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December 2008  
  
A few months ago I read a _New York Times_ article on South Korean 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. And yet when I was in high
school it wouldn't have seemed too far off as a description of the US. Which
means things must have been changing here.  
  
The course of people's lives in the US now seems to be determined less by
credentials and more by performance than it was 25 years ago. Where you go to
college still matters, but not like it used to.  
  
What happened?  
  
_____  
  
Judging people by their academic credentials was in its time an advance. The
practice seems to have begun in China, where starting in 587 candidates for
the imperial civil service had to take an exam on classical literature.  It
was also a test of wealth, because the knowledge it tested was so specialized
that passing required years of expensive training. But though wealth was a
necessary condition for passing, it was not a sufficient one. By the standards
of the rest of the world in 587, the Chinese system was very enlightened.
Europeans didn't introduce formal civil service exams till the nineteenth
century, and even then they seem to have been influenced by the Chinese
example.  
  
Before credentials, government positions were obtained mainly by family
influence, if not outright bribery. It was a great step forward to judge
people by their performance on a test. But by no means a perfect solution.
When you judge people that way, you tend to get cram schools—which they did in
Ming China and nineteenth century England just as much as in present day South
Korea.  
  
What cram schools are, in effect, is leaks in a seal. The use of credentials
was an attempt to seal off the direct transmission of power between
generations, and cram schools represent that power finding holes in the seal.
Cram schools turn wealth in one generation into credentials in the next.  
  
It's hard to beat this phenomenon, because the schools adjust to suit whatever
the tests measure. When the tests are narrow and predictable, you get cram
schools on the classic model, like those that prepared candidates for
Sandhurst (the British West Point) or the classes American students take now
to improve their SAT scores. But as the tests get broader, the schools do too.
Preparing a candidate for the Chinese imperial civil service exams took years,
as prep school does today. But the raison d'etre of all these institutions has
been the same: to beat the system.   
  
_____  
  
History suggests that, all other things being equal, a society prospers in
proportion to its ability to prevent parents from influencing their children's
success directly. It's a fine thing for parents to help their children
indirectly—for example, by helping them to become smarter or more disciplined,
which then makes them more successful. The problem comes when parents use
direct methods: when they are able to use their own wealth or power as a
substitute for their children's qualities.  
  
Parents will tend to do this when they can. Parents will die for their kids,
so it's not surprising to find they'll also push their scruples to the limits
for them. Especially if other parents are doing it.  
  
Sealing off this force has a double advantage. Not only does a society get
"the best man for the job," but parents' ambitions are diverted from direct
methods to indirect ones—to actually trying to raise their kids well.  
  
But we should expect it to be very hard to contain parents' efforts to obtain
an unfair advantage for their kids. We're dealing with one of the most
powerful forces in human nature. We shouldn't expect naive solutions to work,
any more than we'd expect naive solutions for 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 study the way people beat
them and try to plug the holes. You can use the cram schools to show you where
most of the holes are. They also tell you when you're succeeding in fixing
them: when cram schools become less popular.  
  
A more general solution would be to push for increased transparency,
especially at critical social bottlenecks like college admissions. In the US
this process still shows many outward signs of corruption. For example, legacy
admissions. The official story is that legacy status doesn't carry much
weight, because all it does is break ties: applicants are bucketed by ability,
and legacy status is only used to decide between the applicants in the bucket
that straddles the cutoff. But what this means is that a university can make
legacy status have as much or as little weight as they want, by adjusting the
size of the bucket that straddles the cutoff.  
  
By gradually chipping away at the abuse of credentials, you could probably
make them more airtight. But what a long fight it would be. Especially when
the institutions administering the tests don't really want them to be
airtight.  
  
_____  
  
Fortunately there's a better way to prevent the direct transmission of power
between generations. Instead of trying to make credentials harder 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 could measure actual performance, you
wouldn't need them.  
  
So why did they even evolve? Why haven't we just been measuring actual
performance? Think about where credentialism first appeared: in selecting
candidates for large organizations. Individual performance is hard to measure
in large organizations, and the harder performance is to measure, the more
important it is to predict it. If an organization could immediately and
cheaply measure the performance of recruits, they wouldn't need to examine
their credentials. They could take everyone and keep just the good ones.  
  
Large organizations can't do this. But a bunch of small organizations in a
market can come close. A market takes every organization and keeps just the
good ones. As organizations get smaller, this approaches taking every person
and keeping just the good ones. So all other things being equal, a society
consisting of more, smaller organizations will care less about credentials.  
  
_____  
  
That's what's been happening in the US. That's why those quotes from Korea
sound so old fashioned. They're talking about an economy like America's a few
decades ago, dominated by a few big companies. The route for the ambitious in
that sort of environment is to join one and climb to the top. Credentials
matter a lot then. In the culture of a large organization, an elite pedigree
becomes a self-fulfilling prophecy.  
  
