Posts Tagged ‘John Kay’

John Kay on economic controversy

Thursday, October 8th, 2015

I am a great fan of FT columnist John Kay, but his column this week is a profound disappointment. It has deservedly attracted a large number of negative comments. Mr Kay’s errors are serious – serious enough to warrant publication of a corrected version, for the benefit of readers who do not have access to (or the patience to read) online comments at (more…)

advice from bankers for investment of retirement savings

Sunday, September 6th, 2015

FT columnist John Kay, in this weekend’s newspaper, has published a long, fascinating extract from his new book, Other People’s Money: Masters of the Universe or Servants of the People?

The essay is concisely written, and covers a variety of topics, so is impossible to summarize. Here are some snippets: two paragraphs on personal finance and one on reform of the financial system.

Consumers suffered even before financialisation [risky investment of savings] from “financial advisers” who were in fact sales people, although they have perhaps suffered more now that such people dominate the staff of bank branches.

Commission generates a bias to action — and even when, as now in Britain, commissions are largely banned, it is hard to persuade people to pay much for the good advice to do nothing. Regulatory policy still clings to the illusion that it is possible to provide individually tailored financial advice to a mass market. But these levels of personal service disappeared from most areas of retailing decades ago: personalised advice of quality is simply too expensive to be provided except at the very top end of the market. [Emphasis added.]


In talking to the financial community, I have been struck by the number of people who want to do a better job, but who find themselves frustrated by the system within which they work, the values and business imperatives of their employers, the unrealistic and inappropriate demands of their clients, and the regulatory framework imposed on them. Only by addressing all these issues together can we re-establish a financial system designed for the needs of the real economy.

John Kay, “Playing dice with your money“, Financial Times, 5 September 2015.

A news article in the same FT issue reports on the movement of UK banks into advisory services for investment of small retirement savings pots. Mr Kay would not approve.

HSBC has become the first major high street bank to launch a retirement advice service since over-55s gained new flexibility in deploying their pension savings. …. It is now on offer to those with high levels of investable assets, but the bank plans to extend it to more customers in the near future. ….

Since April’s reforms to the retirement finance market, retirees no longer face huge tax penalties for choosing options other than an annuity, meaning they have far more choice over how they deploy their savings after age 55. This has led to a big increase in over-55s moving into income drawdown products.

HSBC is relatively unusual among big high street banks in still offering financial advice to customers including those with as little as £50,000 to invest. ….

Several lenders retreated from offering mass-market financial advice after the Financial Services Authority uncovered failings and levied a series of fines, the largest being a £12.4m penalty for Santander last year.

Barclays currently offers advice through its Barclays Wealth and Investment Management arm, but only to those with at least £500,000 of investable assets, while Lloyds customers must have £250,000 of savings or a £100,000 annual income to access advice through its private banking division.

Judith Evans, “HSBC launches retirement advice service“, Financial Times, 5 September 2015.

Journalist Judith Evan reports facts, but refrains from expressing an opinion. This is standard FT policy. The newspaper, to its credit, restricts opinions to editorials, op-eds and letters to the editor. News columns are almost always editorial-free.

Click here to access a recent podcast by Mr Kay on his new book.



the job of the economist

Sunday, September 6th, 2015

Most business people think that the job of the economist is to predict whether exchange rates will go up or down. Economists are not very good at predicting whether exchange rates will go up or down, with the result that business people have very little regard for economists.

John Kay’s blog, “accessible & relevant economics“, undated.

So very true!

FT columnist John Kay defends liberal education

Wednesday, August 26th, 2015

It is a mistake to focus basic education on job-specific skills that a changing world will render redundant in a few years. The objective should be to equip students to enjoy rewarding employment and fulfilling lives in a future environment whose demands we can neither anticipate nor predict. ….

Fareed Zakaria’s book this year defending liberal education — a tradition that introduces undergraduates to a wide range of subjects and approaches to knowledge — is very much to the point. And so is his refutation of philistine Republican governors (just Google Rick Scott, Rick Perry, or Patrick McCrory), who draw cheap laughs at the expense of philosophy and anthropology. A little capacity for reflection might reveal that morality is not simply a matter of common sense or reading a sacred text, and that an understanding of other cultures — or simply an acknowledgment that there are other cultures — might have led to better outcomes in, for example, Iraq.

John Kay, “A liberal education is now more useful than job-specific skills“, Financial Times, 26 August 2015 (ungated link).

Best-selling author Fareed Zakaria’s latest book is In Defense of a Liberal Education (Norton, 2015).

women in the world of finance

Wednesday, March 18th, 2015

British economist John Kay thinks that banks would improve if more women were in charge.

