John Kay

The interim report of the Kay review into the effect of UK equity markets on the competitiveness of UK business, was released yesterday. It summarises public responses to the call for evidence, and draws out the issues that will be considered in the second phase of the review. Read it here.

Our intuition is that a centrally planned allocation of resources will be more efficient than an uncoordinated one. In a market economy, that error constantly leads us to overestimate the economic advantages, and longevity, of large companies.

This year I wrote that if men think about sex on average every seven seconds, the average man last thought about sex three and a half seconds ago. But neither love nor equity markets are so predictable.

A semantic confusion leads us to use the word market to describe both the process which puts food on our table and the activity of gambling in credit default swaps. That confusion has enabled people to claim the virtues of the former for the latter.

The eurozone’s difficulties have been created by member states not markets, giving members more resources to fight markets makes things worse, not better.

The skill of the statesman is to distinguish situations in which ambiguity makes coexistence possible from those that will make the future more troublesome. In this respect, politicians who have steered world affairs through the financial crisis have not served us well.

A few failed components may bring about collapse in a complex interdependent system. As in the Gulf of Mexico spill, or at the Fukushima disaster, or in the credit market in 2008.

After mistaken claims made ahead of the global crisis won much academic support, long-held assumptions were called into question – but the real world often remains overlooked or ignored.

The suggestion that we might partially turn back the clock has been described as a call for “Hovis banking”, referring to an advertisement that plays on nostalgia. The commercial succeeds because we believe the bread our grandparents ate, before innovations in technology and marketing, was nicer and more wholesome. Perhaps that is true in banking as in baking.

What is important in billiards is the result, not the play: and what matters in business and finance is the outcome, not the process. In business and finance, as in billiards, the imperfections are critical and you can anticipate the result, or understand the outcome, only by appreciating these imperfections.