I once used to write a monthly column for a magazine called Real Business, but like most magazines it only survived a few years. The column was a commentary on macroeconomic events, and the few articles I can still open seem pretty reasonable still. Had I perhaps already grasped what this book makes eminently clear – that how economists characterise ‘business’ is wrong – and unreal? Perhaps, but I couldn’t then or now write such a powerful critique of the models which have led not just to mistaken conclusions but to mistaken actions as well.

Early on Kay addresses the fundamental question of motivation and points out that he still supports the contention that the firm is a ‘nexus of contracts’, an assembly of relationships. However, one of the main purposes of the book is to challenge the idea that these relationships are essentially transactional, rather than personal, social or power based. This book looks at motivation, the interface with finance, regulation and the relationship between price, cost and value. It is the first of two volumes and is intended to be descriptive rather than prescriptive. Description makes for quite a long book, but equally it zips along with sparkling prose. One of the ways in which this is effective is that it enables a proper setting out of context. The context for a business is much more than the market in which it operates. The laws governing liability are central, for example, and Kay provides several examples in which disgruntled investors, customers or employees have failed to make their concerns stick in law. Context also includes the social environment, and personal relationships can carry more weight than theories allow for. Sometimes the most influential person in head office isn’t a so-called leader at all, but a secretary.

The focus on individual motivation and the representative agent has been, I believe, the bane of economics, leading us to that transactional approach and an ignorance of group dynamics. There is currently, and rightly, a focus on diversity in recruitment and in the boardroom. But the need for mutual understanding means that this can easily be only skin deep. Assessments of experience and of approaches to thinking have shown that apparent diversity masks deeper similarities of approaches to the world. That in turn will be reflected in decision making and even agenda setting. Kay focuses on the under-appreciated work of Edith Penrose who analysed business as a social construct and the collaboration and mix of capabilities that are required to make such constructs a success. My own experience in business, whether in economic consultancies, financial institutions or utilities leads me to conclude that enabling mutual respect within an organisation is both key to success and, also, extremely difficult. Perhaps it was easier when hierarchies dominated in organisations where the product was secondary. There is a novel where the protagonist leaves his workstation to try and establish what the product actually is. No matter where he goes and how high up in the factory hierarchy, he never finds out. This was written in the heyday of manufacturing factories but might be just as relevant to some modern service factories such as call centres, or even accountancy firms. Of course, hierarchies will be more probably based on power relationships and this too undermines mutual respect. So too, however, does a group of differentiated Subject Matter Experts (SMEs in the current management jargon). My expertise is better than yours, yah boo sucks. Whether in hierarchies or in the battle of the experts, it is the social constructs which are most relevant,

Kay describes these constructs across time and space (at least developed nation space) with verve. From motivation and structure, he goes on to consider ownership, capital and wealth, and the relationships between them. Economists are of course familiar with the principal-agent problem, though others may be less concerned if they do not believe that profit maximisation is the sole goal of business. If you do, then having managers who want to maximise sales or their salaries or the welfare of their employees might be a problem. Alternatively, you might, and Kay does, argue that the long-term success of any enterprise, business or indeed any organisation at all, depends on consideration of all the stakeholders and focusing upon only one element will inevitably end in disaster. Kay has many examples of firms which dominated their industries but which have disappeared over time, or only survive by reinventing themselves. GE and IBM are prime examples. Industries evolve, and firms must too. A model I built with Paul Ormerod showed that firms must in practice be fairly ignorant. If they had the ability to know implied by most models their length of life would be much longer than we observe in practice. Uncertainty is ubiquitous. If we cannot know the future, then how we think about capital and wealth needs to consider them separately. As a factor of production capital is embedded in things and in property. It is rarely fungible. Wealth is more likely to be fungible but is less likely to be a factor of production for anything in particular. Much investment may be fully depreciated but still immensely useful in production (if well maintained). Roads, railways, sewers, water pipes all spring to mind. These are not easy to value and many are owned by governments. And, as Kay asks, it is hard to think of the useful question to which the historic valuation of these assets would be useful. When Network Rail was reclassified to the public sector in 2014, the value of its assets had to be re-estimated. Previously this had been on the basis of the future revenues that the assets might generate. Under government accounting it had to be done on a replacement basis. What is the cost of replacing the lines into, for example, London Bridge? Estimates were made, and some did improve some aspects of maintenance and enhancement costings but, fundamentally, this constituted a costly exercise to prove nothing worthwhile.

It is like employing tax experts to compute the corporation tax revenues due from public corporations to HMRC. And the auditors also employing experts to check them. And yes, we do this, though it makes no sense. What all this adds up to is that we don’t have a theory of the corporation that is relevant to today’s world. Our theories are either out of date or too narrow. They fail to recognise the limitations of a model based on separable factors of production and transactional contracting. They ignore the importance of all forms of context. I suspect that there is no such thing as a general theory of the firm to which as economists we should cling. We need to recognise that the institutional context means that firms are as various as the humans which start, grow and run them. I have set up and run several firms. I sit on the boards of several too. Even when they purported to do similar things they operated differently and their mix of ambitions were and are different. The only common thread is that people wanted to be proud of what they did. The transactional approach to business has done immense damage in convincing business leaders that it is not only true but right. Economists have contributed to that damage and need to take some responsibility in bringing a wider perspective to bear. This book does that and should be widely read.