A polarization exists today between a market-fundamentalist view that believes there is a market solution to any problem, and the antiglobalization protesters, whose incoherence is summarized in the slogan “capitalism should be replaced by something nicer.” Both positions are caricatures of markets and market economies — and they both distort the reality. And that is bad for business and economic development.
S+B: Why has this simplistic view of market economies become so pervasive?
KAY: The ABM has come to play the role in the political economy that Socialism enjoyed for most of the 20th century. All political positions, even hostile ones, are defined by their relationship to it. Prior to the fall of the Berlin Wall, the Left determined the vocabulary of politics, but with the collapse of the Soviet system, the Right has seized the language of political debate. That debate, whether for or against, is now focused around the ABM.
Markets are remarkable institutions. The creation two or three hundred years ago of what are now the great market economies of Western Europe is one of the great human achievements. But we need to understand how subtle and complicated they are. If competitive advantage weren’t subtle and complex, it would be easy to reproduce and wouldn’t be as remarkable in its effects.
S+B: And this subtlety and complexity means each economy is unique — there can be no blueprint?
KAY: Exactly. Market economies are necessarily embedded in social, political, and economic institutions — and cannot work unless they are. Market economies draw their strength and legitimacy from their context.
We don’t have — and never can have — the capability to see the future a long way ahead and do the sort of planning that crafting these kinds of structures would demand. People find it very hard to see that Socialist plans failed for the same reasons centralized directives in market economies or large corporations will fail.
S+B: You draw parallels between the centralized planning departments at U.S. corporations in the 1960s and 1970s and the Soviet system.
KAY: The 1960s were the heyday of centralized planning, both at the level of the national economy and at the level of the corporation. Looking back on it now, there seem to be quite interesting reasons for that. People did not understand then that the Soviet Union was not doing well economically. It’s hard to believe what was written at the time. Even those on the Right believed that the Soviet economy was doing pretty well; what was wrong with Socialism, they argued, was its morality. Similarly, national planning was at its height in most European states. That was also the high tide of corporate planning.
A Department of Defense study in the 1970s described GE as the best centralized-planning system in the world. When he became CEO, Jack Welch identified the problems this created, such as the absence of honest feedback — the same problem that was so damaging in the Soviet Union. Facing reality was not one of the company’s strong points. Its superficial congeniality made candor extremely difficult. It is striking that Welch uses GE’s approach to nuclear power to illustrate the issue.
I contrast that with experience in Britain, where superficial congeniality continued and candor was never achieved — not even today.
S+B: But by the 1980s, that kind of centralized planning was largely discredited, in the corporate world at least. There is a general acceptance now that it is not possible to create a detailed plan for five or 10 years down the road.
KAY: Both corporate and national planning faded in the 1970s because they didn’t work. That was accompanied by a move to the kind of vision and leadership style of centralized corporate management in which the vision of the heroic individual becomes a key element. And again, if you think about that in terms of the experience of national economic planning, you see the corporate analogue.