Leslie Pratch on Business, Culture, and the Economy

By Leslie Pratch

I can’t answer this question. But I hope my readers will help.

A few nights ago (July 14), I saw Sebastian Mallaby defending hedge funds on Charlie Rose. He said, essentially, that these bandits (who walk away with a c. 20% profit, treated, for tax purposes, as capital gains) contribute to capital allocation. Of course, they are playing with OPM.

Barney Frank (who appeared on Charlie Rose on July 15) has always talked too fast, even back in college according to a classmate of his. But he and Chris Dodd have, somewhat, atoned for their sins. Geithner and Summers have not. (How can you screw up being president of Harvard?)

Obama should have been a real change agent and brought in Stiglitz, Krugman, and Company. If you want to do Keynesan stimulus, be bold. Bring in the guys who would have put a bone in he Congressional throat. Many of my friends still think Obama as a gift from God. Considering the alternatives, I’m inclined to agree. But rumor has it that Hillary Clinton will be a contender in 2012, and I hope that she is.

Too many voters think that reality is what takes up so much of their time watching “reality” shows on TV. Far too many of them can’t identify the three branches of government. Or where Bolivia or Afghanistan are located. Or where the continents are located on the shifting tectonic plates of our surly and unpredictable planet.

Hillary Clinton’s early passion for children (and education and health care) tell me her instincts are in the right place. We need voters who are educated. We need workers who are healthy enough to work. Why there has been no major infrastructure spending is a mystery to me.

As a psychologist, I am trained NOT to delve in to the psyches of individuals whom I have not actually analyzed. That’s the end of this post. I’ll leave the analysis to my readers, whom I hope will comment!

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Leslie Pratch, Ph.D. is a clinical psychologist from the Northwestern Medical School with an M.B.A. in Strategy and Finance from Chicago Booth and a B.A. in Religion from Williams College. She works with boards of directors of public companies as well as private equity investors to assess and develop executives. She can be reached at (312) 464-7919 or leslie@pratchco.com or www.pratchco.com.

By Leslie Pratch

A friend recently, discussing the types of leadership crises facing companies, upheld GM as a model of ethics but one which suffered from bureaucratic inertia. British Petroleum, on the other hand, he believed, suffered from poor public relations: “The CEO has had his foot in his mouth the entire time.” At its root, however, he did concede that the crisis stemmed from aggressive risk taking. Chalk it up to capitalism, he would say. And Goldman, Sachs, though large, has not even profited during the recession. Its leadership crisis is the public perception of questionable ethics.

I respectfully disagree with my friend’s characterization of GM as a model of ethics. I would criticize all the car companies over the world with lack of ethics including their behavior with suppliers. The one leader in the industry who behaved ethically has been Tom Stallkamp who at Chrysler did NOT extract extract price concessions. (Stallkamp had been a director at Baxter and at BorgWarner and was an Industrial Partner at Ripplewood Holdings L.L.C., a New York private equity group, since 2004, the international auto parts supply sector. Ford was in between Chrysler and GM. If you were a supplier, Ford would wear you out. But if you hung in there, you could collect.

GM used to be one of the best companies in the world. When Ignacio Lopez, the former purchasing czar at GM, came into power the 1980s, GM became adversarial. It killed the goose that laid the golden egg; it killed the supply base. What really was out of whack at GM was its internal cost structure, which critics attributed to Lopez’ aggressive cost cutting. Honda was able to be profitable but did not try to cut a new deal once it entered into a supply agreement. By contrast, under Lopez, GM did a bait and switch, enraging the supply base. GM never went with the one company that had predominance on international bids.

In 1993, Volkswagen hired Lopez shortly before the CEO of GM would announce Lopez would be promoted to head the company’s North American operations. GM accused Lopez of misappropriating trade secrets. German investigators began to probe Lopez and Volkswagen after prosecutors linked Lopez to a cache of secret GM documents investigators found in the apartment of two associates of Lopez. Volkswagen, facing plummeting stock prices, forced Lopez to resign. GM and Volkswagen reached a civil settlement, in which Volkswagen agreed to pay GM $100 million and to buy $1 billion worth of parts from GM.

