0:33 Intro. [Recording date: March 20, 2018.] Russ Roberts: My guest is historian and author Jerry Muller.... His latest book is The Tyranny of Metrics, and that book is the subject of today's episode.... What is the tyranny of metrics? Jerry Muller: The tyranny of metrics is a widespread pattern in contemporary organizational life that runs across everything from business through medicine through policing through higher education, K-12 [Kindergarten-12th Grade] education, and even philanthropy. It's a pattern that I define as follows. It's first, it's based on several beliefs which taken on their own sound plausible; but in combination turn out to be counterproductive. Are often counterproductive. So, the first is the emphasis on standardized measurement: the notion that our judgment is unreliable. Experience and talent don't really matter so much. What really matters is measuring performance. So, the first part of it is the metric part. That is the belief that it's possible and desirable to replace judgment with numerical indicators of comparative performance based on standardized data. And the second related notion is that the best way to motivate people within organizations is by attaching rewards and penalties to their measured performance. So, sometimes those, often those rewards are monetary rewards. And often enough they are reputational. And then the third notion is that, is connected with the idea of transparency and accountability. And that is, that the way to make professional organizations--professionals or government organizations--accountable to the public is by making the standardized measures of their performance public. And, as I say, each of these ideas sounds plausible. You measure reward and punish. You make public. But, they often end up having unintended negative consequences. And that's what the book is about. And that's what I mean by the tyranny of metrics. It's not about the evils of measurement. Measurement is often desirable. It's not about the evils of rewarding people through remuneration in other forms. But, it's about the way in which this use of, as I say, standardized metrics to replace judgment--that's really the key theme. That, you can use standardized metrics to replace judgment and experience and come up with workable organizations. Russ Roberts: Of course, the challenge is that judgment can be capricious, wrong. Unjustified. Involve nepotism, sexism, racism. Jerry Muller: Mmmhmmm. Russ Roberts: So, judgment has a bad name these days. And numbers have a gloss of scientific precision. And that seems like an improvement. Why isn't it? Jerry Muller: Well, because some of those things are both true but not true if you universalize them. That is to say, judgment is under attack, both for being linked to the bias or prejudice as you say. And then, of course, there's the whole field of behavioral psychology, that delights in demonstrating how our biases lead us to mis-estimate numerical values and probabilities. And so on. But, there are--and in that sense, measurement can be useful. Into [?] partially interact or inform judgment. The issue as I see it is that measurement can't replace judgment. That is to say: You need judgment to decide, first of all, what's worth measuring, because often the things that are most easily measured are not the most important ones for the organization. And secondly, you need judgment to decide how to evaluate the relative significance of what gets measured. And thirdly, you need judgment because there are lots of important things in organizations that simply can't be measured in any standardized way. A person with judgment can give them a numerical evaluation--can say that Employee X on Criterion Y rates a 5 out of 5 as opposed to a 3 out of 5. But, that rating needn't necessarily, for some qualities, have to do with qualities that cannot be measured. And that are often, at least as significant as the things that can be measured, in terms of the successful functioning of an organization.

6:08 Russ Roberts: So, we had a recent episode with Bryan Caplan on education. Bryan is very skeptical about whether education--excuse me, formal education, years of schooling, sitting in the classroom--leads to much. And he sees, for example, college education, as mainly a signal of persistence, diligence, and conformity, that students send out to the labor force. Of course, there's some truth to that. One of the most interesting pieces of that conversation with him was where I argued that much of what we learn in college, and in high school and below, is not measurable. But real. How to think and how to imagine and how to explore, and all kinds of intellectual curiosity. And there's some of that in your book. So, I'd like to start with that. Let's talk about education. Where, evidence has been objective measures of success: test scores and other measures are used more and more widely, at least for a while. Give us a little bit of that history and where you stand on this question of education and what can be measured. Jerry Muller: Right. So, the field of K-12 education is one where this metric fixation, this combination of standardized measurement, pay-for-performance, and publication of results in the name of accountability has been most intense. And it was actually partly by following those debates that I got more interested in the kinds of issues that eventually led me to write this book, The Tyranny of Metrics. When No Child Left Behind--there's a much longer backstory to the idea of measuring educational performance