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com/about/#Modernism

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

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Perhaps hope and ideology will prove victorious, in Iraq

and on Wall Street. But real life and budgetary arithmetic

generally win out. FT, 19.10.04

John Kay biography

John Kay books

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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.

© John Kay 2009, © Ripserve 2005