John Kay

The activities of Shah Jahan epitomise rent-seeking – the accumulation of a fortune not by creating wealth through serving customers better but by the appropriation of such wealth after it has already been created by other people.

Adam Smith had not imagined a world in which the Wealth of Nations would cross the world digitally at the click of a mouse. Nor had he envisaged one in which legislation would be drafted by paid lobbyists.

Most of footballer pay is what David Ricardo and James Anderson thought of as economic rent and it is just as much determined by politics as economics.

Lobbyists press back the release dates of creative output to the commons with the argument that intellectual output needs to be incentivised. The extension of copyrights, while producing windfall gains for the holders of copyrights on material produced long ago, does little for the artists of that material.

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.

The housing market is like other financial markets: price expectations create momentum that drives prices arising from normal affordability ratios. But they must eventually return to these norms through “mean reversion”, creating the endemic booms and busts of cycles.

At the medieval courts Shakespeare described, the exercise of power was not a means to an end, it was itself the end. The political and economic environment has been transformed. But human nature has not, and the factors that drive powerful men today are little different from those that drove them five centuries ago.

The substitution of transaction-oriented dealings for relationship contracting added to profitability in the short run; but in the long run it eroded relationships that had been the underlying source of much of that profitability.

The fall of the Berlin Wall in November 1989 was the defining economic event of our lifetime. It marked the end of the most extensive controlled experiment in the history of social sciences – the division of Germany into two economic zones, one centralised and planned, the other a market economy. After forty years, the gap in living standards between the two was so extreme that the experiment was terminated.

Mr Buffett’s success demonstrates the weakness of one economic theory, the efficient market hypothesis, and the strength of another – the central role that the pursuit and defence of economic rents plays in modern corporate life.