and rewarding schools and teachers accordingly. Back in the 1860s in Britain, a Liberal Parliamentarian by the name of Robert Lowe put together essentially a pay-for-performance plan for public schools, where they were going to--inspectors were going to go into the school each year and test the children on how well they did in Reading and Arithmetic. And, the schools were going to be penalized if the students didn't do well enough. And, one of my intellectual heroes, Matthew Arnold, the poet and cultural critic whose day job was as an inspector of schools, said, 'What you're going to do here is you are going to end up--first of all you are going to end up penalizing students and schools in areas where the students are poor and less well-off, because they won't show up for school and they won't be as successful on the tests. And also, you'll narrow the focus of schooling to the kinds of things that are tested by the inspector.' Well, all of this, then, recurred in the course of the late 20th century. And it reached its sort of paradigmatic embodiment in No Child Left Behind, which was passed in the early years of the George W. Bush Administration, with Democratic and Republican support. And at first--and that was based on the idea of testing students in schools. And publicizing the results. And rewarding and punishing schools based on the results, including the possibility of closing down schools. All of that-- Russ Roberts: Can I just--I want to interject one thing. This was a Federal mandate imposed on local school districts, in frustration--possibly: who knows what the real reasons were? But part of the justification was the frustration that these schools districts didn't seem to do a very good job. And they weren't accountable. But, here, we would publish, we would measure and then publish and make accountable--all of which are really attractive goals on paper. Jerry Muller: Exactly. And that's the way it sounded to me, at first. And then I began to encounter young teachers who have told me this was having a demoralizing effect upon them, the fact that they had to narrow and tailor their teaching to the requirements of this test. And then I went to a panel, around 2003, 2004, at the American Enterprise Institute, where one of the panelists was Checker Finn, who was a big advocate of this sort of thing; and the other was Diane Ravitch, who had begun as an advocate of what was then called educational reform, but by then had become very skeptical about it. And as I followed the literature on that--and there's been a lot of literature on it and it's actually increased in recent years--it became clear that this whole educational, what was known as the educational reform movement--I mean it had several branches. Part of it had to do with charter schools and greater school choice and so on, which I think is actually a plausible idea. But a good deal of it was based on this metric fixation. And, the more and more evidence that came out, the more it showed that it actually didn't work. In a couple of senses. First of all, it had absolutely no effect on one of the major motivations behind No Child Left Behind. Which was to close the so-called achievement gap between whites, on the one hand, and black and Hispanic students, on the other. Asian students actually did better on the whole than whites; but then people didn't pay much attention to that. Um, so, it's been going on for, um, well, actually, since--this kind of thing has been going on since about 1992. And it got more intense with No Child Left Behind. It's had absolutely no effect on the achievement gap. What it has had--it's had a tremendous effect on K-12 education in the public school system, because more--especially for schools that deal with lower-performing students, but to some degree well beyond that--it's narrowed the range of subjects that are taught. And it's narrowed the way in which subjects like English are taught, so that they are taught to try to maximize student achievement on the tests, as opposed to being able to being able to write a long-form essay or being able to read a novel or a play, and so on. So, it's--not only has it not had the intended effects of lower thing, of narrowing the achievement gap--but it's had the unintended effects in many ways of making education narrower and less functional. And actually AEI [American Enterprise Institute] had a conference about this a couple of months ago, and that was the upshot of a lot of the papers. As well as a recent book by this fellow, Dan Koretz, from the Harvard Graduate School of Education. So, but I found--but then I found that we can talk about this, in field after field. That, when this was tried, by and large, it hadn't worked. Now, the people who specialize in measuring these things are loath to say that in such stark terms. They say the results were difficult to measure, or there were some minor improvements. Or, there were improvements for one group and one grade, but it didn't last through the end of high school, and so on. So, what's so striking when you read through a lot of this literature on pay-for-performance and standardized measurement combined with pay-for-performance is: How often the scholarly literature shows, in a variety of fields, that it doesn't work. And yet, politicians, policy-makers, they don't seem to get the message. And now, this whole regime of metric fixation is being extended to the realm of higher education, as well. Russ Roberts: And everywhere else, as we'll talk about. Jerry Muller: And everywhere else. Right.

