|In Culture & Prosperity: The Truth About Markets, professor and Financial Times columnist John Kay provides a new and illuminating analysis of the nature and evolution of the market economy and attacks the oversimplified account of its operation. Kay even questions whether that account offers an accurate description of the success of the American economy. In a presentation on May 25, 2004, sponsored by the World Bank InfoShop, Kay offers an overview of his latest work to Bank and International Monetary Fund (IMF) staff. The session includes an introduction by Graham Hacche, deputy director of external relations for the IMF.
There were two main objectives for writing Culture & Prosperity, Kay explained. He wanted to compose a book on economics for the general public that would appeal to intelligent non-specialists. Additionally, in light of the “bizarre 1990s” he wanted to provide an explanation of why simple stories about how markets work were insufficient and he hoped to debunk the economic version of the end of history. Kay explained that the American business model is generally believed to be based on four basic propositions. First, individuals are self-regarding and materialism, at least in economic matters, is the dominant motivation. Second, restrictions on markets are costly and ought to be minimized, a concept known as market fundamentalism. Third, most believe that economic role of the state should not extend much beyond private property rights and the enforcement of contracts. Finally, low taxation is regarded as a self-evident truth by most businesspeople.
The co-evolution of economic institutions alongside social and political ones, Kay argued, leads to enhanced economic development, like that experienced by the 20-plus “rich” countries in the world today. He refuted the generally held beliefs about the American economy, insisting that the complexity of human motivation, the prevalence of informational symmetry, and applied risk management all play critical roles and are typically overlooked. Looking for an example of a rational economic man, Kay examined robber barons of the late 19th century and the wealthiest entrepreneurs of the present day. Yet none of Andrew Carnegie, John D. Rockefeller, Donald Trump, Bill Gates, or Warren Buffett defined their desire to make money in materialistic terms. Kay concluded that greed is not an overriding motivation, particularly since social organization diminishes when greed becomes an overriding motivation.
Since motivation by greed is a prevalent view despite much evidence to the contrary, people tend to construct institutions with materialism in mind which, in turn, attracts individuals who are materialistic. People tend to behave in the ways you would expect them to behave based on their situation, Kay insisted. This usually takes into account some belief that the world is much more complicated than it really is. He offered this example: if you offer someone US$100 now or US$120 a week from now, he or she will probably take the money now because there might be a catch and it would be best to “get out while the going is good.” However, if you offer the same person US$100 in 52 weeks or US$120 in 53 weeks, the amount of time involved diminishes any cause for concern, so most individuals would opt for US$120.
Kay also addressed the flaws of informational symmetry and applied risk management. In securities markets, for example, risk does not fall on those who can most cheaply bear it, as the conventional wisdom goes, but on those who know the least about it. Entrepreneurs are generally irrational in their attitudes toward risk, explaining why they often squander large amounts of money gambling on craps and roulette. Individuals who are more rational toward risk still take money off people who are irrational toward it.