Mar 26, 2023·edited Mar 26, 2023Liked by Arnold Kling
Re: "I get the impression that misaligned incentives are a severe problem in academia."
There are deeper principal-agent problems in academia, especially in the context of selective, residential colleges or universities with a major endowment:
(a) Who is the principal?
The Board of Trustees, who have formal governance authority?
Or alumni, who have a lifelong stake in their alma mater's reputation?
Or the faculty, who enjoy tenure and formal governance authority over curriculum, appointments, and promotions?
Or the students, who are at once customers, inputs to one another's education and campus experience, and future alumni 'owners' of the credential (degree) that will signal the right stuff for career and marriage?
(b) What is the maximand ("mission")?
Mission statements are wildly grand -- promise the moon to students -- and are divorced from any performance check. See Brennan & Magness, *Cracks in the Ivory Tower,* ch. 3: "Why Most Academic Advertising Is Immoral Bullshit."
The much-aligned 3rd-party rankings of universities are indeed incomplete, imperfect performance metrics, but constitute nonetheless a rare bullshit-detector in higher education.
Mission capture is pervasive:
Faculty utilize their governance role and power within the organization to distort the mission for political agendas.
Administrators build bureaucracy for totalitarian governance of "student life."
Students demand country-club amenities and extra-curricular programs that crowd out education.
Targeted gifts by alumni indirectly dissipate in extraneous "budget relief."
I am not going to disagree with your headlining conclusion. It is counter-intuitive to many and yet absolutely correct. If you want a long term incentive structure based on short-term feedback cycles, you need to change the feedback criteria periodically to avoid short-term optimization that fits the requirements of the immediate feedback structure but doesn't actually hit the end goal in the relevant longer time frame. Instead, you need to keep changing which aspect/dimension of performance is in the spotlight, with lagging and leading (anticipatory) behaviors carrying much of the integration burden. In short, the performers can't move fast enough to give you exactly what you say you want most, so you get something closer to what you really want.
In the context of economics, business schools and management consultants, your article is a corrective to the various delusions which say that some new incentive system is a panacea. Instead, you actually need some of these fads... ironically, because it prevents people from effectively gaming an even higher scale system across many organizations. But it creates an opportunity to game as well - which is being played by those consultants, in waves.
The real headline about incentive structures is not that there is some difference in interests between principal and agent - which can exist and is worth calling out on occasion, but feels very much like a moral judgement on the dishonest steward - but instead that optimizing any system requires suboptimizing the subsystems. In short, you give someone a job and they do it to the best of their abilities, and you don't get what you want because... their job is only part of the whole. You need to make it impossible to do the job with perfect efficiency because that job is not the focus of the whole of society. The metric is not the target, the map is not the terrain, whatever you want to say about referents and reality. See 'seeing like a state' for how legibility is naturally necessary and distorting.
As an evolutionary biologist by training, practice, and perhaps now inclination, I spend quite a bit of time thinking about incentives. In vitro and in vivo, incentives matter and can be ruthless. In vivo, they ruthlessly lead to extinction of poor performers. In vitro, they ruthlessly lead to frustrated bioengineers, because the organisms play any game you give them better than you had imagined they could. So you end up changing the game constantly. One of the tropes of large scale biological engineering these days is to create two genomes in a single organism and switching them on and off, so that one goes from a small population to a large population in a chemical production batch, and then the other efficiently runs the biochemical process you desire most. At the end of the batch, you change the game again - by sterilizing the entire thing and killing them all. Its crude and inefficient, in reality, but this is the lengths we go to to avoid principal-agent problems. It wouldn't be popular in corporations, but...
The question of private sector, public sector is not necessarily that profit motives create the best incentive structures; but that the kinds of incentives that they internalize are the most readily aligned at a scale that is compatible with human thriving. Biology also creates great incentive structures; but they tend to look like an existential threat at the society level, because that's the cost of failure. I agree with you largely about the problem that non-profits pose in current society - but steelmanning requires that you better explore the cases that demand non-profit NGOs, or perhaps 'tax exempt/privately funded' would be a better nomenclature.
So far, the profit motive to make companies successful has been the best consistent set of limited incentives for creating wealth:
maximize profit = revenue - costs
(over the long term).