GM is changing and the changes are culturally pretty deep. It is getting rid of most of the executives who came up the system, and as a result, the culture is changing. GM had destroyed the relationships it had with the supply base, which enabled it to reduce prices while maintaining high internal costs.

The automotive and heavy truck industry has a used car dealership mentality, a mentality which permeates the entire industry-up to the CEO. What has been lacking is trust, which has forced both the suppliers and the car companies to talk out of both sides of their mouths.

But now that GM has led the way by hiring leaders from outside the industry, the United States may have a shot at a viable automotive industry. One can hope.
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Leslie Pratch, Ph.D. is a clinical psychologist from the Northwestern Medical School with an M.B.A. in Strategy and Finance from Chicago Booth and a B.A. in Religion from Williams College. She works with boards of directors of public companies as well as private equity investors to assess and develop executives. She can be reached at (312) 464-7919 or leslie@pratchco.com or www.pratchco.com.

By Leslie Pratch

How will the sausage machine turn out the sausage? I can’t wait to hear what Obama has to say from the Oval Office.

http://www.nytimes.com/2010/06/15/business/15regulate.html?emc=eta1

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Leslie Pratch, Ph.D. is a clinical psychologist who trained at Northwestern Medical School with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

Posted by Leslie Pratch; written by David Friedman

Here are David’s recent thoughts on crowdsourcing.

I’ve been thinking a lot about crowdsourcing and the types of problems where it (and some team-oriented variants of crowdsourcing) could work. In my research, I ran across the story-so far-of the crowdsourcing of solutions to the blowout of the Deepwater Horizon well in the Gulf. I say so far since as of this writing the problem is continuing only slightly unabated.

BP didn’t post the question of what to do on any of the available crowdsourcing platforms, like Innocentive. It didn’t launch a crowdsourcing site of its own for a long time, although it has one now that claims to have over 7800 suggestions. However, BP is not very transparent about what it is doing with the suggestions, as highlighted in this article. Other people have leapt into the breach, providing venues for people to offer suggestions. These included the Guardian newspaper and a site called BPOilnews.com. People also apparently began submitting comments the the U.S. Environmental Protection Agency’s Open Government site (since it was open and had “EPA” in the title); eventually the EPA opened another site specifically to deal with the BP situation. The EPA’s new site defines the problems it is interested in help with — which is one advantage of being slightly proactive (even if you are dragged to being proactive by other people).

In a very interesting post, Laurel Papworth notes that the PR advantages of crowdsourcing -of asking for help and at least pretending to listen — would have been valuable for BP. Instead, they have taken the route of trying to be the experts and instead looking quite foolish.

The desire of people to help is impressive. Their capacity to help might be very large. It appears that BP is resistant to taking help, although it’s admittedly hard to know (lack of response by them, lack of publicity by them of their response doesn’t mean they aren’t reading what they are getting, but it does make one wonder). It would be nice to see some response, and some evaluation publicly of the ideas that have been received.

What do you think BP should have done? What should it do now to get the most from the public?

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Leslie Pratch, Ph.D. is a clinical psychologist who trained at Northwestern Medical School with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit pratchco.com.

David Friedman (Yale School of Management alum and a former McKinsey & Company partner) is a consultant, educator and thinker who cares deeply about people and what happens to us. He is dedicated to creating high integrity individuals beginning with early childhood. He can be reached at  (312) 863-3489 or at bridgewellpartners.com.

Posted by Leslie Pratch; written by David Friedman

Today we have a guest blogger, David Friedman, who has a masters degree from the Yale School of Management and prior to starting his current firm, Bridgewell Partners, was a former partner at McKinsey & Company. He writes:

There’s been a lot of writing about the relationship economy.  I have been wrestling with some of the fundamental issues/ questions and would love to have an engaged dialogue with people about it.

