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Really useful economics

Who would believe that the dismal science of economics could light up the world?

By Romesh Vaitilingam 01 March 2005

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Telling people you’re an economist – even an economic journalist – invariably draws a request for advice on the likely next movement of interest rates or house prices. But as John Kay’s new book, Everlasting Light Bulbs, amply demonstrates, economics nowadays provides illumination on a far broader scale – from familiar problems like how a couple can co-ordinate their plans for the evening, through big policy debates around regulation and public services reform, to the grand modern themes of globalisation and technological change.


Indeed, forecasting – whether it’s the property market or the wider economy – is one of the discipline’s least successful activities and, in contrast with a common perception, one now largely avoided by serious economists. Much of Kay’s career has been spent trying to explain the real value of economics for understanding how businesses, industries and national economies work. And during this time, it is clear that the world of economic research has become increasingly powerful, not only through the ideas and insights that inform a wide range of government policies and organisational practices, but also in the growing number of economists in key policy roles.


Kay’s life as an economist began extraordinarily early. Arriving at Oxford in 1969 as a graduate of Edinburgh, his hometown university, he was appointed a fellow of St John’s College within a year, and had published his first article in the Economic Journal by the age of 22.


In the mid-1970s, Kay worked for the Institute for Fiscal Studies (IFS) on Nobel Laureate James Meade’s committee on direct taxation. Two other economists who subsequently divided their time between the ivory tower and policy-making were colleagues: the late John Flemming and Mervyn King, now governor of the Bank of England. Shortly thereafter, Kay and King collaborated on The British Tax System, which has been for many years the standard work on the economics of taxation.


Towards the end of the 1970s, Kay took on a more permanent role with the IFS, aiming to turn it into a fullscale public policy research institute. At that time, the influence of economic research on policy was considerably weaker than today. But Kay quickly made a splash in policy circles, notably with analyses of the budget, his 1984 book, The Reform of Social Security, written with Nick Morris and Andrew Dilnot, and the promotion of “fiscal neutrality”, the idea that the tax system should support free markets and avoid distorting people’s behaviour.


In 1986, Kay left the IFS to take up two new challenges, the directorship of the Centre for Business Strategy at London Business School (where he founded Business Strategy Review), and the launch of London Economics, one of the first consultancies in Britain to sell economic research to the private sector. Both these ventures were based on the assumption that if economic research with an emphasis on communication could be done in public policy, it could also be done in business policy. And, Kay reasoned, if there is a valid application of economics to business policy, there ought to be a market for selling economic research.


Having successfully launched one small enterprise in the shape of IFS, this time Kay wanted an equity stake in his creation. And there is no doubt that he acquired considerable ‘real world’ credibility from building a successful business. In a sense, he addressed the traditional business world’s taunt of academics – “If you’re so smart, how come you’re not rich?” He confesses that part of the motivation for his consultancy was the dominant value system of the 1980s. At a time when intellectual life tended to be regarded with contempt and where success was judged by how much money you had, he found it gratifying to demonstrate that, without necessarily sharing those values, his academic skills could reap significant rewards in the real world.


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