John Kay has consistently shown that it is possible not only to follow the rigorous intellectual pursuit of economics, but also to illuminate the wider world of public policy and business practice. My 2005 review of his book of essays Everlasting Light Bulbs outlines his success in communicating economic ideas.


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 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, governor of the Bank of England [2003-13]. 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 full-scale 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 the London Business School (where he founded Business Strategy Review [where this piece first appeared]), 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.


Kay’s next move was back to Oxford in 1997 as founding director of the Said Business School. While his stay there was relatively short-lived, the fact that an economist was given this role was a significant statement about the need to give a proper intellectual dimension to the study of business behaviour.


Kay understands why many academics think management theory is little more than a series of virtually contentless airport bestsellers. Indeed, he has been highly critical of such books, with devastating attacks on the ideas of prominent marketing and strategy gurus such as Theodore Levitt, Michael Porter and Gary Hamel.


But, Kay argues, it is a mistake to say that because a lot of nonsense is written, there is nothing of intellectual substance you can say about business. He makes an analogy with the pre-scientific stage of medicine 100 years ago when nonsense was also a popular currency. As with medicine then, we actually know a lot about business but we still seek a structure to put that knowledge together, to sort out good analysis from bad.


Much of Kay’s work has been to explain that project and demonstrate its intellectual value. Part of the solution is to use the rigour of economics. But management demands a more eclectic range of approaches than just economics. Here Kay again uses the analogy of medicine, an applied discipline founded on the fundamentals of physics, chemistry and biology. Similarly, he contends, management is an applied discipline that must be embedded in economics, sociology and psychology.


But Kay notes how few economists are teaching business, how few have adapted from a public policy standpoint, and how economics and business strategy, so seemingly related, are so distinct. This he ascribes to the formerly dominant paradigm of industrial economics. In the structure-conduct-performance framework, the industry is the unit of analysis. Unfortunately, this means that the central business problem – why firms in the same industry perform differently – cannot be addressed.


Kay points out that while the new industrial economics of games, contracts and information has much relevance to real business behaviour, it has been developed far from business circles and in a difficult mathematical language. Translation and reconnection are essential.


In his 1993 book, Foundations of Corporate Success, Kay analysed the corporation as the central institution of modern economies. In his view, a firm is not just a bunch of shares but a collection of relationships between its various stakeholders: employees, customers, suppliers, shareholders. Each firm has distinctive ‘capabilities’ derived from its history, and these must be its sources of competitive advantage.


This framework is a powerful organising theme, not only for thinking about management but also for analysing the ways that economies function more broadly. Kay’s portrayal of the firm as a social institution rather than a capital market vehicle has important implications. Most significantly, he claims, it is possible to believe that competitive markets are an efficient system of economic organisation but simultaneously to reject the individualist value system that applauds selfishness and glorifies private property. This is one of the central messages in his 2003 book, The Truth about Markets.


In fact, Kay goes much further, arguing that the only way to create a market economy that commands wide support is to dispose of the notion that the functioning of markets depends on base and contemptible aspects of human behaviour. We must reconnect business values with the broader values of our daily lives, he believes. This is the essence of the ‘stakeholder’ view of business and society, which fleetingly became central to New Labour thinking just prior to the 1997 election.


Kay’s influence as a political guru may have been brief but his influence as a communicator of economic ideas has been significant and lasting. Two of his former research colleagues have become leading lights of economic journalism – Matthew Bishop, business editor of The Economist, and the BBC’s economics editor Evan Davis (now presenter of Newsnight). And Kay’s weekly columns in the Financial Times frequently provoke controversy with their attacks on sloppy thinking by an assortment of ‘DIY’ economists in business, consultancy and public service. The new book is made up of a selection of these pieces from the past eight years.


The final chapter of the book takes the form of a letter of advice to a niece who is contemplating a career as an economist. Uncle John is not necessarily convinced, warning of the low salaries and poor morale in university life and the relatively low demand for good economists in business and government.


But while it is true that few companies outside the financial institutions employ economists, there seem to be growing opportunities in the civil service. Almost all Whitehall chief economist positions – as well as the top jobs at the Bank of England, the Competition Commission, the Office of Fair Trading and Ofcom (in 2005, in addition to Mervyn King at the Bank, there were, respectively, Derek Morris, John Vickers and David Currie) – are now held by former academic economists.


And while British academic life is clearly unappealing to many smart young people right now, places like the IFS and the Centre for Economic Performance (at the London School of Economics) show that it is still possible not only to follow the rigorous intellectual pursuit of economics, but also to illuminate the wider world of public policy and business practice.