14:22 Russ Roberts: But, what's your thought on this? So that was a great summary. But, what's your thought on this issue of--and it's beyond the scope of the book, but I'm just curious because I noticed in a few places that you do talk about it in passing--that everything is, in principle, measureable. So, one response to that literature would be--it's not mine, but one response could be--'Well, we just didn't do it correctly. We just need to measure it better. We just need better tests. We need tests that are less rote, that are more expansitive[?]' Etc., etc. Respond to that argument, and the general idea that education should be, in theory and in principle, and in reality, testable. Jerry Muller: Right. So, there are--in some respects, testing is genuinely useful. And this is one of the points that I make. When standardized measured of performance are used by practitioners to diagnose what they are doing in their practice, then they can be genuinely useful. So, a teacher can have her students take some standardized test on arithmetic or math or English. And she can see how they are doing: to what degree are they catching on? It doesn't have to be a standardized test from outside, that's imposed from outside the classroom. Of course, it could be one that she creates. And that's a way of keeping track of how the students seem to be doing on that particular slice of the subject. So, in that sense, testing is fine. What, when testing becomes counterproductive and pernicious is when it's connected to reward and punishment. Reward and punishment of the teacher or reward and punishment of the school. That's when it becomes, that's when it becomes problematic. And then, of course, many of the most important things that go on in any institution, including certainly in schools and universities, can't be measured. The degree to which, in school, children are taught to behave, taught to cooperate, taught to be self-controlled. All of those things are difficult to measure; and yet they are by no means the least important thing that goes on in the school. The way in which intellectual curiosity in the variety of subjects is or is not cultivated. That's difficult to measure. And of course, that's one of the problems with the Bryan Caplan book-is that under what, first of all, he has an extremely materialistic and economistic conception of how to measure things. Namely, your salary. As if that's the only thing that counts in life. It is an important thing in life. But, it's not the only thing that counts in life. And then, of course, his belief that only those things that you can measure are real. So, there's all these intangible elements that go on in K-12 education. And go on in college education. You know--when I engage my students in the classes--I did this morning on the family in the market, and I aroused their interest, and they say something; and another student refutes it. Or, I ask something that calls it into question. And they have to think, dialogically and dialectically. All of that develops skills that really matter in life. And in the world. But, they'd be very difficult to measure through some standardized test.

18:36 Russ Roberts: So, I'm very sympathetic to your point. I fundamentally agree with it. But I'm going to challenge it in a different way. Partly the way I think Bryan might. But, I think also in a way that he might not but I will. Which is, that: you know, I agree with you that all those intangibles--those nonmeasurables, those immeasurables, those key parts of education, such as cultivating curiosity, encouraging dialogue, intellectual challenges, internal dialog, skepticism--these are what a great education should involve. Jerry Muller: Right. Russ Roberts: But, you and I also know that, whether you measure them or not, they are really hard to get people to work on. So, I think--you know, one argument would be, 'Well, it's true we can't measure them, but people know--it's not like, well that's what people are spending all their time on. At the expense of more measurable things.' They're not doing a good job, period. There are so many mediocre teachers in schools, K-12 and in college, who teach by rote, who do give, who teach to a test that's not a very good test. Their own, perhaps. That doesn't challenge the students, that doesn't change their focus and the way they perceive the world or their deep sense of knowledge and wisdom. And these imperfect tests at least mean that something is going to get done in the classroom. I think that would be the best defense that some folks could come up with. Are you sympathetic to that at all? Jerry Muller: Uh, a little bit. But, you know, there's a larger point here. And that is, the fact that some institution is not working as well as we would like it to, or producing the results that we think is desirable doesn't mean that instituting metric fixation--this combination of standardized measurement, reward, and punishment, and publicizing results--it doesn't mean that that's going to make the organization better. In other words, that's true of a lot of life. The fact that the situation is problematic doesn't mean that the solution that you have at hand is actually going to make the situation better. And, what I argue--what I'm inclined to argue--is that in many cases, it actually makes the situation worse. So, it's not that I deny the problem. It's that I'm skeptical of the efficacy of the proposed solution. Russ Roberts: Yeah; that's very well said.

21:18 Russ Roberts: This reminds me--and there's an example or two in your book of this, where people will say, 'Well, this situation--the outcomes are not very attractive.' So, what we need, are, say, incentives. We need the things that make market outcomes work really well. So, we'll just put those in. Jerry Muller: Mmm-hmm. Russ Roberts: And, in fact, in my conversation with Diane Ravitch--and we'll put a link up to that old episode, which was quite a while ago--that's exactly what it came down to. She was horrified at the solution of "running a school like a business." Jerry Muller: Right. Russ Roberts: I certainly agree with that. We shouldn't run a school like a business. It doesn't mean a business couldn't run a school well. In today's world there are a lot of charter schools run by non-profits, and maybe for-profits. I think we have the potential to do a good job. But, certainly because businesses work well using carrots and sticks, means schools could