What I get, and deeply believe

(1) People working together with new electronic tools can create immense economic value. Many  tools (social networks, etc.) are are inexpensive or free. Leveraging these tools and the relationships they facilitate (new relationships, stronger relationships) are central benefits of “the relationship economy.”

(2) Relationships in themselves are valuable to people. There is a social value to being connected to other people ; for example, people who have lots of friends live longer. Relationships are also the major (maybe sole) mechanism for personal growth, and people want to grow personally (become wiser).

(3) Many people understand that establishing rewarding relationships begins with giving, and creating trust begins with trusting.

What I’d like to think more about and talk with people about is the bigger “so what”

The relationship economy is a big deal for sure; I’m wondering if it’s a giant deal.

(1) Is the “relationship economy” just a new front in the old self-interested free enterprise economy? It certainly is that: it gives brands a new way to connect with people and can change the way companies innovate. It definitely provides some power shifting within the economy. But it would only be a fundamental change economically if it changed economics so much as to alter the world in a meaningful way. For example, if better innovation could cut the cost of what we buy by 50%, effectively doubling our income – then that would be a fundamental change (where a quantitative shift leads to qualitative difference).

(2) Is the “relationship economy” most important because it lets people start to value relationship and the experience of relationships as extremely valuable in themselves? People are starved for attention from other people–real attention, real understanding. They want the social benefits of connecting, for the experience itself. I had this “social benefits of connecting” experience while posting my first LinkedIn question. It was about software and I got 20 responses. I engaged in dialogue with about half the people, and feel like I found a new friend or two – because I asked for help and they responded effectively.

(3) Is the “relationship economy” a critical phase in the explosion of the Internet, creating a “new nervous system for the planet” and making it much easier for people to think about the whole?  If this leads to more interest in the “whole” and less in “my share of the whole” then it is transformational. I think by analogy of this picture of the Earth taken from space. Seeing the planet shows us a whole and makes it harder to disregard it.  Will we start thinking about the “whole” (whatever that is) and focus on making that healthy? To repeat, that would be transformational.

Which is it? Or is it all? Or is it up to us to make of it what we do?  Comments are most  welcome.

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Leslie Pratch, Ph.D. is a clinical psychologist who trained at Northwestern Medical School with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

David Friedman is a consultant, educator and thinker who cares deeply people and what happens to us. He is dedicated to creating high integrity individuals beginning with early childhood. He can be reached at  (312) 863-3489.

Posted by Leslie Pratch; written by David Friedman

Today we have a guest blogger, David Friedman, a consultant who founded Bridgewell Partners and started the blog Positive Structures. He writes:

If strangers want to collaborate together, they need to know something about each other and how to work together. It would be great if each person would make available the critical information that others need to see, in advance, whether a collaboration is likely to be useful and possible. And to see how best to get started.  Here’s a start on what could be critical:

1. My skills

2. My values

3. Things I am willing to take questions about

4. How best to contact me on different subjects, if you are a known acquaintance (or come referred by a close contact of mine)

5. How best to contact me on different subjects, if you are a stranger to me

6. The time frame in which you can expect a response from me

7. What I am pursuing right now – in case you’d like to try to help me first on something I’m doing (which for most people would be a good way of getting me interested in helping you)

8. How much time and availability I usually make for new inquiries and projects, and whether now is a “usual time”

9. Key members of my social network (perhaps for business people something like my first circle of “LinkedIn” connections) – in case you know any of them. Then, if you happen to know any of them, you can contact them for an introduction (and raise your odds) or else contact them and find out what’s the best way to approach me and what to expect when you do (e.g., “If you send him an email and haven’t heard in two days, try again. He doesn’t mind being re-emailed”)

10. My style of working — perhaps using something like a Meyers-Briggs Type Index, or some other system that many people are familiar with

In fact, if these could be put into a standardized form like something like the Vcard, then they would be searchable. In his blog, Taylor Davidson has coined the phrase “Personal API”; he means something different than I do, but I think the phrase captures well “a machine-readable publicly available version of how best to interact with me.”