In gov't, without profit objectives, we should have an 8 year term limit on Fed bureaucrats. (See Republican candidate Vivek Ramaswamy https://www.vivek2024.com/)
Getting new people helps reduce the old hand's ability to game the system.
Excellent. The statement: "With so much science funded by government, we have nurtured a culture of grant-writers who lack the boldness and originality to generate important discoveries." Having been on many grant reviews in different agencies over the decades I have observed these outcomes. Something truly innovative seldom gets the money. That is why the private sector created Angel Investors (AI) and VC's.
Along this line I was looking into why Asperger's got combined with Autistic by the psychologists in the latest DSM-5. I have observed that some of the people who have made larger innovations that ultimately changed the world are those who used to be defined as Asperger's, but now as Autistic which is a much more harmful social box. As E. Musk who actually got electric cars and reusable rocket boosters to work and is changing the world also had the ability to avoid social pressures to prevent innovation. Perhaps the latter requires being on the Autistic spectrum.
With the new social science DEI, with everything being correct social ability involving people, will the innovators who dream of what could be done be lost as social outcasts?
After 30 years in the corporate world I think performance assessments should be based on measurable objectives aligned with the two principles: shareholders who are ultimately paying our salaries and clients. Especially in support functions people tend to forget about internal clients and avoid the key question: would they come to me if they had freedom of choice? Then there is the issue of team playing, I.e. to maximize team performance often someone has to give in something. But over the years I am finding out that people are more responsive to these concepts compared to the past. In academia they are missing some of these important parameters.
Let me provide a slightly different perspective on private sector business incentives. Employees who are not interested in ”gaming the system” will earnestly strive to deliver what management tells them is important. For example, an oil company production manager may be told that he should deliver the lowest possible unit operating costs, and for a given set of fields, lower unit operating cost is probably a good thing. But, one way to achieve lower average unit operating costs is to sell high unit operating cost fields. The sale of these fields at a fair price may generate no NPV but will achieve the stewardship metric… unit operating costs will fall. And it may not be clear at all whether selling any particular asset is value creating or not. I don’t think that any of this is ”gaming” by the production manager, instead senior management is getting what they requested.
Years of experience in a very well managed private sector firm made it very clear to me: senior management is responsible for setting the direction of the firm and aligning stewardship metrics and performance evaluation metrics with those goals. Employees are responsible for delivering on these metrics. Senior management needs to change metrics not as employees cheat or game the system but as senior management finds better and better ways to align stewardship metrics and incentives with value creation for the firm. Criticism of employees for delivering what they’ve been asked to deliver is, in my view, quite harsh.
Roger Martin believes that the attempt to deal with the principal-agent problem in business has resulted in a a complete misalignment and gaming of the business sector. Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” The idea was that the executives had motivation to game the reward system and feather their own nests --and so did things like fiddle the accounting records in the fourth quarter so that the Christmas bonuses could be larger. Then, in the first quarter, the account sheets would miraculously be re-calibrated, to reflect the real profitability. The shareholders who own the firm were getting cheated by these little accounting games. Jensen and Meckling proposed that the exectutives would be more interested in the long term profitability of the firm than these short term fiddles if the executives were compensated in stock from the firm. It was an elegant idea. Their interests would be made align with stockholders because they would be themselves stockholders.
They were sadly mistaken. An executive class that was willing to sacrifice a bit of the the long term profitability of the firm on yearly accounting manipulations took to the sort of wholesale gaming of the system where all that matters is how much the stock prices reflect the opinions of the analysts. The notion that stock prices are driven by the profitability of the firm went by the bye, the potential to game the system increased exponentially, and the long term profitability of the firm lost out to a view that only could see as far ahead as the next quarter, or the next financial report. The old investors, who wanted a firm that would pay them for their investments with yearly dividends (ideally forever) were increasingly replaced with a new sort that was only interested in stock sale profits.
See Martin's book: Fixing the Game (which also contains ideas about what to do to fix the problem, involving changing the incentives again.)
Re: "I get the impression that misaligned incentives are a severe problem in academia."
There are deeper principal-agent problems in academia, especially in the context of selective, residential colleges or universities with a major endowment:
(a) Who is the principal?