do that, too. Imposing that from the top down does not create the institutional infrastructure that a market creates en-route to the outcomes that we like about markets. And so, I think that's--I think that's an incredibly important point, that: 'Yeah, this isn't working well, so we'll just jam in these incentives.' And we know incentives work. They do. The problem, as you point out, many times, as you point out in the book is that they work too well. People respond to the incentives rather than the ultimate goals of the institution. Jerry Muller: Yeah. And we should come back to that. But let me say a little bit about this notion of running a school like a business. What actually happens is the schools--the schools and other non-profit-making institutions on whom metric fixation is imposed--is they don't actually run like a business. They are made to run like a simplified caricature of a business. And that is to say, in real business it's true that there is a bottom line. But, people within business organization have motivations over and above those of monetary reward. That's certainly an important one. But, there are other ones that are important for the functioning of the organization that have to do with intrinsic motivation. That is, what the greed of people find the job interesting, or to what degree do they find the job significant. And then, there are qualities that are unmeasurable. Like, mentoring. Or, cooperating with one's fellow employees. That are actually essential to a profit-making business, too. And, one of the problems in profit-making businesses where metric fixation has taken hold is that it also in this, in this simplified caricature of how people work, this notion that they have a kind of, have low-fee and response to material incentives, it actually has a distorting effect in businesses, too. So, first of all, there are differences between businesses and schools. And, secondly, even in businesses, the use of this, kind of, simplified conception of human nature turns out to be counterproductive. And then, as people, like, as many people now, but for example, Henry Mintzberg, a really fascinating professor of management at McGill has pointed out, and James Q. Wilson did this in a different way. Ultimately businesses do have a kind of single bottom line. But institutions like schools or universities or government agencies, don't have one single purpose. They have a multiplicity of purposes. And, if you just try to focus them on one or two of those purposes, the other important parts of the organization--the other important goals of the organization are not going to be well served. Russ Roberts: And actually may be corrupted. I mean, I-- Jerry Muller: Yes. Russ Roberts: I'm--as many listeners know--this podcast is sponsored by Liberty Fund. Which is a foundation in Indianapolis, IN, which has fabulous educational things. They publish books. They run conferences. And they have the Library of Economics and Liberty, of which EconTalk is a part. Jerry Muller: Yeah. Russ Roberts: And I am paid a fixed amount to generate these episodes by Liberty Fund. And you could, they could instead say, 'We're not going to just pay you a fixed amount. We're going to pay you based on the number of downloads. Jerry Muller: Mmmhmm. Russ Roberts: And, that is a reasonable thought. It's a reasonable measure of success. It's one I use personally, in looking and in evaluating my performance as the host. Jerry Muller: Mmmhmm. Russ Roberts: And--but it could be that's the way I'm compensated. I'm not. But it could be. It's not an unreasonable idea. And yet, there is a huge pressure, and you mention it in passing in one chapter--a huge pressure by Boards of Directors for philanthropic organizations for charities to measure stuff. Oriented toward results. Not just feeling good about what you are doing. And that's basically--the effect of the altruism movement, we've talked about here on the program with William MacAskill. It's not a bad idea. It's a good idea, in general, to care about what happens, not just whether you think you are doing a good job. So, that's okay. The challenge is: How do you measure it? As you point out. And so, if we'd measured this podcast by downloads only, one challenge would be I'd have an incentive to become corrupt. Literally corrupt. To downloads, to get people to download it who weren't going to listen to it. Obviously that could happen. But the bigger problem would be it would change the way I run the program--the kind of guests I have. And I have deliberately chosen a style for the program that I think is educational. And I hope it's a little bit entertaining as well. But, that style limits the number of listeners to some extent. And I think it's just a profoundly non-obvious thing, because--I say 'non-obvious' because so many people do it anyway. To choose some measure. Because that way, we'll have incentives. And it's just--it's dangerous, actually. Jerry Muller: Right. So, this is actually a fabulous example that you've hit upon. I mean, one of the reasons that I'm pleased to be on EconTalk is that I have listened to EconTalk a lot over the years, and learned a lot from it. And sometimes I've gone out and bought the books. Or, sometimes, I've simply assimilated ideas which have then found their way into my own work. Now, that's something that's--it's not difficult to measure. It's impossible to measure. But you know that the people who--and it's actually sort of known among a certain class of listeners to EconTalk--that EconTalk has a sort of high level of listeners. And in that sense it's very effective. But, as you say, we could be talking about something much more popular or sensationalistic or whatever. And you could have more listeners. And your metrics would be better. But, you wouldn't really be accomplishing your goal. And neither would your employer. Russ Roberts: And, some people might say, 'We just need better measures.' So, I was happy to see in a recent book that EconTalk gets acknowledged as being useful. And that's lovely. Jerry Muller: Uh huh. Russ Roberts: 'So, we could use that as the measure. It won't just be how many downloads. It will be: 'How many books mention EconTalk in passing?' And then that encourages me to work with prospective authors to suck up to them and hope that they'll mention EconTalk; and maybe ask them directly. And then they'll get turned back. It opens up a chain of consequences that are uncertain.

