Profile: John Kay, Economist

Stuart Crainer: You talk about making economics accessible and relevant, which suggests that it’s inaccessible and irrelevant. Is that the case and why?

John Kay:

I think academic economists have taken in large part to talking to themselves so that accessibility isn’t prized. I find that odd since I took up economics because I was good at mathematics, but interested in the real world and it seems to me odd that so many economists are not interested in the real world. It was a big change for me coming to London Business School, over 25 years ago now, and talking to people in business for the first time. I had been doing things in the field of industrial organisation for years and never really talked to business people.

SC: Is there a golden thread that runs through your career which takes you through Nuffield College, the Institute of Fiscal Studies, London Business School, and Saïd Business School?

JK:

What I discovered was that what I was good at was taking complex, serious ideas and putting them across in ways that people could easily understand and, since the Institute for Fiscal Studies, that’s been the guiding thread of my career. I’ve done it in various different ways, in a think tank, by teaching at a business school, through my consulting business and now the principal way is writing books and a weekly column in the Financial Times.

SC: If somebody asks at a dinner party, what you do, how do you describe yourself?

JK:

I say that I’m an economist but then they usually turn round and talk to the person on the other side.

SC: Nothing personal, I’m sure.

JK:

Nothing personal, or even worse than that is they ask you either what is going to happen or what should be done. When I say I don’t forecast whether interest rates are going up and down, and that whether interest rates are going up or down is not very interesting nor very important, people are surprised. They think that is what economists do. It’s true that most people in the world at large think that economics is about macroeconomic forecasting, whether interest rates will go up, what will happen to inflation or what GDP growth will be next year.

SC: You wrote something about management a few years ago saying that our understanding of management was akin to our understanding of medicine in the medieval times. Have things moved on?

JK:

I don’t think they’ve moved on much and medicine’s a good analogy. We’re dealing in both cases with very complicated systems which we’ll only imperfectly understand and the main way of getting knowledge is finding practical things that work; although there’s also a bit of understanding required of the basic mechanisms by which the body or a firm works.

SC: And what’s the role of business schools in this?

JK:

The primary role of business schools, certainly this is the idea I came to when I was at London Business School, was to encourage people to think that it’s possible and appropriate to approach business issues in a structured, intellectual way.

I remember at first I used to disparage the way so much practical management practice consisted of giving people lists or sophisticated matrices to fill in the boxes of. I came to realise that when people hadn’t really been used to structured, organised thinking about these issues, the list is often a good starting point.

SC: And you had a spell practicing leadership in a business school when you were the Founding Director at Saïd Business School. What did you learn from that experience?

JK:

I learnt you can’t practice leadership at Oxford University. It is difficult to fulfil either a leadership or a managerial role in any academic environment but Oxford, from a point of view of someone who thinks about management, is a peculiarly dysfunctional institution in that sense.

SC: What about your books? Looking back, which ones do you consider most important? The Truth About Markets? You wrote a book with Mervyn King at one point, didn’t you?

JK:

Yes, that was the second book I published in 1979, which seems a long time ago. Mervyn and I, as young radicals, wrote a book about the British tax system, which doesn’t sound as if it would be a bestseller but we wrote it in a style that surprised many people and it went through five editions.

SC: Which do you consider your most important or useful book? 

JK:

The one I’m keenest on is The Truth About Markets which I wrote ten years ago. The idea in my mind was to do for economics what some of the popular science books or popular philosophy books do — to take serious ideas and put them across in a way that made them accessible. One of the reasons I’m still proud of it is that if one goes back now, conscious of events that have happened since 2003 when we published it, it stands up extremely well in its analysis, both of the strengths and limitations of markets.

SC: Who were the key mentors in your thinking as it developed? You worked with the likes of James Mirrlees and James Meade for example.

JK:

They were my mentors when I was a student and young academic, and I was very lucky having access to these both exceptionally brilliant minds, and they’re both Nobel Prize winners and brilliant minds in a different way.

SC: And since that time who are the key mentors or influences in your thinking over the last 20 years?

JK:

I’m not sure there have been mentors in that sense over the later part of my career. There’s been a series of events and incidents that have reinforced the way I think.

SC: And your Financial Times columns, how do you find the discipline of writing a column in a small amount of space every week?

