The Truth about Markets by John Kay

Economics made easy - from Enron to Madonna

Markets are a bit like democracy: the worst system for allocating resources, save for all the others. There is nothing like a global bubble followed by recession to make people question that core mechanism of exchange. John Kay's new book seeks to explain why, for all their faults, they arrive at better decisions than cabinet ministers or Soviet planners.

Because Professor Kay is one of the leading British economists of his generation, his voyage of discovery takes him into a crash course in economics. Here is a man who can explain Pareto efficiency in words that most of us can understand. He gives answers to those puzzling questions that nag the non-specialist. Why are some countries rich and others poor? Why do people doing the same job in Mexico and the US, a few miles apart, get completely different wages? Why did Argentina, 100 years ago one of the richest countries of the world, fall so far behind?

Coca-Cola, Bill Gates, Madonna, Boo.com, Nick Leeson – they all get walk-on roles. So too do relativity, DNA, the green revolution and ABM. ABM? That is the American Business Model, the stylised version of US corporate behaviour, which in extreme form arguably led to the collapses of Enron and WorldCom.

At least it was shareholders who lost money on Enron. Kay reminds us that British taxpayers had to fund one the worst economic decisions by a rich state: the AGR nuclear power programme. Total costs were £50bn and the assets were, in effect, worth less than nothing, for they could only be sold by the Government taking over the decommissioning costs.

For many readers, the most fascinating feature of Kay's book will be the way he explains why big economic decisions go wrong. AGR was backed by the scientific establishment; the civil servants behind it took their peerages. The key feature was the lack of dissent, even in a democracy.

Where dissent was even more absent, in Soviet Russia and China, the consequences have been much more catastrophic. Khrushchev saw maize growing in the US prairies and introduced it in Russia. But the weather and soil were different, and the economic consequences led to his downfall. Mao's Great Leap Forward, when agricultural workers were forced into sudden industrialisation, producing steel in backyard furnaces instead of tending fields, led to more than 30 million deaths from starvation. These experiments put the many failures of the market into a proper, and chilling, perspective.