The Business of Economics

The Business of Economics

The Business of Economics

The Business of Economics

Synopsis

Medicine and business management share certain similarities, writes John Kay. For centuries, the theories behind medical practice were mostly nonsense. Doctors simply applied fashionable nostrums, bleeding one patient, starving another, and sometimes the patient got better, sometimes not. The prestige of a doctor rested more on the social rank of his patients and the confidence of his assertions than on the evidence of his cures. Much the same can be said of present-day management gurus. But there is one difference between medicine and management, Kay adds. In the last 100 years, medicine has been transformed by science. Management has not. In The Business of Economics, Kay argues that it is economics that can provide the science that management presently lacks, that economics is the natural backbone of business management. In the many insightful and lively pieces collected here, Kay looks at the application of economics to the central strategic issues facing firms--their choice of activities and markets. He is particularly interested in microeconomics, the study of markets, industries, and firms, and is on the other hand highly critical of macroeconomics, economic modeling, and economic forecasting (which he says is inevitably wrong). He is especially illuminating on the recently developed resource-based theory of strategy, which attempts to explain the success or failure of a firm in terms of its "distinctive capabilities" (the factors which differentiate them from others in the same market and which cannot be easily reproduced by competitors even when recognized.) For instance, BMW's highly skilled work force, due to Germany's high level of general education, is hard to reproduce by competitors in other countries. Kay shows how BMW exploited its highly skilled labor force (opposed to low-wage foreign workers or robots found in many other auto plants) to get a large share of the market for up-scale, high-performance cars. Among the many other topics discussed in this idea-rich book are Saatchi & Saatchi's dismal attempt to globalize in the 1980s, Honda's great success selling low-end motorcycles in the U.S., the fare of the Eurotunnel, and the reason why race-car driver Nigel Mansell makes seventy-five times as much money a year as Britain's Prime Minister, John Major. Described in Business Age as the "most important business analyst in Britain bar none," John Kay is renowned for his incisive, entertaining, and controversial columns in the Financial Times of London. In addition, he is a regular commentator on radio and TV, and is in much demand as a speaker and consultant. In The Business of Economics, he shares his thoughts on a wide range of issues facing businesses today. His clear and down-to-earth writing style informs, challenges, and entertains, and his rigorous and clever analysis of the corporate world offers insights into the business problems and decisions faced by executives and managers every day.

Excerpt

This book is a collection of essays, articles and lectures on the application of economics to business issues. In an endeavour to make the whole more than the sum of the parts, I have organised it around four themes.

The first section is concerned with the uses of economics. Most business people think economics is about forecasting inflation, growth, and interest rates. These are not the subjects of this present volume. The only references to these activities are in chapter 2, where I examine the track record of macroeconomic forecasters I show not just that the record is abysmal, which most people already suspected, but that--in contrast to the prevailing view that economists always disagree--all the forecasts available at any time are much the same. It is just the economy that is different. This book stresses the priority of microeconomics--the study of markets, industries and firms--over macroeconomics--the analysis of monetary and fiscal policies.

Like most students, I was attracted to economics by the prospect of learning how to conquer inflation and unemployment. But I discovered that microeconomics was not only more interesting: it also offered more answers, even to these macroeconomic problems.

Most people--including many economists--still think that macro relates to the big issues, micro to the small. The essay in Chapter 4, which suggests that the Chancellor's so-called Wise Men would do better to consider the level of taxi fares than the level of taxes, was written to tease. But it was also written to make a serious point.

Take the greatest of all economic experiments--the fifty-year division of Germany into two economic zones. There are not many people who believe that the main reason why income levels in the West ended at levels more than twice as high as those in the East was the Bundesbank's exemplary management of West Germany's interest and exchange rate policy. What really mattered was the different ways in which the two zones organized their industries and their markets. Or we might ask why have the tiger economies of east Asia shown such rapid growth while most of Africa has experienced economic decline? Here too, the key issues are not to do with the growth of the money . . .

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