Media Spotlight: Obliquity
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By John Kay
Following our review of economist John Kay’s 2003 book The Truth About Markets last week, now we’re looking at his latest book, Obliquity.
Kay recently gave the keynote speech at the Association of Mortgage Intermediaries’ annual dinner, ending it with a gloomy prediction of the dire fate that awaits capitalism unless enough is done to underpin the structure on which it rests.
This went down like a lead balloon with many in the mortgage industry who were in attendance on the night.
Criticism of the speech was twofold - it was too downbeat and it would have been more helpful if it had been delivered four years previously.
But attacking an economist for failing to prevent a financial meltdown is like attacking a psychologist whose patient cracks and goes on a murderous rampage.
Economics is a social science and economists’ subject, human activity, is always changing.
And of course, mapping the way humans behave becomes even harder when they frequently come up with a rational explanation of what they have done after the event rather than before it, as Kay points out at the beginning of the book.
His thesis is that when we look at firms and attempt to fathom why they behaved in a certain fashion an indirect reason often lies at the heart of the matter.
Kay has a gift for explaining his ideas by using examples from all walks of life. Everything from the architecture of Le Corbusier, the writings of Oscar Wilde, the art of Picasso, the Vietnam war and the brutal dictatorship of Pol Pot to the performance of companies such as ICI are covered.
All these analogies point towards the fundamental rule of putting the appropriate structure in place - firms need to be aiming to grow their business rather than maximise profits for shareholders, while the regulatory environment needs to be strict without being constricting.
Kay warns of the folly of looking for patterns where there are none. To illustrate his point he describes an article in the Daily Telegraph in 2002 in which David Beckham is praised as a physics genius for applying just the right amount of force to make the ball swing and hit the back of the net.
“The human mind is programmed to look for patterns and seek causes, and this approach is often valuable,” says Kay. “But that programming leads us to see patterns in random events and attribute intentions where none exist. We believe we observe directness in obliquity.”
As the Financial Services Authority itself has belatedly admitted, it saw the smooth running of the market and the avoidance of a financial crash for years as a sign that the measures it had put in place were working. It was mistakenly attributing the effect of stability to the cause of financial regulation working.
As with Beckham’s kick, the market’s trajectory was not engineered. Sure, there was an intention but after that it was pot luck.
It’s worth noting that Bank of England governor Mervyn King is mentioned in the acknowledgments section for providing feedback on early drafts of Obliquity. Kay clearly has the ear of those who are looking to reconfigure financial regulation.
Book review by Robert Thickett
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