Real life examples are hard to find. Here’s a non-machine readable example. It’s wonderful, although it might not encourage you to contact the owner of it, who is a professor of mathematics at UCLA.

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Leslie Pratch, Ph.D. is a clinical psychologist who trained at Northwestern Medical School with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

David Friedman is a friend who describes himself as a consultant, educator and thinker who cares a lot about people and what happens to us. He is dedicated to creating high integrity individuals beginning with early childhood. He can be reached at  (312) 863-3489 or at Bridgewell Partners.

By Leslie Pratch

In the past few years, I have taken to telling clients that honesty is essential for business success and effectiveness. No doubt the moral philosophers would criticize me for not appreciating it for what it is. But the fact that companies can do well by doing good may just be another plus for the human potential.

The market runs on trust. It is the trust we put in one another that allows the wheels of commerce turn smoothly. On the other hand, it is the same general trust that creates the opportunity for individuals to profit by the abuse of that trust. The former CEO of an investment bank with a brokerage operation who wanted to remain anonymous once told me about a small institutional account that traded with his firm.

“Everything settled on time. Then the account made a large purchase in the aftermarket of a hot IPO, only to see the price collapse shortly thereafter. The account claimed that he had put in a sell order, not a buy order, and refused to pay. I knew he was lying, but it was his word against our trader’s word and we wound up taking the loss on the position instead of him. Obviously, that was the last trade we did with him.”

Any company with liars and cheaters in its midst runs great risk and if it does not get rid of them the whole business could be brought down. There does seem to be a general exception when very large companies do very bad things. Sometimes they put themselves out of business but more often they survive malfeasance: The legal system does not want to put them out of business because of the loss of jobs and impact on competition.

Arthur Andersen was put out of business by the Justice Department. Many believe it was a mistake because it eliminated a viable competitor in an existing oligopoly and put many innocent individuals out of work. Its brand was severely damaged by the Enron and WorldCom scandals. It certainly would have paid handsomely in settlements and fines. But I believe it could have survived had it not been for the indictment.

I suppose if honesty issues lead to economic loss on the part of the perpetrator, a certain degree of justice has been rendered and life can go on. It would be interesting if an economist could make the case that there is a large cost to corruption.

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Leslie Pratch, Ph.D. is a clinical psychologist from the Northwestern Medical School with an M.B.A. in Strategy and Finance from Chicago Booth and a B.A. in Religion from Williams College. She works with boards of directors of public companies as well as private equity investors to assess and develop executives. She can be reached at (312) 464-7919 or leslie@pratchco.com or www.pratchco.com.

By Leslie Pratch

Leslie: Welcome, Pamela! Could we take a few minutes to talk about what is going on with the health care debate? I’ve been following your blog on business and public policy and just finished reading your synopsis of the November 2009 Business Week story on health care policy. I was impressed by just how much waste (approximately $700 billion/year) could be eliminated. Even without reducing fraud completely, reducing waste could free up billions of dollars to offset the expected 10-year investment in implementing a public option system.

Pamela: Hi, Leslie! I think it is important to try to understand what is going on, as health care policy affects all of us. First, let’s agree on what health insurance is. It is a means of spreading risks. The greater the number of individuals in the system, the more the risk is distributed across all members, and the cost to insure each individual goes down. Second, the debate affects each one of us. Most of us want coverage and no one wants his or her choice to be constrained. No one really wants to build up wasteful, inefficient programs that require still more dollars to fund (except those who will find steady work in such a bureaucracy).

Leslie: Only the most hard-hearted person could argue in favor of denying health care to those who need it. Certainly, government plays a role in not only protecting the state militarily but also ensuring a baseline level of healthcare for all citizens.

