Posts Tagged ‘John Kay’

John Kay on inequality

Wednesday, December 4th, 2013

There is nothing new here, but I found the entire column interesting, perhaps because I agree with it.

Some inequality is inevitable, and there seem to be three principal factors that make it more tolerable.

Inequality is easier to accept if everyone is becoming better off. Recent dissatisfaction in Britain and the US is significantly attributable to the fact that while some have grown much richer, median incomes have not increased. The criticism that the rapid economic growth of China and India has been accompanied by rising inequality is mainly made from outside these countries.

Inequality is easier to accept if the beneficiaries have benefited people other than themselves. Bill Gates’s extraordinary wealth causes little resentment because he is associated with technological innovations that have transformed business and personal life. Financiers rarely attract similar approval because – sometimes rightly, sometimes wrongly – they are suspected of appropriating wealth created by others rather than engaging in genuine wealth creation.

And inequality is more tolerable if its beneficiaries behave well. Mr Gates has chosen to devote his Microsoft fortune and his time to philanthropy rather than fly in entertainers and exotic foods for lavish parties. Investor Warren Buffett lives in the Omaha bungalow he purchased 50 years ago.

John Kay, “London’s mayor is half right on envy, greed and inequality“, Financial Times, 4 December 2013.

This will soon be posted at, in the archive of John Kay’s past FT columns.

Ronald Coase, R.I.P.

Tuesday, September 3rd, 2013

British economist Ronald Coase, who had a great influence on my own understanding of economics, has died, at the age of 102.

Coase wrote and published little, but the quality of his writing was superb. In 1991, he won a Nobel memorial prize in economics for two articles: “The Nature of the Firm”, published in Economica in 1937, and “The Problem of Social Cost”, published in the Journal of Law and Economics in 1960. The first publication is the one that had such a profound effect on me even though (perhaps because) the article was regarded as an aberration by mathematical economists and econometricians, who ignored institutions as they modelled the firm as a production function. One of the reference books that I keep at my desk – next to Adam Smith’s Wealth of Nations – is The Nature of the Firm: Origins, Evolution, and Development, edited by Oliver E. Williamson and Sidney G. Winter (Oxford University Press, 1993).

FT columnist John Kay admires Coase as much as I do, and has written a warm obituary for tomorrow’s newspaper.

Ronald Harry Coase, the son of two Post Office workers who both left school at the age of 12, was born in the London suburb of Willesden in 1910. Condemned to wear leg irons as a boy, he won a late scholarship to Kilburn Grammar School and then went to the London School of Economics. There Arnold Plant, professor of commerce, introduced him to Adam Smith’s “invisible hand” and helped him win a travelling scholarship to the US to investigate the structure of American industry.

In classical economic theory, agents moved effortlessly towards equilibrium in a frictionless world. In reality, goods are bought and sold in marketplaces – sometimes literal, sometimes virtual – and economic life is dominated by corporations. Classical theories ignored or looked through these institutional arrangements. Economists saw only the investors, employees and customers who obtained, without cost or intermediation, the information they needed to do the business of the market economy.

John Kay, “Ronald Coase: Nobel Prize winner who explored why companies exist“, Financial Times, 4 September 2013.

John Kay on mark-to-market accounting

Thursday, July 18th, 2013

British economist John Kay has written another excellent, ungated column.

[A]ccounting standards – both IFRS [International Financial Reporting Standards] and the US Generally Accepted Accounting Principles – have moved from “prudence” towards “neutrality” and from “historic cost” to “fair value”. That emphasis implies insistence on marking trading assets to market prices. ….

Concern is often expressed about the difficulty of applying mark-to-market principles when there is no active market. Actually, the larger problem arises when there is an active market. ….

A contradiction lies at the heart of the efficient market hypothesis: if market prices did incorporate all available information about the value of an asset, no one would have an incentive to obtain that information in the first place. The perverse implication of asserting that the market price of one’s assets measures their fair value is that the people best placed to supply information about fair value – the owners – abandon the attempt to make such an assessment in favour of the judgment of traders. And this is not an academic quibble: what happened at Enron, and in the banks, was that trading assets were marked to values that had been established not by people who knew about the contracts or the loans, but by the biased and ill-informed assessments of the traders [my emphasis].

To express reservations about the primacy of mark-to-market principles is not to say that assets are best valued at historic cost. Market prices may often provide insights of relevance to managers and investors. But one can acknowledge that utility without adopting an ideological commitment to the infallible, or at least irrefutable, wisdom of the market. In the past decade, the efficient market hypothesis has been mugged by reality. ….

Accounts have many users and many purposes, and these vary with the nature of the business and the environment in which it operates. The nature and content of appropriate financial information should be a matter for negotiation between the companies that prepare accounts and the parties who use them.