JK:

It’s interesting; the newspaper world is one of the few where deadlines are real; if the copy isn’t there, the paper or the newspaper goes to press and you are not in it, and that’s a discipline. But when I started writing once a week for the Financial Times I thought, I’m going to run out of things to say after a few months; that hasn’t happened. Partly I’ve been lucky that so much of interest has happened in the world in the last few years, there’s never any shortage of things to talk about.

Even so, it would get quite stressful if one didn’t have a little drawer full of ideas, which you can pull out if no inspiration strikes in a particular week.

SC: Where do the ideas come from?

JK:

It’s hard to say sometimes. They come from all over the place. Sometimes they come from things I’ve read, sometimes they’re just random thoughts, or a particular experience prompts one to think what is going on here or you hear other people’s bad arguments and you think it’s time to sort that out.

SC: What about the review of UK equity markets? I was slightly surprised you said yes in the first place because it seems an unusual step for you to take, so what was the attraction of doing it?

JK:

You think it was an unusual step in the sense that you would be surprised I would do a government review at all or that as a particular topic?

SC: I thought your boredom threshold with dealing with civil servants and that sort of thing might be low.

JK:

It’s true I worried about the boredom threshold when I took that on. What I was most frightened of was the prospect of having to listen to people say things about which you thought ‘they would say that, wouldn’t they?’ There are a number of tasks I’ve refused because I thought I would be subject to that. Naturally there was a bit of that but there wasn’t too much and one of the things I found refreshing was a lot of people were willing to talk frankly about what they thought.

SC: And what surprised you? What of your opinions changed as you went through that process?

JK:

I didn’t understand how completely defunct the primary market for equity capital was in this country but, as a source of capital for business, new equity is not something you would even consider. And I was also surprised at the way in which the structure of shareholding in the UK has changed. I knew that it had shifted from individuals to institutions; what I didn’t realise was that it was no longer the case that British pension funds and insurance companies were the major holders of UK shares. I came to see that the dominant players in equity markets today are large asset managers, BlackRock, Legal & General, Deloitte, these kinds of people.

SC: Are you optimistic that change will follow? There is a long history of reviews coming out and not necessarily a huge amount happening.

JK:

It’s difficult. The major change I concluded was necessary is a philosophical shift, both in relation to the way we think about equity markets and the ways we regulate them, to move away from transactions and trading and towards or back to structures that are based on trust relationships; that’s something with the best will in the world which could only happen slowly.

Am I optimistic that change will happen? I don’t know. There’s been a big shift in the last few months in which people in this country have come to see that what went wrong in 2007/8 and thereafter was not the product of unfortunate events, that happened in a sector at a particular time, but they were symptomatic of deep-rooted problems in the culture of the financial services industry. And that recognition is key to making radical changes in the way we think about finance and the ways in which we regulate it.

SC: The philosophical and abstract change you’d like to see happen is a much harder argument than ‘let’s have some more regulation.’

JK:

It is but we have extensive regulation of the financial services sector, which is yet ineffective in achieving its objectives. We need to re-think regulation in a basic way but we’ve a large regulation industry now that seems to have a vested interest in its own growth and expansion.

SC: You also have been going back to your roots in Scotland and contributing to various debates there; how did that come about?

JK:

I’m a Scot and, though I haven’t lived there for a long time, I still feel sentimental about going back there. When the SNP won power in Scotland in 2007, Alex Salmond asked me to join his Council of Economic Advisors. That meant I found myself going back to Scotland more often, and also starting to think about the issues involved in devolved or independent government and particularly the Scottish context.

SC: How far do you look ahead when you’re working?

JK:

I have plans for two books. I’d like to write a book about the economics of Scotland ahead of the referendum, which is scheduled for 2014, because the quality of the public debate on the economic issues is low and I hope one could sort that out. It is not so much to make any particular case, but asking the question, ‘what is this debate about in the sense that the amount of independence you can have is quite limited’ — it’s a small country, five million people with a principal trading partner.

The other bigger exercise I’m engaged in is I want to write a book on the economics of financial services, to ask some of the questions we asked about equity markets more generally. This will ask two basic questions. One is ‘what does the financial services system needed by the real non-financial economy look like, and how much of the activity that today takes place within financial services contributes to that?’

The other question which needs answered is ‘why is this activity so profitable or so unprofitable?’ A few people have asked that question. People have barely asked it and there’s a dearth of answers about it.

SC: Which book do you wish you had written?

JK:

The ones I’m writing, how else could it be?