The Board of Trustees, who have formal governance authority?
Or alumni, who have a lifelong stake in their alma mater's reputation?
Or the faculty, who enjoy tenure and formal governance authority over curriculum, appointments, and promotions?
Or the students, who are at once customers, inputs to one another's education and campus experience, and future alumni 'owners' of the credential (degree) that will signal the right stuff for career and marriage?
(b) What is the maximand ("mission")?
Mission statements are wildly grand -- promise the moon to students -- and are divorced from any performance check. See Brennan & Magness, *Cracks in the Ivory Tower,* ch. 3: "Why Most Academic Advertising Is Immoral Bullshit."
The much-aligned 3rd-party rankings of universities are indeed incomplete, imperfect performance metrics, but constitute nonetheless a rare bullshit-detector in higher education.
Mission capture is pervasive:
Faculty utilize their governance role and power within the organization to distort the mission for political agendas.
Administrators build bureaucracy for totalitarian governance of "student life."
Students demand country-club amenities and extra-curricular programs that crowd out education.
Targeted gifts by alumni indirectly dissipate in extraneous "budget relief."
Arnold;
I am not going to disagree with your headlining conclusion. It is counter-intuitive to many and yet absolutely correct. If you want a long term incentive structure based on short-term feedback cycles, you need to change the feedback criteria periodically to avoid short-term optimization that fits the requirements of the immediate feedback structure but doesn't actually hit the end goal in the relevant longer time frame. Instead, you need to keep changing which aspect/dimension of performance is in the spotlight, with lagging and leading (anticipatory) behaviors carrying much of the integration burden. In short, the performers can't move fast enough to give you exactly what you say you want most, so you get something closer to what you really want.
In the context of economics, business schools and management consultants, your article is a corrective to the various delusions which say that some new incentive system is a panacea. Instead, you actually need some of these fads... ironically, because it prevents people from effectively gaming an even higher scale system across many organizations. But it creates an opportunity to game as well - which is being played by those consultants, in waves.
The real headline about incentive structures is not that there is some difference in interests between principal and agent - which can exist and is worth calling out on occasion, but feels very much like a moral judgement on the dishonest steward - but instead that optimizing any system requires suboptimizing the subsystems. In short, you give someone a job and they do it to the best of their abilities, and you don't get what you want because... their job is only part of the whole. You need to make it impossible to do the job with perfect efficiency because that job is not the focus of the whole of society. The metric is not the target, the map is not the terrain, whatever you want to say about referents and reality. See 'seeing like a state' for how legibility is naturally necessary and distorting.
As an evolutionary biologist by training, practice, and perhaps now inclination, I spend quite a bit of time thinking about incentives. In vitro and in vivo, incentives matter and can be ruthless. In vivo, they ruthlessly lead to extinction of poor performers. In vitro, they ruthlessly lead to frustrated bioengineers, because the organisms play any game you give them better than you had imagined they could. So you end up changing the game constantly. One of the tropes of large scale biological engineering these days is to create two genomes in a single organism and switching them on and off, so that one goes from a small population to a large population in a chemical production batch, and then the other efficiently runs the biochemical process you desire most. At the end of the batch, you change the game again - by sterilizing the entire thing and killing them all. Its crude and inefficient, in reality, but this is the lengths we go to to avoid principal-agent problems. It wouldn't be popular in corporations, but...
The question of private sector, public sector is not necessarily that profit motives create the best incentive structures; but that the kinds of incentives that they internalize are the most readily aligned at a scale that is compatible with human thriving. Biology also creates great incentive structures; but they tend to look like an existential threat at the society level, because that's the cost of failure. I agree with you largely about the problem that non-profits pose in current society - but steelmanning requires that you better explore the cases that demand non-profit NGOs, or perhaps 'tax exempt/privately funded' would be a better nomenclature.
There is also the Iron Law of Bureaucracy*: 2 kinds of people in every org.
1) those devoted to the goals of the org;
2) those devoted to the org. (Above the goals/ purpose)
https://sagehana.substack.com/p/the-iron-law-of-bureaucracy Has good examples with Covid.