John Kay, “The market is not the best place to set a fair price for assets“, Financial Times, 17 July, 2013.

The published version is available here (behind a metered paywall).

John Kay on “quantitative easing”

Wednesday, July 10th, 2013

British economist John Kay wonders why policymakers since 2008 have given so much attention to monetary stimulus, and so little to fiscal stimulus.

When I was a student, I learnt that if there was a plentiful supply of liquidity to the banking system, there would be easy credit for businesses and households, which would encourage them to spend more. It was never clear that this mechanism worked well in recessions: nervous businesses and households might be reluctant to spend and invest, however much liquidity was available to them. ….

A few technical papers from central banks try to estimate the overall macroeconomic effects of post-2008 monetary policies. But there is almost no direct evidence …. The one policy certainty is that countries that claimed an early commitment to fiscal rectitude would encourage growth have not come through the crisis as well as those readier to adopt fiscal stimulus. ….

Most opportunities for long-term investment are found in infrastructure, either in the public sector, or associated with or financed by the public sector. Yet far from treating the depressed state of western economies as an opportunity to make such investment, and taking advantage of opportunities to raise long-term finance at interest rates that are negative in real terms, austerity-minded governments have been cutting capital expenditure and their central banks have been aggressively buying long-term debt back from its private holders.

Why has so much attention been given to these monetary policies with no clear explanation of how they might be expected to work and little evidence of effectiveness? The very phrase “quantitative easing” seems designed to discourage non-technical discussion. But the real answer, I fear, is all too familiar: these policies may not benefit the non-financial economy much, but they are helpful to the financial services sector and those who work in it.

John Kay, “Quantitative easing and the curious case of the leaky bucket“, Financial Times, 10 July 2013.

An ugated version will be posted here shortly.

tax reform

Thursday, June 20th, 2013

British economist John Kay explains why it does not happen. The reason has everything to do with economic power, and nothing to do with technical economics.

The first time my research gained wide publicity was in 1979. In collaboration with another young academic, I explained that many large British companies paid no corporation tax. The issue resurfaces again as my co-author retires from the Bank of England. ….

It is disingenuous for companies to claim they pay the tax legally due when their assessments are based on accounts that defy economic and business realities.

In the main, however, tax authorities have preferred to cut deals with big corporations rather than pursue costly legal action. They will not do the same for you and me. It makes no sense for a small company to pay an accountant to do anything but calculate the amount of tax that is properly due, or to incur legal fees resisting a challenge. The unacceptable outcome is an entirely correct perception that there is one law for the little guy and another for the big battalions. The potential effect of that perception on tax compliance is one that it is well worth spending millions of pounds to avoid.

A serious reform agenda would involve a principled reappraisal of the basis for taxing corporations both nationally and globally, and a strategy for effective enforcement of existing rules. Such a strategy would make clear that executives of companies which present accounts to tax authorities that are essentially false, and the accountants who support them, will in future run serious risks. The door they hear closing behind them might be the door of a prison cell rather than the door of 10 Downing Street.

John Kay, “Don’t blame the havens – tax dodging is everyone else’s fault“, Financial Times, 19 June 2013 (ungated link).

welfare for the wealthy

Wednesday, May 22nd, 2013

British economist John Kay explains how, but not why, bankers and fund managers are not suffering from the Great Recession that they caused.

The financial crisis left a few individuals responsible for it very rich while its consequences made millions not responsible for it much poorer. If this involves no crime, then we have failed to define or prosecute crime appropriately.

John Kay, “Prosecutors must uphold the law, not cut deals with the accused“, Financial Times, 22 May 2013 (ungated).


finance in a non-capitalist world

Thursday, May 16th, 2013

One of life’s paradoxes is that never have modern companies been so awash with cash, yet never have they been so active in capital markets. Apple last month raised $17 billion by selling bonds because it could, not because the company lacked cash to give its shareholders in exchange for stock. Apple has reserves of $145 billion stashed overseas, but would have to pay taxes on any money it repatriated. By borrowing money it does not need, Apple obtains a business deduction (payment of interest) and avoids payment of taxes on past profits.

British economist John Kay runs through the logic of this, and suggests that we are living in a non-capitalist world, even though we insist on calling the system by its old name.

In the 19th century, railroads raised funds from private investors to finance costly infrastructure. Later, large manufacturing corporations raised capital in much the same way.

But only a few businesses today, mainly utilities, have the capital-intensive character typical of those early days of industrialisation. …. [I]t is now relatively unusual for a business to own the premises from which it operates. Employees today generally do not know who owns the building in which they work, or the desk at which they sit. They do not know because it does not matter. Their boss tells them what to do, not because he owns the means of production, but because he has been appointed as the boss.

