December 2008A few months ago I read a New York Times article on SouthKorean cram schools that said Admission to the right university can make or break an ambitious young South Korean. A parent added: "In our country, college entrance exams determine 70 to 80 percent of a person's future." It was striking how old fashioned this sounded. Andyet when I was in high school it wouldn't have seemed too far offas a description of the US. Which means things must have beenchanging here.The course of people's lives in the US now seems to be determinedless by credentials and more by performance than it was 25 yearsago. Where you go to college still matters, but not like it usedto.What happened?Judging people by their academic credentials was in its time anadvance. The practice seems to have begun in China, where startingin 587 candidates for the imperial civil service had to take anexam on classical literature. [1] It was also a test of wealth,because the knowledge it tested was so specialized that passingrequired years of expensive training. But though wealth was anecessary condition for passing, it was not a sufficient one. Bythe standards of the rest of the world in 587, the Chinese systemwas very enlightened. Europeans didn't introduce formal civilservice exams till the nineteenth century, and even then they seemto have been influenced by the Chinese example.Before credentials, government positions were obtained mainly byfamily influence, if not outright bribery. It was a great stepforward to judge people by their performance on a test. But by nomeans a perfect solution. When you judge people that way, you tendto get cram schools—which they did in Ming China and nineteenthcentury England just as much as in present day South Korea.What cram schools are, in effect, is leaks in a seal. The use ofcredentialswas an attempt to seal off the direct transmission of power betweengenerations, and cram schools represent that power finding holesin the seal. Cram schools turn wealth in one generation intocredentials in the next.It's hard to beat this phenomenon, because the schools adjust to suitwhatever the tests measure. When the tests are narrow andpredictable, you get cram schools on the classic model, like thosethat prepared candidates for Sandhurst (the British West Point) orthe classes American students take now to improve their SAT scores.But as the tests get broader, the schools do too. Preparing acandidate for the Chinese imperial civil service exams took years,as prep school does today. But the raison d'etre of all theseinstitutions has been the same: to beat the system. [2]History suggests that, all other things being equal, a societyprospers in proportion to its ability to prevent parents frominfluencing their children's success directly. It's a fine thingfor parents to help their children indirectly—for example,by helping them to become smarter or more disciplined, which thenmakes them more successful. The problem comes when parents usedirect methods: when they are able to use their own wealth or poweras a substitute for their children's qualities.Parents will tend to do this when they can. Parents will die fortheir kids, so it's not surprising to find they'll also push theirscruples to the limits for them. Especially if other parents aredoing it.Sealing off this force has a double advantage. Not only does asociety get "the best man for the job," butparents' ambitions are diverted from direct methods to indirectones—to actually trying to raise their kids well.But we should expect it to be very hard to contain parents' effortsto obtain an unfair advantage for their kids. We're dealing withone of the most powerful forces in human nature. We shouldn't expectnaive solutions to work, any more than we'd expect naive solutionsfor keeping heroin out of a prison to work.The obvious way to solve the problem is to make credentials better.If the tests a society uses are currently hackable, we can studythe way people beat them and try to plug the holes. You can usethe cram schools to show you where most of the holes are. Theyalso tell you when you're succeeding in fixing them: when cramschools become less popular.A more general solutionwould be to push for increased transparency, especially at criticalsocial bottlenecks like college admissions. In the US this processstill shows many outward signs of corruption. For example, legacyadmissions. The official story is that legacy status doesn't carrymuch weight, because all it does is break ties: applicants arebucketed by ability, and legacy status is only used to decide betweenthe applicants in the bucket that straddles the cutoff. But whatthis means is that a university can make legacy status have as muchor as little weight as they want, by adjusting the size of thebucket that straddles the cutoff.By gradually chipping away at the abuse of credentials, you couldprobably make them more airtight. But what a long fight it wouldbe. Especially when the institutions administering the tests don'treally want them to be airtight.Fortunately there's a better way to prevent the direct transmissionof power between generations. Instead of trying to make credentialsharder to hack, we can also make them matter less.Let's think about what credentials are for. What they are,functionally, is a way of predicting performance. If you couldmeasure actual performance, you wouldn't need them.So why did they even evolve? Why haven't we just been measuringactual performance? Think about where credentialism first appeared:in selecting candidates for large organizations. Individualperformance is hard to measure in large organizations, and theharder performance is to measure, the more important it isto predict it. If an organization could immediately and cheaplymeasure the performance of recruits, they wouldn't need to examinetheir credentials. They could take everyone and keep just the goodones.Large organizations can't do this. But a bunch of small organizationsin a market can come close. A market takes every organization andkeeps just the good ones. As organizations get smaller, thisapproaches taking every person and keeping just the good ones. Soall other things being equal, a society consisting of more, smallerorganizations will care less about credentials.That's what's been happening in the US. That's why those quotesfrom Korea sound so old fashioned. They're talking about an economylike America's a few decades ago, dominated by a few big companies.The route for the ambitious in that sort of environment is to joinone and climb to the top. Credentials matter a lot then. In the culture of a large organization, an elite pedigree becomes a self-fulfillingprophecy.This doesn't work in small companies. Even if your colleagues wereimpressed by your credentials, they'd soon be parted from you