John Kay: philosophy

Introduction
The resource based theory of strategy
Stakeholding and corporate responsibility
An end to grand designs - modernism and post-modernism
Markets are embedded in a social context
Consilience

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. (See FT article of 10 October 1996)

My interests are different. Virtually all my work has been in microeconomics. First taxation, then regulation, and most recently issues of business strategy. Microeconomics is concerned with the behaviour of individual agents in the economy - such as households and firms - and with individual industries and markets and the prices of the goods and services sold in them. Macroeconomics, in contrast, is about aggregates - consumption and savings, national income and inflation. Only macroeconomists (and only a minority of them) pronounce on exchange rates.

So do not look on this site for predictions of exchange rate or forecasts of economic growth: you will not find them. My professional objective is to use the tools of economics to understand change in the structure of firms, industries and markets. This is the content of business economics.

You can get a flavour of what business economics is about from some of the articles on this website, - from 1 May 2000, 24 January 2001, 21 February 2001, 4 April 2001. The subject matter of business economics is closely related to business strategy, but the economic input into business strategy has always been modest and even Michael Porter, (the best known economist to have become a strategy guru) disguises his economic credentials. In an article from The Economic Journal you can read my attempt to explain the gap between business economics and strategy and, in an introduction to the Financial Times "Mastering Strategy" series , an exposition of what business economics has to say about strategy.

Here is a brief guide to what I regard as some distinctive aspects of my own thinking. There is a linkage and progression through them which may be more obvious to me than to you.

The resource based theory of strategy
This is one of the principal strands of thought in business strategy today. My own contribution to it is contained in Foundations of Corporate Success (1993) or Why Firms Succeed (1995): for a briefer version see the FT's introduction to "Mastering Strategy".

Resource based theory sees the firm as a collection of assets, or capabilities. In the modern economy, most of these assets and capabilities are intangible. The success of corporations is based on those of their capabilities that are distinctive. Companies with distinctive capabilities have attributes which others cannot replicate, and which others cannot replicate even after they realise the benefit they offer to the company which originally possesses them.

Business strategy involves identifying a firm's capabilities: putting together a collection of complementary assets and capabilities, and maximising and defending the economic rents which result. The concept of economic rent is central in linking the competitive advantage of the firm to conventional measures of performance - read more in an article first published in Finance Director. See also a keynote speech of July 2000 on How Measurement in Organisations has Changed.

Stakeholding and corporate personality
The idea of a firm as a collection of capabilities contrasts with two popular and more individualistic views of the firm. One, prevalent in US business journalism, is that companies are essentially extensions of larger than life chief executives - General Electric is Jack Welch, Microsoft is Bill Gates. The other, more widely held amongst economists, is that we can 'look through' firms to the individuals who have relationships with them. In this reductionist view shareholders, too numerous and too busy to manage firms themselves, hire managers to run the firm on their behalf. These managers then make contracts with employees, suppliers, and customers.

But companies which could be satisfactorily characterised in either of these ways would not make profits. Successful firms have distinctive capabilities. The value these firms add results from this identity and they cannot simply be defined by the contracts they have made. In a profound sense - a sense which is commercial and moral as well as legal - such companies have a reality, and a value, which is distinct from the individuals who contribute to them.

From this perspective, it hardly makes sense to talk about the ownership of a modern company. A large, successful corporation is necessarily a social institution, and would not survive if it were not. This position has political as well as economic implications. This leads to the economics of "stakeholding" - see Prospect and my inaugural lecture at the Said Business School.

An end to grand designs - modernism and post-modernism
Firms are not the product of grand designs. The same is true of economic systems. Attempts to establish economic systems on the basis of abstract blueprints in Eastern Europe, Russia and the third world have led to lamentable failures. In the last decade this has been as true of the blue prints of the right as it was previously true of the blueprints of the left.

In other disciplines, the modernist view that systems and knowledge can be derived from entirely general first principles has come and gone. In architecture, for example, the twentieth century view that 'a house was a machine for living in' - entirely rational, functionalist - has given way to post-modernism. Architectural rationalism discarded much that was valuable, but tacit rather than explicit, in the classical tradition and the emphasis on functionality in modern architecture proved ultimately not even to be effectively functional. (You can read more in an article I wrote in the Financial Times on 29 April 1998.)

Yet economics and business are today the last bastions of modernism. There is still a firmly rooted belief that there are right ways of organising firms and economies, not just for here and now, but as universal maxims: and that in matters of business and economics sensitivity to culture, context, tradition and history are unaffordable sentimentality.

I disagree profoundly with this modernist position. Social phenomena can never be successfully understood or analysed in this way. There are many perspectives - literary, anthropological, economic - on the ways in which we behave and in which our society is organised. Each of them has a measure of truth, neither is the whole truth. See FT article 7th March 2001

Markets are embedded in a social context
That modernist view is today most clearly found in views on the design of economic systems. Broadly, the 'Washington consensus' is that well-defined private property rights, active capital markets, and free internal and external trade, are necessary and sufficient for economic success. This is part of what Fukuyama, borrowing Nietzsche's striking phrase, called the end of history. In the combination of late 20th century American progressive opinion, lightly regulated capitalism and liberal democracy we have arrived, once and for all, at the right answers.

I believe that this description of how market economies function is certainly superficial, and even wrong. I share the commitment to market economics and market economies. But I see the social context of markets not as a sideshow but as an integral part of how these markets work. And I believe it is the absence of an appropriate social context that provides the explanation of why the 'Washington consensus' has so often failed, just as socialism failed: because they relied on principles deduced in abstraction from the reality of the environment within which it was intended to function.

This social context is essential because
- modern economies need and process complex information. Asymmetry of information in transactions is handled by a range of rules, conventions and relationships between traders
- small group interactions frequently have pathological properties which need to be handled by contracts and conventions, by participation in hierarchically structured organisations, and by the development of sustained relationships
- many markets for risks do not and cannot exist: since the cost of insecurity to individuals may be very high, social as well as economic institutions for risk sharing and risk pooling are needed and are found in all societies
- property rights are not, in any but the simplest of economies, obvious or natural: they are social constructs and there are many different possible property rights régimes.

Reasoning of this kind denies the possibility of a single model, or blueprint, for economic systems. Properly functioning businesses, and markets, are particular products of specific social contexts and cannot easily be created outside of these contexts. See "The Good Market" from Prospect Magazine for an elaboration of this kind of thinking. A much more extended account will be found in my next book.

Consilience
Where is economics, including business economics, going? The most important developments in intellectual life over the last two or three decades are probably to be found in biology.

The discovery of DNA and the mapping of the human genome gives us the scientific underpinning for understanding life itself. The development of modern evolutionary biology and psychology allow us to begin to understand the relationship between our chemical and physical nature and our behaviour. Today, all this seems remote from economics and business. We can only see hazily how this project might enhance our understanding of economic and business processes, though see "Rational Economic Man" and "The Tortoise and the Hare", for some speculation. For broader insights, see EO Wilson, Consilience (1998) and S Pinker, The Blank Slate (2002)

Yet this central project of modern science must, if successful, ultimately change the nature of social science in fundamental ways.

There is ultimately at least a possibility of the real integration of social and natural sciences. That implies a subject of psychology that is firmly based in neurophysiology. Ultimately this may lead to a study of economics and management that builds on a much deeper appreciation of how individuals operate and social relationships are constructed. Such knowledge is certainly still one or two generations away, but has the potential to give us an understanding of social processes of a kind that today we can barely imagine.

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