A modern company, such as Apple, is knowledge-based, outsources its manufacturing and has little need of any tangible capital at all. A new business will need investment to meet its initial operating losses but can expect to become cash generative at an early stage of its life. If the company seeks a public listing on an exchange, the likely purpose is to provide a liquidity event for early-stage investors, or to reassure employees that their options have value, rather than to raise money to expand the business. Facebook took in cash from investors because it could, while admitting that it had no particular use for it. We still use the word “capitalism” when we refer to the institutions of the modern market economy but it has become a misleading term.

John Kay, “Why business loves capital markets, even if it doesn’t need capital“, Financial Times, 15 May 2013 (ungated).

the politics of protest

Thursday, May 9th, 2013

John Kay has an excellent column this week, on political response to the financial crisis. Read the entire essay, which can be downloaded at the ungated link below.

America’s Tea Party is a rising of the socially conservative poor, funded by the rich. The comedian Beppe Grillo’s Five Star Movement argues that the only way to cope with Italian politics is to laugh at it. The Scottish National party, with roots in a romantic view of Scotland’s history and culture, reinvented itself around the potent but decidedly unromantic cry of: “It’s Scotland’s oil.” Alternative für Deutschland is an intellectual movement of professors; and Greece’s New Dawn, a fascist revival.

These and the many other new anti-political movements – some thoughtful, some sinister, some silly – could hardly appear more disparate. Yet they share a resentment of others supposedly responsible for our problems – a media and a political class that supposedly fails to acknowledge popular concerns, and foreigners who do not share our culture or our heritage. United only in grievance, they are so varied because by their nature they can only be national.

Contrary to many expectations, the most traditionally international of political groupings – the left – derived no benefit from the [financial] crisis. …. In the few countries in which parties of the left have gained power since the crisis, this is … a byproduct of voters’ near universal rejection of whatever government was in power at the time. The “change you could believe in” that US President Barack Obama and François Hollande of France brought was principally that they were not their predecessors.

John Kay, “Sinister or silly, protest politicians are united in grievance“, Financial Times, 8 May 2013.

the parable of the ox

Sunday, April 28th, 2013

FT columnist John Kay explains, with a simple parable, how financial markets function.

In 1906, the great statistician Francis Galton observed a competition to guess the weight of an ox at a country fair. Eight hundred people entered. Galton, being the kind of man he was, ran statistical tests on the numbers. He discovered that the average guess (1,197lb) was extremely close to the actual weight (1,198lb) of the ox. This story was told by James Surowiecki, in his entertaining book The Wisdom of Crowds.

Not many people know the events that followed. A few years later, the scales seemed to become less and less reliable. Repairs were expensive; but the fair organiser had a brilliant idea. Since attendees were so good at guessing the weight of an ox, it was unnecessary to repair the scales. The organiser would simply ask everyone to guess the weight, and take the average of their estimates.

A new problem emerged, however. Once weight-guessing competitions became the rage, some participants tried to cheat. [snip]  Continued at the ungated link below.

John Kay, “The parable of the ox“, Financial Times, 25 July 2012.

On 4 January 2013 John Kay discussed the implications of this parable (which are not good!) with presenter Tim Harford on BBC Radio 4’s ‘More or Less’. Click here to listen to it.

institutions and economic development

Thursday, April 11th, 2013

“Institutions matter” has become a mantra of development economics. Economist John Kay finds this pithy advice to be unhelpful, because there is no blueprint of unique institutions that are necessary or sufficient for sustainable growth.

[T]o say institutions matter is to beg the question: which institutions? The conventional reply emphasises property rights and rule of law. This excludes the arbitrary rule of the mad dictator or the king who enjoys power by divine right – but provides little further guidance. ….

So when the Chinese ask how to establish the institutions to support a stable, prosperous economy, it is not enough to mumble: “Property rights and rule of law – go to Denmark and see.” There are many versions of the successful formula of lightly regulated capitalism and liberal democracy, each with its own challenges. While there are common principles, there is no blueprint that can be enshrined in a Washington consensus or proclaimed “the end of history”.

Nor is there an established blueprint for a transition from anarchy or traditional society to the institutions that today’s development economists understand matter. Hong Kong in the 19th century experienced one such transition – the importing of institutions from another jurisdiction with the support of the Royal Navy and a garrison of troops. But that model for the most part did not prove acceptable, or permanent, elsewhere. Its resilience in Hong Kong was the result of a unique context. Institutions matter – but perhaps histories matter even more. And while countries can learn from history, they cannot reproduce histories.

John Kay, “Prosperity requires more than rule of law“, Financial Times, 10 April 2013 (free access).