29:19 Russ Roberts: I want to turn to that now. Which is, as you've said already, and it's mentioned many times in the book: One of the results of these kinds of incentives and metric fixation is unintended consequences. And I want to ask two questions. One: Why are they inevitably--seemingly--why are they inevitably negative unintended consequences? And, secondly, are you sure they are unintended? Because-- Jerry Muller: Yeah. Yes. Russ Roberts: Because, you and I, if you--I mean, you've thought about it. You are in the top, I'd say, half of a percent, maybe even higher, of people who have thought about how complicated incentives are. I'm in the top something. I'm kind of an economist: that's kind of our job. So, when someone--if I'm on the Board of a charity and someone says, 'Well, let's incentivize the director; but we'll make their pay based on such-and-such'; and my first thought it, I'm going to start thinking right away: 'Gee, what's that going to lead to?' And you are, too. You are "only an historian," Jerry. But you clearly know a lot of economics. You are not certified as an economist, but you know a lot; you've read a ton. And I've written a book about, essentially unintended consequences of incentives--the wrong kind. So, you'd think of these things. Don't other people think of these things? And, secondly: Why are--maybe the are on purpose? Jerry Muller: Right. So, sometimes the--so, one of the effects of measuring performance, and then rewarding and punishing it, is that people in the organization will indeed focus on what gets measured and rewarded. And, sometimes that's in keeping with what the leadership or the CEO [Chief Executive Officer] or Management want. But often enough, they want that because they actually haven't thought the consequences very well. Because, in many, in most organizations, they have multiple purposes. And in most jobs, there are multiple facets. I mean, if you are in a standardized job where you are, you know, flipping hamburgers or you are changing windshields or something like that, where there is not much room--where these is actually sort of really one function; it's not very intrinsically interesting; there is not much room for innovation; mentoring and cooperation doesn't matter that much--well, then measuring and rewarding may work. But in, as I say, in most jobs there are multiple facets to the job. And one of the unintended negative effects is that if you--is that people will actually focus on what gets measured and rewarded, at the expense of the other parts of the job, and the other purposes of the organization, that aren't being measured and rewarded in a way that can be ultimately dysfunctional. So, that's one of the first unintended consequences. A second, of course, is a whole--a second unintended consequence that people who try to implement these things from the top typically forget about is: How much time it takes to actually input the information, analyze it; and, that that is time taken away from doing the activity that is nominally being measured. So, that's another factor. And then, there's the whole realm of gaming the metrics. That is to say, of attaining the metrics in a way that is at odds with the actual goals and purposes of the organization. And, you know, part of my book is a catalog of that--of all the ways--of which perhaps the most dramatic example is: Teaching to the test. Actually orienting the education in the K-12 classroom towards the narrow range of skills that are required to take a test. Including simply having the students practice taking a test more and more. What could be more pedagogically deadening than that? But it could also improve the metrics. Or: Take another example. You know, some years ago the National Health Service in Britain had a lot of complaints about waiting times to be admitted to the hospitals were too long. So, they declared that hospitals would be penalized if the waiting time to get in to, to be admitted to the hospital was 4 hours or more. So, what did the hospital--so, some of the hospitals did the following: When they had patients coming in by ambulance and they knew that the wait was going to be more than 4 hours, they would have the ambulance circle around the hospital until they could admit the patients within 4 hours. Which sounds kind of amusing at first, until you think about the fact that there were then patients sitting at home, waiting to get picked up by those ambulances, who weren't picked up in a timely way. So, the hospital could meet its metrics in a way that was transparent, but with negative effects for the actual purposes of the institutional. So, one of the things that metric fixation does, is it turns us all into gamers. Russ Roberts: And there's an example that I think--by the way, that example is so horrific that I'm a little bit skeptical about it. Because--I understand the incentive to do that. It's so ugly. But, of course, as you point out, and this one I'm sure is true: Doctors will refuse patients because they are afraid the surgery is too risky or the outcome won't go well, and their success rate that gets published will look bad and then they won't look like good doctors. Jerry Muller: Right. And that happens all the time, once these surgical report cards were instituted by which surgeons' rates of success and failure were publicized. So, many of them, at least some of them, reacted by what we call creaming or cherry-picking or selection bias--it goes under a number of names, but it basically means the same thing: you take cases where you are more likely to be successful, and you turn down the cases--for example, patients with co-morbidities and complex situations where the risks are greater, and so you are less likely to succeed. And, of course, the people who pay for that are the people who don't get operated on, which you don't see in the metrics. Russ Roberts: Yeah. But your point about ambulances reminds me of something I've never seen but I suspect is true, which is that, I've noticed that airlines will tell you the scheduled arrival of a flight, and it seems way out of line with how long the flight's going to take. I assume that's because they keep track of how many times a flight it--a late flight is 15 minutes or more past expected arrival, and so they just build a cushion in, to reduce their bad performance measurement. Jerry Muller: That's exactly the causal chain.

