Over the past months, your editor has been both angered and perplexed by efforts within the world of public education to defend academics like Edward Kame' ennui who simultaneously advised the Department of Education on Reading First regulation and profited from sales under the rules they helped to establish. These conflicts of interest would be obvious to any business executive or first year law student.

This posting moves on to the problem of explanation. How and why could academic experts let this mess come to pass? And why did it come to light? 

In a Nutshell

The most likely reason that academics' conflicts were so widespread in Reading First implementation, so easily found by investigators in emails, defended by the targets of investigation with a straight face in Congressional hearings, and rationalized  by observors is that they represented a normal way of doing business with the Department of Education. The conflicts came to light because, while agrieved parties remain silent when they fail to win work with a government monopoly in order to fight another day, in a market, participants who are loosers for reasons other than price and quality competition are expected to come forward with their complaints.

This is not to say that unethical and criminal behavior run rampant in the Department of Education. The problem is actually more insidious, essentially woven into the Department's culture. The Reading First scandal was the first significant clash between an old way of doing business at the Department and what's expected in a federally-regulated marketplace like the one ushered in by No Child Left Behind.

Consuting relationships that are completely inappropriate in the rest of our competitive economy served a useful purpose in the vertically integrated state-managed monopoly that has defined public education. Your editor has no doubt that the academics knew what they were doing was problematic, but is willing to believe that at least some did not recognize their tenuoos positions until very late in the game. They failed to internalize the personal consequences of this market transition until it was too late.

Conflicts of Interest in a Marketplace

To your editor's way of thinking, what have been accepted ethics guiding consulting relationships in public education are the exception. Not wrong for their circumstances, simply a departure from the norm. They became wrong when NCLB change the Cepartment's circumstances.) So let’s start with the rule - the American economy beyond public education.

Certain principles are fundamental to modern markets. One is the duty of loyalty that advisors owe to their clients. In essesnce, advisors are not entitled to both advise a client on dealings and have their own interests at stake in the client’s decision. The duty to fully disclose all potential conflicts, including those of family and business partners, rests with the advisor, not the client.

The reasons for this are fairly obvious. Markets are based on the idea of competition in the open. If an advisor can withhold from his client his own interests in the subject matter of his advice, his advice may serve his own interests and harm those of his client.  Placing a duty of disclosure on the advisor rather than one of discovery on the client vastly reduces the costs of doing business, and improves market efficiency.  

Moreover, when potential investors believe that competition is based primarily on arbitrary factors such as “who you know” close to government decisionmakers rather than quality and price, they demand far higher returns on their capital to adjust for the higher level of risk. This is why the cost of capital is higher for a firm doing business in Russia or Nigeria, that one operating in New York or Iowa.  Again, removing conflicts of interests to the greatest extent feasible improve market efficiency. Finance is employed to improve quality and lower prices, rather than better personal connections.

This is not to say that American commerce is immune from insider dealings and undisclosed conflicts. Anyone who folows the news knows it is not. But those same news reports underscore how these practices are not condoned, even with a wink and a nod. One reason our economy is so highly productive is that American laws governing commerce place a premium on openness, treat the failure to disclose conflicts of interest and efforts to exploit such conflicts as serious offenses, anticipate and even expect the parties harmed by this abuse to report it, and goes to some lengths to punish transgressors severely. Violaters run real risks of criminal and civil liability, and these risks discourage all but the most brazen white collar criminals.

Tomorrow: Part II - the role of consultants in the vertically integrated state-run monoply that defined public education before NCLB.