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Emerald Group Publishing Limited
Copyright © 2003, MCB UP Limited
The Truth about Markets
The Truth about Markets
John KayPenguinISBN: 0-71399-4894£25.00
When the iron curtain was dismantled, the US free-market, economic model seemed destined to dominate. However, events over the last five years have caused some people to doubt this unchallenged dominance. Kay argues both form and against the market-driven model – pointing out the strengths and the weaknesses. What markets are very good at, he suggests, is not those strengths always claimed for them – allocating goods and services, promoting efficiency and co-ordinating the otherwise uncoordinated. Rather their great strength is that they allow accountability and feedback. It is the variety of ways in which business organisations respond – some well, some badly – that is at the heart of successful wealth generation.
Kay is as critical of the chief executive who outstays his welcome as he is of the old Soviet planner. Both inhibit the vital feedback and have a tendency to ignore or over-ride key information.
The advantage of a market economy over a planned economy is pluralism. Individual capitalist firms do not necessarily make better decisions than individual central planning agencies – in fact quite often they do not. However, in a planned economy, there is only one set of decisions – if those are wrong, the economy fails. In a pluralist, market economy, there are enough right decisions to outweigh the bad – those making wrong decisions go to the wall. This is why monopoly is as bad as state control.
Kay is concerned that the dominant influence of the US's financial markets – which he dismisses as little more than arenas for sophisticated gambling – actively undermines great enterprise, because it gets in the way of what organisations need to do to be successful. The short-term fixation with share price distorts their thinking and actions. Instead of reacting to what the market is telling them, organisations are too busy manipulating the share price.
Kay points out that Norway and Switzerland are as rich as the USA, and that the strength of their economies (and their societies) is rooted in adaptive organisations and strong relationships. What matters is their openness and the effectiveness with which they treat feedback.
Much of what Kay says rings true. Whether Western nations listen and build a supporting framework (or more properly dismantle a non-supportive one), only time will tell. To offer appropriate support, we need to build institutions and social capital that we know support organisations, whether it is long-term investing institutions, better systems of corporate governance or a richer understanding of why teams and devolved decision-making are vital to business success.