36:57 Russ Roberts: So, now I want to raise the question which you didn't answer, because it's an unpleasant thing to think about, or you just gave a--you got derailed, it's either one--about whether some of these are intended. I want you to talk about what happens in the world[?] police, or policing, because this is such a depressing and human response to measurement that has happened in police around the country. So, talk about how the tyranny of metrics works with police and the FBI [Federal Bureau of Investigation]. Jerry Muller: Sure. So, and this is an excellent example of two things that people confuse, and that is the use of metrics for diagnosis by practitioners versus the use of metrics for reward and punishment. So, one of the tools that's gotten a lot of attention in the last few decades is CompStat [Compare Statistics]--these computerized statistics that were first developed, by the police I believe, in New York, and since have been adopted in many other cities. And they have an informational diagnostic element--that is, using GIS [Geographic Information System] and so on, they map where crimes are occurring almost in real time. And, that can be very valuable in terms of deciding where you are going to deploy squad cars and things like that. But then there's another element that often goes with it, and that is there are these weekly sessions in which district commanders have to defend the rate of crime and so on in their district. And, in many places, their promotions are attached to the issue of whether crime goes down in their district. Now, of course, in good part--so part of making crime go down in their district is something that's amenable to improvement by where they deploy police and how they deploy police and so on. But, much of it has to do with who lives in the neighborhood and all sorts of other things. Russ Roberts: Things beyond the control of the police. Jerry Muller: Things that are beyond the control of the police. So, when they're told, for example by politicians--like, somebody who is running for mayor will typically be challenged by someone else who says, 'Oh, the crime rate is too high.' So, the mayor tells the police commissioner: 'We have to cut the crime rate by 5% by the end of the year.' And, he tells that to the commanders and he tells that to the cop in the car and the police on the street. Well, they actually can't cut down crime, the actual incidence of crime by 5%. But, what they can cut down is the official reporting of crime by 5%. And there's been many, many documented cases of this in various places in the United States, but also in Great Britain and elsewhere. And that is: Police who were told that their promotion or whatever depends on their cutting the rate of major crimes; and there's four major crimes that go into the FBI's index of major crime indicators. So, what they end up doing often is taking crimes that ought to be classified as felonies and classifying them as misdemeanors. So, what ought to be grand theft becomes a minor theft. What ought to be aggravated assault becomes something much more minor. And so on. So, this is gaming the metrics through reclassification. And in some cases, crimes are reported to the police and they simply don't record it at all, so that it doesn't make its way into the metrics. So, all of this then has a corrupting effect on the diagnostic value of the metrics that are being gathered. But, again, the politicians can brag about the fact that they've cut the crime rate by 5%, or they've increased test scores by x%, or what have you. Russ Roberts: Well, that's where I wanted to raise this pretty cynical and not-so-attractive thought, that maybe it's not unintended. Maybe it's intended. So, you use this metric. And so they get reclassified. And the police look good. The politician looks good. The people who live in the neighborhood know that it's maybe--maybe some of them realize that actually crime is going up, not down, or real crime hasn't changed at all. But, the system kind of incentivizes everybody to use this fake cheerleading metric that can be waved around and actually--here's the irony--it reduces accountability. That's the incredible part of it. Jerry Muller: Yes. I think that's quite right. One of my other criticisms of the use of metric fixation is that it tends to reduce initiative and entrepreneurialism within organizations. But, as someone pointed out to me when I gave a talk on this recently, there actually is a lot of initiative and entrepreneurialism, but it's in gaming the metrics as opposed to improving the result. And I think that's what you're talking about. Russ Roberts: Exactly.

