’t recognize that markets actually operate — and can only operate — through an elaborate social, political, and cultural context. While some of that may be government regulation, a lot of it is self-regulation — the ways people expect to behave. To suggest that unregulated markets are more efficient is wrong. Markets rely on rules and signals. Without these, you get chaos.
The third premise, which in a sense is obviously mistaken, is that a successful business needs a minimal state. This argues that the only legitimate role for the state is in the protection of property rights and the enforcement of contracts. But when you look at them closely, you find that successful market economies have the largest and most powerful governments the world has ever seen.
S+B: And the fourth myth?
KAY: The fourth is that there’s an overriding need for low taxation, which is also untrue.
S+B: This is a controversial book — not least because its publication coincides with a rise in anti-American sentiment around the world. Superficially, someone might hear echoes of the anticapitalist, antiglobalization protesters.
KAY: I have no doubt at all that the market economy is the only successful form of economic organization, and that both rich and poor countries benefit from an open international trading system. But I see the market economy today described — not just by its opponents, but by its defenders — in terms of a lightly regulated society in which individual greed is the dominant motivation. This is ethically unattractive, which is why the protesters win sympathy from a much wider audience. But, more importantly, it is not a correct description of how real market economies work. The societies that are closest to that model — Nigeria, Haiti, and modern Russia — are not successful.