ifyour performance didn't match, because the company would go out ofbusiness and the people would be dispersed.In a world of small companies, performance is all anyone caresabout. People hiring for a startup don't care whether you've evengraduated from college, let alone which one. All they care aboutis what you can do. Which is in fact all that should matter, evenin a large organization. The reason credentials have such prestigeis that for so long the large organizationsin a society tended to be the most powerful. But in the US at leastthey don't have the monopoly on power they once did, preciselybecause they can't measure (and thus reward) individual performance.Why spend twenty years climbing the corporate ladder when you canget rewarded directly by the market?I realize I see a more exaggerated version of the change than mostother people. As a partner at an early stage venture funding firm,I'm like a jumpmaster shoving people out of the old world ofcredentials and into the new one of performance. I'm an agent ofthe change I'm seeing. But I don't think I'm imagining it. It wasnot so easy 25 years ago for an ambitious person to choose to bejudged directly by the market. You had to go through bosses, andthey were influenced by where you'd been to college.What made it possible for small organizations to succeed in America?I'm still not entirely sure. Startups are certainly a large partof it. Small organizations can develop new ideas faster than largeones, and new ideas are increasingly valuable.But I don't think startups account for all the shift from credentialsto measurement. My friend Julian Weber told me that when he wentto work for a New York law firm in the 1950s they paid associatesfar less than firms do today. Law firms then made no pretense ofpaying people according to the value of the work they'd done. Paywas based on seniority. The younger employees were paying theirdues. They'd be rewarded later.The same principle prevailed at industrial companies. When myfather was working at Westinghouse in the 1970s, he had peopleworking for him who made more than he did, because they'd been therelonger.Now companies increasingly have to pay employees market price forthe work they do. One reason is that employees no longer trustcompanies to deliver deferred rewards: why work to accumulatedeferred rewards at a company that might go bankrupt, or be takenover and have all its implicit obligations wiped out? The otheris that some companies broke ranks and started to pay young employeeslarge amounts. This was particularly true in consulting, law, andfinance, where it led to the phenomenon of yuppies. The word israrely used today because it's no longer surprising to see a 25year old with money, but in 1985 the sight of a 25 year oldprofessional able to afford a new BMW was so novel that itcalled forth a new word.The classic yuppie worked for a small organization. He didn't workfor General Widget, but for the law firm that handled GeneralWidget's acquisitions or the investment bank that floated theirbond issues.Startups and yuppies entered the American conceptual vocabularyroughly simultaneously in the late 1970s and early 1980s. I don'tthink there was a causal connection. Startups happened becausetechnology started to change so fast that big companies could nolonger keep a lid on the smaller ones. I don't think the rise ofyuppies was inspired by it; it seems more as if there was a changein the social conventions (and perhaps the laws) governing the waybig companies worked. But the two phenomena rapidly fused to producea principle that now seems obvious: paying energetic young peoplemarket rates, and getting correspondingly high performance fromthem.At about the same time the US economy rocketed out of the doldrumsthat had afflicted it for most of the 1970s. Was there a connection?I don't know enough to say, but it felt like it at the time. Therewas a lot of energy released.Countries worried about their competitiveness are right to beconcerned about the number of startups started within them. Butthey would do even better to examine the underlying principle. Dothey let energetic young people get paid market rate for the workthey do? The young are the test, because when people aren't rewardedaccording to performance, they're invariably rewarded according toseniority instead.All it takes is a few beachheads in your economy that pay forperformance. Measurement spreads like heat. If one part of asociety is better at measurement than others, it tends to push theothers to do better. If people who are young but smart and drivencan make more by starting their own companies than by working forexisting ones, the existing companies are forced to pay more tokeep them. So market rates gradually permeate every organization,even the government. [3]The measurement of performance will tend to push even the organizationsissuing credentials into line. When we were kids I used to annoymy sister by ordering her to do things I knew she was about to doanyway. As credentials are superseded by performance, a similarrole is the best former gatekeepers can hope for. Once credentialgranting institutions are no longer in the self-fullfilling prophecybusiness, they'll have to work harder to predict the future.Credentials are a step beyond bribery and influence. But they'renot the final step. There's an even better way to block thetransmission of power between generations: to encourage the trendtoward an economy made of more, smaller units. Then you can measurewhat credentials merely predict.No one likes the transmission of power between generations—notthe left or the right. But the market forces favored by the rightturn out to be a better way of preventing it than the credentialsthe left are forced to fall back on.The era of credentials began to end when the power of largeorganizations peaked in the late twentieth century. Now we seemto be entering a new era based on measurement. The reason the newmodel has advanced so rapidly is that it works so much better. Itshows no sign of slowing.Notes[1] Miyazaki, Ichisada(Conrad Schirokauer trans.), China's Examination Hell: The CivilService Examinations of Imperial China, Yale University Press,1981.Scribes in ancient Egypt took exams, but they were more the typeof proficiency test any apprentice might have to pass.[2] When I say theraison d'etre of prep schools is to get kids into better colleges,I mean this in the narrowest sense. I'm not saying that's all prepschools do, just that if they had zero effect on college admissionsthere would be far less demand for them.[3] Progressive taxrates will tend to damp this effect, however, by decreasing thedifference between good and bad measurers.Thanks to Trevor Blackwell, Sarah Harlin, Jessica Livingston, and DavidSloo for reading drafts of this.