42:46 Russ Roberts: So, let's talk a little bit about the alternatives and the reality that these techniques are extremely appealing to everybody--except you and me, and a few other people who are worried about these kind of effects. They do operate under the guise of scientific precision. They appear to be leveraging the incentive effects that often are attractive in certain organic systems like markets. And so, they are everywhere, as you point out. Many, many chapters--it's a short book, but there are many chapters, and the chapters are short--I think a nice design element. Jerry Muller: And if I can add something to that, Russ: they are also often connected to--I mean, I'm not the first to call it this--this managerialism, as an ideology. Which is different from management. Management is a craft, and the practice. Managerialism is this notion, much of which comes out of some business schools and is promoted by all sorts of business gurus--it's the notion that management is not a matter of experience. Russ Roberts: It's not an art or a craft. Jerry Muller: It's not an art or a craft; it's not based on judgment. It's a matter of technique. And you have--so, that creates an incentive to use this simplified conception of incentives in the first place; and then to have these standardized techniques for measuring, for surveilling, and for rewarding. And, it's part of that managerial ideology that a manager, a CEO [Chief Executive Officer], say, should be able to go from a company that makes one sort of product to a company that does something entirely different. Or, should be able to go from being a CEO of a Fortune 500 company to being the president of a university, or from going to be the CEO of a Fortune 500 company to being the head of the Department of State. The notion is: All organizations are the same, and we can have these standardized techniques, and because there are numbers attached, they are scientific; and because there are incentives they must work, and so on. That's part of the whole misapplied package, I think. Russ Roberts: So, I wanted to challenge you to think about--you've done a wonderful job pointing out what's wrong with these things. With this whole trend. And I think the challenge for those of us who are worried about it, whether it's in education, police, medicine, all kinds of--the running of charities and not-for-profits generally--the real challenge is: I think we need a better defense of judgment. And I'll give you my favorite example of this, and it brings in an insight I've learned from another EconTalk guest, Nassim Taleb. Somebody, a friend of mine who is interested in finance said, 'Value at risk is a flawed measure.' Because value at risk is used to measure the riskiness of a portfolio. And, in the financial crisis a lot of firms were over-confident about the riskiness of their portfolio. Jerry Muller: Mmmhmm. Russ Roberts: And Taleb and others have pointed out, 'Well, yeah, those measures were flawed.' Everybody knew those measures were flawed. Anybody in the business knew they were flawed. If you asked them about it, as my friend would say, he said, 'But they are the best we have.' Jerry Muller: Mmmhmm. Russ Roberts: And his argument was: 'Something is better than nothing.' And your point, which I think is 100% right, is that, 'Yeah, that's true, as long as you keep it as a tool, a diagnostic tool to help people with your judgment.' But, once it becomes something that becomes, I don't know--regimented. Used for pay and performance. Used for assessment. Used for promotion. It distorts behavior badly. But I'd say it does one other thing. This is the Taleb point. Which is: It lulls you into thinking you've got your hand and head wrapped around the challenges that you face. Jerry Muller: Right. Russ Roberts: And his example, which I love, is: You know, the people who are lost in Paris, they are supposed to meet somebody at the Arc de Triomphe--this is my version of it. But it's his example. He's supposed to meet somebody at the Arc de Triomphe; and they're lost; and finally somebody says, 'There's good news, I've found a map.' 'Oh, thank goodness.' It's a map of New York. But it's better than nothing. And the answer, of course, is it's not. It's actually much worse. Because it deludes you into thinking you are heading toward your goals. And, I think the challenge here--and my friend in finance who insists it's better than nothing--and I say it's hot. He said, 'Well, what's the alternative?' And the alternative, of course, is judgment. It's craft, it's art, it's a recognition that you do not fully understand the situation. You do not fully understand how to get there from here--literally, in the case of an organization. Akin to that map story. And you've got to grope. You don't know the full ramifications of your portfolio at any one time. You might use metrics to give you a better measure. But you don't know. And I think--my argument is, is that's better than fooling yourself into thinking you are knowing. And a lot of people find that deeply dissatisfying. Hehehe. They say, 'Oh, no. We can do better than that.' React to that, those examples and claims. Jerry Muller: Yeah. So, it is this kind of scientism on the one hand, that thinks that everything can be measured in the way that physicists might measure inanimate objects. And that forgets that people are animate objects. Hehe. And they react back on what's being measured. I think that--I don't want to pose the situation as metrics or no metrics. The way I would pose it is, metrics with judgment, informed by judgment and being modified by judgment. And, indeed, even metrics together with pay-for-performance, can be functional, if what is being measured and rewarded accords with the actual professional goals of the people in the organization. So, if you are going to reward a hospital for increasing the level of safety--that is something--and you are even going to even reward the physicians on the basis of those safety measures--that may actually boost the physicians' intrinsic motivation, because there is this link between what they themselves know that they would like to happen, and what is being measured and rewarded. So, in that sense, you know, even pay-for measured performance can work, depending on, as I say, what the goals are. And then there's the question of who has input into setting the measurements. And that's a matter of professional judgment, too. And then of judging, as I've said before: How relatively important those measurements are compared to others? And what might be extenuating circumstances? A lot of life in business and in organizations is a matter of extenuating circumstances. That is, things that are beyond the framework that you set out with in the first place. So, I think that, it's not a matter of metrics or judgment. It's the two of them functioning together. But, as you say, there are times--this metric fixation, this trinity of measuring, rewarding, and making public--it seems like a magic bullet. In so many situations. And there are lots of situations, in organizations, in the field of education and medicine and so on, where we really would like to have better outcomes. But, the magic bullet often doesn't work.