The most powerful posts in the financial world are held by women. Janet Yellen chairs the US Federal Reserve, and Christine Lagarde is managing director of the International Monetary Fund. Mary Jo White heads the US Securities and Exchange Commission, and was preceded in that job by Elisse Walter and Mary Schapiro. America’s new Consumer Financial Protection Bureau is directed by a man — but the reason is that the industry feared Senator Elizabeth Warren would fill the role too effectively.

All of these posts are public appointments. …. Senior jobs in private-sector finance are taken almost exclusively by men. ….

Simple justice, and the folly of excluding any qualified person, argues against discrimination on grounds of gender (or anything else). But perhaps men and women bring rather different qualities to finance. Cambridge neuroscientist John Coates (himself a former Wall Street trader) emphasises the link between testosterone and risk taking. The surges of testosterone and cortisol he observes as traders are gripped by excitement and depressed by loss are not observed in the same way in women.

This is perhaps a hormonal explanation of why men are drawn to the risk-taking functions in finance while women are engaged in regulating and organising. We might have better banks if there was rather less male risk taking and more female regulating and organising. Time, perhaps, for more women to be employed in executive roles in financial institutions.

John Kay, “Banks might improve with more women in charge”, Financial Times, 18 March 2015 (ungated link).

Published by FT with a different title.

lobbyists and sex workers

Saturday, February 28th, 2015

This post is not about lobbyists’ payment to sex workers for services rendered (nor vice versa). Rather, it is about difficulties both groups face in legal collection of fees for services rendered.

Economist John Kay explains that only five years ago did the US Supreme Court begin to classify lobbying as a remunerative activity worthy of judicial protection. Previously, the court ruled that an agreement to lobby for pay, like an agreement to provide sex for pay, is “pernicious in its character”, so unenforceable. Sex workers, presumably, are still unable to appeal to courts for collection of unpaid bills.

[In 1874] the [US] Supreme Court … [ruled that a] contract to lobby government … was contrary to public policy and hence, like an agreement to sell sex, unenforceable in the courts. Paid lobbying, said Mr Justice Swayne, was “pernicious in its character”. But this was only the beginning of his denunciation. “If any of the great corporations of the country were to hire adventurers to procure the passage of a general law with a view to the promotion of their private interests,” he thundered, right-minded men “would instinctively denounce the employer and employed as steeped in corruption and the employment as infamous”. ….

But in Citizens United in 2010, the same court held that the expression of views you were paid to hold was no longer “an infamous employment, steeped in corruption”, but an activity deserving of the protection awarded to free speech under the First Amendment. That contentious decision probably did not, in the end, seal the outcome of the 2012 election — though the tide of political donations that it unleashed will surely decide a presidential contest before long. Americans may look back on Justice Swayne as the wiser judge. “If the instances (of paid lobbying) were numerous, open, and tolerated,” he predicted, “they would be regarded as measuring the decay of the public morals and the degeneracy of the times.”

John Kay, “What did the US Supreme Court have to say about Sir Malcolm Rifkind in 1874?“, Financial Times, 25 February 2015 (ungated link). Published earlier in the FT with the title “Good lobbyists augment legislators’ work”.

Noah Haynes Swayne (1804-1884) was a Republican politician, the first Republican to be appointed as a justice to the US Supreme Court. He was in office from 1862 to 1881.

In response to Mr Kay, the Deputy Chief Executive of the Chartered Institute of Public Relations (London, UK) describes lobbyists’ service to clients as legitimate, positive and useful.

John Kay … draws on another age to summarise the problems of the present and denigrates the modern lobbying industry, which is a legitimate business service and a positive and useful part of our democracy.

Modern lobbyists service their clients and employers by helping them understand legislative and political processes and to create ethical and achievable objectives within them. They are highly skilled at introducing information into political dialogue in the most effective way to assist in the achievement of these objectives. Good lobbyists know their interests are best served by enabling legislators to exercise their critical judgment based on a range of relevant, balanced information.

Phil Morgan, “Good lobbyists augment legislators’ work“, letter to the editor, Financial Times, 27 February 2015 (metered paywall).

the simple economics of increased longevity

Wednesday, October 15th, 2014

Thanks to technological change, life expectancies everywhere are rising. John Kay this that this is wonderful -a demographic change to be welcomed rather than feared.

Achieving these extended lifespans costs money. Not necessarily much, because healthy lifestyle is a more important contributor to longevity than medical treatment. But we all die, either from the remaining diseases we have not yet learnt to cure, or the accumulated effects of old age itself. So medical and care costs will inevitably be an increasing fraction of national income. But this is money the public really wants to spend. It resists attempts to control the grotesque costs of private US healthcare. “More for the National Health Service” is always the British electorate’s top spending priority. ….

Gloomy prognostications, sometimes of population explosion, then of secular stagnation, have repeatedly been falsified. But one certainty is that all the issues of concern result from developments that give us more choices – the choice between higher material living standard and more leisure, the indulgence of spending more looking after ourselves, and the opportunity for women to have careers as well as, or along with, family lives.