Pamela : A productive, flourishing society has healthy citizens who practice preventive and ongoing care to ensure good health, which treats diseases in the early stages, and provides emergency care whenever needed.

Leslie: On the other hand, isn’t it everyone’s business to ensure that the federal government outlays equal tax revenues and to avoid deficit spending when possible?

Pamela: Engaging in large deficit spending over time will hinder a country and create downward pressures on the growth of the economy. Many in the U.S. fear that a universal health care system will bankrupt the country. On the other hand, many statistics point to the tremendous cost to society of the high percentage of uninsured Americans and the growing costs to us all if a plan is not implemented.

Leslie: Yes, U.S. businesses need to find a way to cut salary and fringe costs per employee to be competitive in tomorrow’s global economy. Healthcare is a big “fringe” cost to businesses. A universal option would be one way to reduce this cost. Can you disentangle the mixed public-private partnership that characterizes the U.S healthcare system?

Pamela: I’ll try! In the United States, most people receive health insurance through their employers. With full employment, low costs and a strong economy, this system usually works; however, the cost of providing health insurance to employees is having an adverse impact on the bottom line of so many companies, especially the smaller ones. Compared to past decades, fewer companies offer health insurance, and most companies offer less generous plans.

In addition, unemployment rates are high and many of those who are without work are now also without health insurance. The cost of private health insurance for those who do not get health insurance through a group plan is often too high to bear. As a result, unemployed individuals often go without. Interestingly enough, many senior citizens are happy with their health plan, which is usually Medicare.

Leslie: What is the biggest problem in health care reform?

Pamela: The uncertainty of what exactly will happen. Many interest groups and individuals are afraid that the current situation, challenging as it is, will only get worse.

Leslie: I imagine individuals would evaluate the how good a health care situation is according to different criteria. Can you elaborate what those criteria might be?

Pamela: The concern of the political right is choice and the cost of a public option, as broader access will ultimately raise taxes. An unarticulated but potent fear on the right is loss of innovation. The concern of the political left is coverage for all.

Leslie: Would you spell out the conflict between the two sets of concerns?

Pamela: Let me give an example of what might happen if government played a larger role. In 2006, Massachusetts implemented universal health care for the state by mandating the purchase of health insurance, providing subsidies for those who cannot afford health insurance, and providing a centralized marketplace for health insurers so that the consumer has greater choice of insurance options. The bill is essentially a way to provide health insurance coverage, not a way to provide health care. Although the new plan has been in place for only a few years, we can see a few results, both desired and not.

First of all, the percentage of insured individuals has increased dramatically. Approximately 97% of Massachusetts residents now have health insurance coverage. Although his figure may still fall short of the 100% goal, the percentage of insured is much higher than in every other state in the country. Second, the undesired result is that the costs of providing health insurance for all have been enormous. At the time the bill was passed, there was little to no discussion regarding cutting costs. Now that the state budget is out of control, Massachusetts has gone back to the drawing board to find out where to cut costs.

A recent Business Week feature article focused on “10 ways to cut health care costs now.” The emphasis is on NOW because many groups in the private sector cannot wait to cut costs. They are struggling and must cut costs now. Examples of success abound, and most of them feature eliminating waste and fraud in the system, and practicing sensible preventive care.

Leslie: How can we in the U.S. lower employee salary and fringe costs? Beyond reducing fraud, how do we bring about truly effective and lasting change?

Pamela: The only way is through a comprehensive and lasting federal plan. Many have feared that universal health care reeked of socialism. But socialism is a knee-jerk rejection of government-sponsored care. A better way to think about the health care industry is to use an example from our own economic system, namely, Wal-Mart. Like government, Wal-Mart is a single buyer of goods and services with tremendous buying power. Using Wal-Mart as analogy to universal access as an option we get the antithesis of socialism. One can argue that a single buyer of services will create pressure to lower costs, and can enforce abuses of the system.

