John Kay’s article this week in the FT (“A good economist knows the true value of the arts”) was up to his usual high standard. 

Many people underestimate the contribution disease makes to the economy. In Britain, more than a million people are employed to diagnose and treat disease and care for the ill. Thousands of people build hospitals and surgeries, and many small and medium-size enterprises manufacture hospital supplies. Illness contributes about 10 per cent of the UK’s economy: the government does not do enough to promote disease.

Such reasoning is identical to that of studies sitting on my desk that purport to measure the economic contribution of sport, tourism and the arts. These studies point to the number of jobs created, and the ancillary activities needed to make the activities possible. They add up the incomes that result. Reporting the total with pride, the sponsors hope to persuade us not just that sport, tourism and the arts make life better, but that they contribute to something called “the economy”.

The analogy illustrates the obvious fallacy. What the exercises measure is not the benefits of the activities they applaud, but their cost; and the value of an activity is not what it costs, but the amount by which its benefit exceeds its costs. The economic contribution of sport is in the pleasure participants and spectators derive, and the resulting gains in health and longevity. That value is diminished, not increased, by the resources that need to be diverted from other purposes.

We are used to seeing self-serving economic studies in this country, in which the alleged job-creation effects of particular activities are used to argue for special treatment or subsidies.  I have commented on a particular example of this already, where the Irish Insurance Federation tried to argue that up to 2,000 jobs in the life and pensions industry could be lost due to the Government’s planned changes to pension tax relief.  Self-serving claims that a sector needs special treatment to avoid job losses are rarely valid;  in fact, such claims should by definition lead to the particular cause that expresses them being treated with greater suspicion.

John Kay (in the Financial Times) writes about banks that are  “too big to fail”, and as usual is worth quoting :

Their activities underwritten by implicit and explicit government guarantee, it is increasingly business as usual for conglomerate banks. The politicians they lobby sound increasingly like their mouthpieces, espousing the revisionist view that the crisis was caused by bad regulation. It was not: the crisis was caused by greedy and inept bank executives who failed to control activities they did not understand. While regulators may be at fault in not having acted sufficiently vigorously, the claim that they caused the crisis is as ludicrous as the claim that crime is caused by the indolence of the police.

John Kay in Wednesday’s Financial Times has gone surprisingly soft on those villainous bankers.

“Better, as so often, to follow an aphorism of Warren Buffett’s: invest only in businesses that an idiot can run, because sooner or later an idiot will. Our banks were not run by idiots. They were run by able men who were out of their depth. If their aspirations were beyond their capacity it is because they were probably beyond anyone’s capacity….. we would be wiser to look for a simpler world, more resilient to human error and the inevitable misjudgments. Great and enduringly successful organisations are not stages on which geniuses can strut. They are structures that make the most of the ordinary talents of ordinary people.”

I think John Kay is too kind to bankers.  It was not complexity but greed  Read the rest of this entry »