So far, the profit motive to make companies successful has been the best consistent set of limited incentives for creating wealth:
maximize profit = revenue - costs
(over the long term).
In gov't, without profit objectives, we should have an 8 year term limit on Fed bureaucrats. (See Republican candidate Vivek Ramaswamy https://www.vivek2024.com/)
Getting new people helps reduce the old hand's ability to game the system.
*from the late Jerry Pournelle
Excellent. The statement: "With so much science funded by government, we have nurtured a culture of grant-writers who lack the boldness and originality to generate important discoveries." Having been on many grant reviews in different agencies over the decades I have observed these outcomes. Something truly innovative seldom gets the money. That is why the private sector created Angel Investors (AI) and VC's.
Along this line I was looking into why Asperger's got combined with Autistic by the psychologists in the latest DSM-5. I have observed that some of the people who have made larger innovations that ultimately changed the world are those who used to be defined as Asperger's, but now as Autistic which is a much more harmful social box. As E. Musk who actually got electric cars and reusable rocket boosters to work and is changing the world also had the ability to avoid social pressures to prevent innovation. Perhaps the latter requires being on the Autistic spectrum.
With the new social science DEI, with everything being correct social ability involving people, will the innovators who dream of what could be done be lost as social outcasts?
I’m academia we need more competition among ideas, especially those not currently welcome.
After 30 years in the corporate world I think performance assessments should be based on measurable objectives aligned with the two principles: shareholders who are ultimately paying our salaries and clients. Especially in support functions people tend to forget about internal clients and avoid the key question: would they come to me if they had freedom of choice? Then there is the issue of team playing, I.e. to maximize team performance often someone has to give in something. But over the years I am finding out that people are more responsive to these concepts compared to the past. In academia they are missing some of these important parameters.
Let me provide a slightly different perspective on private sector business incentives. Employees who are not interested in ”gaming the system” will earnestly strive to deliver what management tells them is important. For example, an oil company production manager may be told that he should deliver the lowest possible unit operating costs, and for a given set of fields, lower unit operating cost is probably a good thing. But, one way to achieve lower average unit operating costs is to sell high unit operating cost fields. The sale of these fields at a fair price may generate no NPV but will achieve the stewardship metric… unit operating costs will fall. And it may not be clear at all whether selling any particular asset is value creating or not. I don’t think that any of this is ”gaming” by the production manager, instead senior management is getting what they requested.
Years of experience in a very well managed private sector firm made it very clear to me: senior management is responsible for setting the direction of the firm and aligning stewardship metrics and performance evaluation metrics with those goals. Employees are responsible for delivering on these metrics. Senior management needs to change metrics not as employees cheat or game the system but as senior management finds better and better ways to align stewardship metrics and incentives with value creation for the firm. Criticism of employees for delivering what they’ve been asked to deliver is, in my view, quite harsh.
Roger Martin believes that the attempt to deal with the principal-agent problem in business has resulted in a a complete misalignment and gaming of the business sector. Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” The idea was that the executives had motivation to game the reward system and feather their own nests --and so did things like fiddle the accounting records in the fourth quarter so that the Christmas bonuses could be larger. Then, in the first quarter, the account sheets would miraculously be re-calibrated, to reflect the real profitability. The shareholders who own the firm were getting cheated by these little accounting games. Jensen and Meckling proposed that the exectutives would be more interested in the long term profitability of the firm than these short term fiddles if the executives were compensated in stock from the firm. It was an elegant idea. Their interests would be made align with stockholders because they would be themselves stockholders.
They were sadly mistaken. An executive class that was willing to sacrifice a bit of the the long term profitability of the firm on yearly accounting manipulations took to the sort of wholesale gaming of the system where all that matters is how much the stock prices reflect the opinions of the analysts. The notion that stock prices are driven by the profitability of the firm went by the bye, the potential to game the system increased exponentially, and the long term profitability of the firm lost out to a view that only could see as far ahead as the next quarter, or the next financial report. The old investors, who wanted a firm that would pay them for their investments with yearly dividends (ideally forever) were increasingly replaced with a new sort that was only interested in stock sale profits.
See Martin's book: Fixing the Game (which also contains ideas about what to do to fix the problem, involving changing the incentives again.)
https://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/