In addition, cutting fraud and waste will save money which will reduce overall costs. Business Week points out that $700 billion is wasted every year in the U.S. medical system, and if just half of that were saved, there would be enough funds to provide health care for all Americans!

Note: This entry was written in mid-November and as such some of the debate has already taken place. The political issues and risks to our country financially and in terms of health care remain.

Pamela Mearsheimer is a Financial Manager who brings her strong financial expertise and organizational skills to assist small businesses improve their financial organizations and achieve their goals. Pamela’s formal education includes MBA at the University of Chicago with an emphasis on Finance and Statistics; Certificate in Administration and Management, Harvard University; BA from the University of Chicago.

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Leslie Pratch, Ph.D. is a clinical psychologist from the Northwestern Medical School with an M.B.A. in Strategy and Finance from Chicago Booth and a B.A. in Religion from Williams College. She works with boards of directors of public companies as well as private equity investors to assess and develop executives. She can be reached at (312) 464-7919 or leslie@pratchco.com or www.pratchco.com.

By Leslie Pratch

To continue my previous post on information asymmetries and economic stimulus, Milton Friedman said if you want to stimulate the economy, just give the poor money. That was how the negative income tax was born. I believe in protecting those at the bottom end of the income distribution in times of depression by giving them money to bring them up to the 5th or 8th percentile. But I don’t know how to do that. I don’t think we can rely on philanthropy. Sometimes the government has to intervene.

I would like to bridge those on the left to those on the right. Those on the left tend to be more in favor of social policies; those on the right say those social policies interfere with legitimate freedoms. The government, for example, shouldn’t give out smallpox vaccines. The negative income tax was Friedman’s idea of a permanent arrangement to help the poor not be poor targeted at recessions.

Most economists at the University of Chicago do not think government action is prudent because the stimulus is too small and it takes too long to work its way into the system; Joseph Stiglitz and Paul Krugman have made these same points. Investors in the private sector are skilled at making investments and even they make mistakes. Government officials are neither skilled in that activity nor do they make decisions to maximize output; Ted Steven’s bridge to nowhere is an example.

Krugman has said for months we ought to substitute government spending for shortfalls in private spending; essentially, government should substitute spending to fill in the gap in spending not filled by the private sector. That seems reasonable but do we have the right incentives in place? Government officials haven’t been trained in managing investment projects, and they are motivated by political considerations. That’s a recipe for wasting money. The government allocation of spending is subject to political forces in the government which means a lot of it is going to be wasted than if it were done in the private sector.

Sam Pelzman, an industrial economist trained at Chicago (I believe he got his Ph.D. in 1960 or 1961) said this past December that only one policy works: a payroll tax holiday. What this means is that instead of holding wages for social security you let the employee have it. The payroll tax is 7.65%. If you make $40,000 a year, $333/month is taken out for payroll taxes. Pelzman’s idea is just don’t withhold that money. Total consumer spending will go up by 10%. That is a powerful engine. With 120 million workers times one thousand times four is half a trillion dollars and that amounts to 3-4% of GDP which, if put in consumers’ hands, they will spend.

Milton Friedman put forth the idea that people spend what they perceive their permanent income to be. When you have a transitory component of income, you view it as transitory. Friedman’s hypothesis is that consumers will invest the transitory component in a durable good such as a car. The essence is that consumers take the transitory income to pay down debt which is like investing in durable goods and the payroll tax holiday would go on for a couple of years.

I believe there are ordinary and natural forces in the economy that produce a correction. I think we are already seeing it. The stock market has been really strong since March 9, 2009, which I believe was the bottom; the Dow is trading above 9,000 and so it’s up 2500 points on a 6500 point base. That’s a 40% increase in the stock market; each stock market point is worth $15 billion; so we are up 2500 points. That’s $15 billion times 2500 – in other words, $4 trillion of added wealth through stock market moves alone. I think the stock market itself will stimulate spending. The economic climate should be good in a year and unemployment by then might be down to 9%. It takes time for labor unemployment to go down, but there is now a lot of slack capacity and eventually that slack capacity will be priced appropriately and then, finally, consumers will spend.