This doesn't work in small companies. Even if your colleagues were impressed
by your credentials, they'd soon be parted from you if your performance didn't
match, because the company would go out of business and the people would be
dispersed.  
  
In a world of small companies, performance is all anyone cares about. People
hiring for a startup don't care whether you've even graduated from college,
let alone which one. All they care about is what you can do. Which is in fact
all that should matter, even in a large organization. The reason credentials
have such prestige is that for so long the large organizations in a society
tended to be the most powerful. But in the US at least they don't have the
monopoly on power they once did, precisely because they can't measure (and
thus reward) individual performance. Why spend twenty years climbing the
corporate ladder when you can get rewarded directly by the market?  
  
I realize I see a more exaggerated version of the change than most other
people. As a partner at an early stage venture funding firm, I'm like a
jumpmaster shoving people out of the old world of credentials and into the new
one of performance. I'm an agent of the change I'm seeing. But I don't think
I'm imagining it. It was not so easy 25 years ago for an ambitious person to
choose to be judged directly by the market. You had to go through bosses, and
they 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 part of it. Small
organizations can develop new ideas faster than large ones, and new ideas are
increasingly valuable.  
  
But I don't think startups account for all the shift from credentials to
measurement. My friend Julian Weber told me that when he went to work for a
New York law firm in the 1950s they paid associates far less than firms do
today. Law firms then made no pretense of paying people according to the value
of the work they'd done. Pay was based on seniority. The younger employees
were paying their dues. They'd be rewarded later.  
  
The same principle prevailed at industrial companies. When my father was
working at Westinghouse in the 1970s, he had people working for him who made
more than he did, because they'd been there longer.  
  
Now companies increasingly have to pay employees market price for the work
they do. One reason is that employees no longer trust companies to deliver
deferred rewards: why work to accumulate deferred rewards at a company that
might go bankrupt, or be taken over and have all its implicit obligations
wiped out? The other is that some companies broke ranks and started to pay
young employees large amounts. This was particularly true in consulting, law,
and finance, where it led to the phenomenon of yuppies. The word is rarely
used today because it's no longer surprising to see a 25 year old with money,
but in 1985 the sight of a 25 year old _professional_ able to afford a new BMW
was so novel that it called forth a new word.  
  
The classic yuppie worked for a small organization. He didn't work for General
Widget, but for the law firm that handled General Widget's acquisitions or the
investment bank that floated their bond issues.  
  
Startups and yuppies entered the American conceptual vocabulary roughly
simultaneously in the late 1970s and early 1980s. I don't think there was a
causal connection. Startups happened because technology started to change so
fast that big companies could no longer keep a lid on the smaller ones. I
don't think the rise of yuppies was inspired by it; it seems more as if there
was a change in the social conventions (and perhaps the laws) governing the
way big companies worked. But the two phenomena rapidly fused to produce a
principle that now seems obvious: paying energetic young people market rates,
and getting correspondingly high performance from them.  
  
At about the same time the US economy rocketed out of the doldrums that 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. There was a lot of energy
released.  
  
_____  
  
Countries worried about their competitiveness are right to be concerned about
the number of startups started within them. But they would do even better to
examine the underlying principle. Do they let energetic young people get paid
market rate for the work they do? The young are the test, because when people
aren't rewarded according to performance, they're invariably rewarded
according to seniority instead.  
  
All it takes is a few beachheads in your economy that pay for performance.
Measurement spreads like heat. If one part of a society is better at
measurement than others, it tends to push the others to do better. If people
who are young but smart and driven can make more by starting their own
companies than by working for existing ones, the existing companies are forced
to pay more to keep them. So market rates gradually permeate every
organization, even the government.   
  
The measurement of performance will tend to push even the organizations
issuing credentials into line. When we were kids I used to annoy my sister by
ordering her to do things I knew she was about to do anyway. As credentials
are superseded by performance, a similar role is the best former gatekeepers
can hope for. Once credential granting institutions are no longer in the self-
fullfilling prophecy business, they'll have to work harder to predict the
future.  
  
_____  
  
Credentials are a step beyond bribery and influence. But they're not the final
step. There's an even better way to block the transmission of power between
generations: to encourage the trend toward an economy made of more, smaller
units. Then you can measure what credentials merely predict.  
  
No one likes the transmission of power between generations—not the left or the
right. But the market forces favored by the right turn out to be a better way
of preventing it than the credentials the left are forced to fall back on.  
  
The era of credentials began to end when the power of large organizations
peaked in the late twentieth century. Now we seem to be entering a new era
based on measurement. The reason the new model has advanced so rapidly is that
it works so much better. It shows no sign of slowing.  
  
  
  
  
  
  
  
  
  
**