Professor Kay is understood to have fallen out with the university authorities over decision-making within the new school. As one observer put it: "It was business culture versus the dreaming spires."
Construction work on the school, which is being built with a pounds 20m donation from the Saudi businessman Wafic Said, began only last month.
Professor Kay's sudden departure will come as a severe blow to the university, which has looked on enviously at Cambridge University's success with its own Judge Management School.
Anthony Hopwood, the Said Business School's finance director, will step in as Professor Kay's replacement for the time being.
The Said Business School had already suffered controversy, first because the money came from an international businessman, and second because it was originally going to be built on a playing field in the centre of Oxford. Building work was subsequently relocated to the car park of Oxford railway station, on the edge of town.
Professor Kay now intends to return to London Economics, which he used to chair, and to write a book on the social consequences of financial markets. He and Nick Morris founded London Economics in the mid 1980s. Before that they had launched the Institute of Fiscal Studies, an independent, influential think-tank on tax issues that remains the only one of its type today.
The professor has also advised Tony Blair personally on modernising Labour's thinking, and especially on the concepts of the "Third Way", a political and economic approach avoiding the extremes of both Old Labour and Conservative thinking.
The Said Business School is due to be completed in 2001. It will offer MBAs (Masters of Business Administration) to people willing to pay fees of up pounds 12,000, like most other business schools. Professor Kay said repeatedly that he was determined to make its courses intellectually rigorous. He was concerned that some other business schools were seen as a soft option academically.
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