What is not to like about these developments? Why should we care about lower gross domestic product per capita, or higher public spending as a share of national income if it is the consequence of things that make us better off?

John Kay, “Economic growth allows us to choose longer lives – surely that’s a good thing?”, Financial Times, 15 October 2014 (ungated link).

banking in crisis-prone USA and dull Canada

Thursday, June 5th, 2014

Mark Carney, governor of the Bank of England, is rightly admired for his handling of the global financial crisis. But perhaps the key fact is not that he is Mr Carney, but that he is Canadian, and the bank of which he was previously governor was the Bank of Canada. ….

The US had a uniquely fragmented and fragile retail banking structure, the product of a long-term alliance between community bankers and agrarian populists, made possible by a system jealous of states’ rights. This was replaced towards the end of the 20th century by a network of financial conglomerates controlled by deal makers and traders, who had a decisive hand in stimulating the subprime mortgage boom; a new, bizarre and disastrous play in the game of bank bargains.

Profs [Charles] Calomiris and [Stephen] Haber describe Canada’s mortgage market as displaying “enviable dullness”: but they might have applied the phrase to Canada’s financial system and some might extend it to the country itself.

Capital markets, regulatory institutions and the behaviour of people employed in the financial sector are neither predetermined nor universal, but rather the product of culture, history and the political system. That is a perspective developed effectively by Profs Calomiris and Haber.

John Kay, “Why banking crises happen in America but not in Canada“, Financial Times, 4 June 2014 (ungated link).

Mr Kay is reviewing Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, by Charles W. Calomiris and Stephen H. Haber (Princeton University Press, 2014).

reforming the economics curriculum

Wednesday, May 21st, 2014

Students of economics are in revolt – again. A few years ago, even before the crisis, they established an “autistic economics” network. After the crisis, in 2011, a Harvard class staged a walkout from Gregory Mankiw’s introductory course. That course forms the basis of textbooks prescribed in universities around the world. This year, 65 groups of students from 30 countries established an International Student Initiative for Pluralism in Economics. In no other subject do students express such organised dissatisfaction with their teaching. ….

Their demand for more pluralism in the economics curriculum is well made. Yet much of the “heterodox economics” the …  students suggest including is flaky, the creation of people with their own political agenda, whether Marxist or neoliberal; or of those who cannot do the mathematics the dominant rational choice paradigm requires. Their professors reject the introduction of these alternative schemes for the same good reasons their science colleagues would reject phlogiston theory or creationism.

Yet teachers are mistaken in their conformity to a single methodological approach – encapsulated in the claim that has taken hold in the past four decades that approaches not based on rational choice foundations are unscientific or “not economics”. The need is not so much to teach alternative paradigms of economics as to teach that pragmatism, not paradigm, is the key to economic understanding.

John Kay, “Angry economics students are naive – and mostly right“, Financial Times, 21 May 2014.

Ungated access here.

GDP is a flawed measure of output

Wednesday, April 16th, 2014

Gross Domestic Product (GDP) has many flaws, some of which are well-known. It ignores unpaid work, for instance, including work done, mainly by women, caring for young children, the elderly, the infirm – even a spouse and adult children. The famous example from first-year economics is that GDP would go up if everyone took in their neighbour’s wash, charging each other for laundry services. With few exceptions (imputed rent for owner-occupied housing is an important one), GDP is a measure of market transactions.

FT columnist John Kay thinks that the problem is more serious than many realize. GDP, he explains, measures poorly even what it is supposed to measure.

At Oxford university, many students regard attendance at lectures as optional. So teachers who fail to enlighten or entertain end up talking to empty rooms. A malicious fellow student measured lecturing performance by computing the ratio of attendance at the start of a course to attendance at the end. The highest score was earned by the hapless teacher of a first-year course on national income accounting.

Few universities now offer such a course. They have responded, or pandered, to student preferences, and the economics curriculum has moved on. Not necessarily in a good way; national income accounting … is no longer well understood. ….

And national income accounting cannot handle the financial services sector. Reported output of financial services rose dramatically during the 2008 financial crisis. This nonsensical result arises because the measurement of financial services output is strongly influenced by the margin between average bank lending and borrowing rates, which increased sharply. When someone confidently quotes the contribution of financial services to national income, you can be sure they have no understanding of the esoteric concept of “financial services indirectly measured” (don’t ask). Only a few people in the depths of national statistics offices do. This problem casts doubt on the validity of reported growth rates both before and after the crisis.

It once puzzled me that many economists in the financial sector forecast and discussed GDP without knowing what it was. I have since realised the job of market pundits is not to forecast GDP but to forecast what the statistics office will announce is GDP, and that is not at all the same.

John Kay, “GDP is flawed – just not the way most people think“, Financial Times, 16 April 2014.

There is much more in the full column, which can be downloaded at the link or, in a few days, at