51:02 Russ Roberts: I want to say something a little bit radical and get your reaction. Your book encouraged me to think about--and this conversation encouraged me to think about the--what I would call, maybe meta-incentives. Or--I don't have a word for it. But, let me give you the layout, what I'm thinking. Jerry Muller: Okay. Russ Roberts: So, if you say to a, to someone, I think principals of a school--I'm talking about an elementary school, now, or a high school, K-12. Principals of a school should be allowed to give out bonuses based on performance of their teachers. Jerry Muller: Mmmhmmm. Russ Roberts: And, when I [?] suggested that, the typical answer I get back from people who are uneasy with that is the following: 'Yeah, but they're prejudiced. They don't really--they shouldn't be entitled to indulge their personal favorites,' say, or the people who are easy to get along with. They don't really--they are not going to do a good job. Jerry Muller: Mmmhmmm. Russ Roberts: So, we need some objective measure, whether it's test scores or others to measure performance. So, my reaction to that is: A good Principal knows exactly who the good teachers are in their school. And they know who the bad teachers are. And you don't need a test. In fact, the test misleads you--as you pointed out. Jerry Muller: Mmhmmm. Russ Roberts: And, fundamentally, what you are really saying is: in the public school system, for example; maybe even in some private schools, the Principals have too much leeway. There's no market check on them. True, they--if they do their--if they are well-trained and they are skilled and they have good judgment, they could run a school with lots of authority. And lots of power. But, they are too unaccountable. And, what these metrics allow us to do is to constrain their discretion. And that's fundamentally--to me--I just want to realize, that's just a different way of saying that there's no attractive way to incentivize the principle. Ehhuh. And so, therefore, we want to remove discretion. Go to these objective measures. And I'm going to make the radical argument--is, as we've expanded the reach of government and the size of government, inevitably we have to try to find ways to, um, restrain and incentivize politicians, bureaucrats, administrators, etc. And they are inevitably going to be flawed. Like we're talking about. Whereas, in an organization--I mean, the analogy would be, in a financial firm where people are, it's a partnership where people are investing their own money, they are not going to use these goofy measures to justify outside investors that they've done a good job. They are going to know inside whether they have done a good job or not. More or less. Yes, they have biases. Yes, they can self-deceive. But they are spending their own money. As we move to worlds and situations where more and more people are spending other people's money, we have to try to find ways to incentivize them correctly. And they are inevitably going to be terribly flawed. Jerry Muller: Mmmhmm. Yes. Uh--so, first of all--in terms of what you said about how this works in Finance. Um, I think that's an important point. You know. One might think, if one was naive, or it one had gone to business school, that, uh, the way in which people in Finance are to be incentivized is purely on the basis of how much profit they bring into the firm. And that is certainly one of the ways in which they are incentivized. But, as you say, people in the firm know what other roles these people have been playing--in mentoring others, in cooperating, in bringing in new ideas, in taking initiative, and so on. So, they take that--so, I'm saying in a profit-making business, if it's well run, they take such things, such intangible things, unmeasurable things, into account in rewarding. When it comes to--when it comes to schools and principals and so on, yes--I guess I would say, the truth is I would say there are dangers on each end. Russ Roberts: Agreed. Jerry Muller: And--on the one hand, of giving a Principal leeway, and that is to say, discretion. Which leaves room for judgment. Which creates the possibility of, on the one hand bias and prejudice; and from the point of view of his subordinates, of fonding[?] behavior. Uh. I would say that we've become so focused on that set of dangers that the pendulum has gone way too far in the other direction to eliminate or minimize the role of judgment and discretion. And that's what my book is trying to help counteract. Russ Roberts: That's very well said. The only point I'd add, on the case of Finance, and I'm going to broaden it a little bit, is that: I know you care about whether your cooperative, and so on. I also care about, say, the riskiness of the portfolio. I don't care just about the return. I'm in a bit of--I'm in a little minor Twitter war today about whether Ben Bernanke, Henry Paulson, and Tim Geithner did a good job in dealing with the financial crisis. And I suggested that they did not. And everyone comes back to me with: 'Yeah, but look how long the recovery's gone along.' As if that were the only metric. Obvious counterpoint to that is: 'It's been a pretty mediocre recovery.' But that's not my real point. My real point is that, by rewarding bad actors in that situation, they sowed the seeds for the next crisis. That next crisis will not be put at their door. It will be put at whoever is in charge at that point. Jerry Muller: Yeah. Russ Roberts: And I think the relentless praise for short-term results is incredibly dangerous. Jerry Muller: Uh-huh. Russ Roberts: I'm not saying I'm right. I'm not saying that--in fact, I don't look particularly right, right now, because we haven't had another crisis. I think things look pretty good. I'm open to the possibility that they did a good job. But, my real point isn't that they did a bad job because of the next crisis. It's all these other subtle things about faith in democracy, faith in capitalism, the rewarding of cronies that the financial crisis solutions dealt in. Those are the things that to me are intangible, and don't get laid at their door. So, I do think: Yes, you are right. You have to be careful. Judgment has got its own risk. But, the other direction is really, really dangerous, too. Jerry Muller: Agreed.