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Leslie Pratch, Ph.D. is a clinical psychologist from the Northwestern Medical School with an M.B.A. in Strategy and Finance from Chicago Booth and a B.A. in Religion from Williams College. She works with boards of directors of public companies as well as private equity investors to assess and develop executives. She can be reached at (312) 464-7919 or leslie@pratchco.com or www.pratchco.com.

By Leslie Pratch

I am not an economist but I certainly was exposed to price theory in business school at the University of Chicago. Recently, I reread a lecture Milton Friedman gave during the 1950s. He argued that a free market is a situation is one in which transactions are voluntary, bilateral, and mutually informed, the idea being that everybody going into the marketplace is well informed believing the transaction will make them better off.

Over the past 10 years, economists have worked on information asymmetries, situations in which the parties are not mutually and equally well informed. The models assume that at least one party to a transaction has relevant information whereas the other does not. Some economists argue that the economy operates at an optimum level (whatever “optimum” means) assuming full employment (i.e., an unemployment rate near 5%) even under conditions of asymmetric information. “If we’re smarter, we should be richer, right?”

From an economic point of view, from a price theory point of view, there may well be theoretical free market support for that argument. But that doesn’t satisfy me from an ethical point of view. If parties are not mutually and equally well informed, those with more information are likely to wind up with all of the wealth and those with less information will wind up with none of the wealth.

Take subprime housing loans or credit card offerings. The bank says, “All the terms are right there” but when do consumers really have the information? Credit card offerings are turgid, long, and have tiny print. The agreements give the banks all sorts of power and many consumers have gotten into trouble because they lacked information. I get credit card offers at 0% interest until March 2009. Implicit is that after March the rate goes to prime plus 9.5%. Many consumers are not savvy enough to grasp that implication. It is up to consumers to get smarter. Bernard Madoff was recently sentenced to 150 years had information about what he was doing that most of his clients did not have. Maybe his clients should have been smarter. I am heartened by news of rules for mortgage lending that protect consumers (reported in July 24th’s Wall Street Journal) which suggest that Richard Thaler’s proposal in the New York Times is being enacted.

Institutions work hard to develop information and that information is valuable. The SEC and to a far greater extent, the accounting profession, has a long history (longer than 600 years in the case of double entry accounting) where the essence of the activity is to develop, systematize, and certify information. The accounting profession is sanctified by government regulation (e.g., in recognizing FASB). The government sees it proper to disseminate some information. But when information is not shared, information goes into the direction of greater and greater imbalance. A market in which increasing numbers of parties are deprived of information implies that the performance of the economy will get worse.

The free marketers have said “We want to maximize total wealth creation” but they don’t take into consideration the distribution of income. Influence the income distribution in ways that the market would not cause is in the realm of political philosophy or social policy; it is not the economist’s job.

Another question economists try not to address is “Over what period of time?” If a highly unequal distribution of wealth and income leads to one level of total wealth output, and a more equal distribution leads to better wealth output would economists say the latter is better?

Information asymmetries have values implications that we should care about (assuming we are not economists). Not interfering with any activity, including the creation and distribution of information is the definition of an efficient market. All information is impounded in a price of a commodity. Greater transparency would be consistent with those who believe intensely in the free market. But relying on the market place to produce a socially satisfactory income distribution is not okay by me.

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Leslie Pratch, Ph.D. is a clinical psychologist from the Northwestern Medical School with an M.B.A. in Strategy and Finance from Chicago Booth and a B.A. in Religion from Williams College. She works with boards of directors of public companies as well as private equity investors to assess and develop executives. She can be reached at (312) 464-7919 or leslie@pratchco.com or www.pratchco.com.