The Bureaucracy Coefficient
In the space of days, two of the best performing football coaches in the United States announced independently that they were leaving their current positions. Nick Saban retired from the University of Alabama on January 10, 2024. Bill Belichick parted ways with the New England Patriots on January 11, 2024. They epitomized success. Alabama’s Crimson Tide won 87% of their games and six national championships under Saban’s leadership. He won an additional championship at LSU. Belichick won six Super Bowls and 296 games with the Patriots.
Here's Saban on what it takes to win.
“And the big part of being a team is you have to be able to communicate with other people and you have to work with other people. And you can never have any team chemistry for this reason: mediocre people don’t like high achievers and high achievers don’t like mediocre people. So if everybody doesn’t buy into the same principles and values of the organization at the same high standard, you’re never going to be successful. Just like our Spring practice right now. You know what my goal at Spring practice is? Get the right guys on the bus. Get ‘em in the right seats. And get the wrong guys off the bus. So one of these days, you’re going to be working in an organization and somebody’s going to try to do that to you. So which one of those people do you want to be? Do you want to be somebody they’re trying to get off the bus? Because you’re satisfied with mediocre performance. Because you can never have any team chemistry in your organization if everybody’s not committed to the same standard and the same things. You know when I worked for Bill Belichick we had one sign in the building. It was, ‘Do your job.’ You know. You go in all these places and you see all these things. One sign. Do your job.”
Saban had the luxury of having a simple mandate: to win a national championship. He was in the enviable position of optimizing for performance and only performance. He had the leadership freedom to act, unimpeded for as long as he succeeded and as long as he wanted to hold the seat.
Most corporate entities have multiple mandates including, potentially and in some combination, to grow revenue, generate profits, generate free cash flow, be responsible citizens, align with the right people, promote social causes, and advance the interests of different types of stakeholders.
The modern organization is a Hydra. There are multiple layers of control, all moving in separate directions but for the parts that bind them together.
So it is natural that we might see what Rory Sutherland calls the box-tickers:
“In every organisation, whether in the public or private sector, a great inversion has taken place where the people who do actual, useful work (from surgeons to call-centre staff) find themselves working at the behest of a vast army of box-tickers and pen-pushers who demand that they must conform to a host of metrics and proxy targets so their contribution can fit into a cell on a spreadsheet. Although this caste often uses capitalist language, its principal achievement is a kind of Sovietisation of the modern organisation.
“As in the Soviet system, the people who report, quantify and measure things end up with all the power and none of the scrutiny. Rather than fostering motivated teams and trusting them to make decisions, every job is reduced to an algorithm, with the participants treated as wholly interchangeable components. Although beadily focused on the output of productive staff, the administrative caste effectively marks its own homework when it comes to its own activities.
“And this is my explanation for the ‘productivity crisis’. It isn’t that there has been no improvement in productivity. It’s just that genuinely productive people now form a minority in any organisation. Not only do they feel powerless, they have spotted that any monetary gains from performance improvements will never translate into better pay or working conditions for them. Instead, they will be dressed up as ‘cost-savings’ and presented as such to investors by the finance director and the chief executive (who used to be the finance director before he got promoted) since the chief preoccupation of the modern organisation is the collation of numbers. Any money left over will be used to hire even more people in bogus administrative roles, largely as a reputational firebreak for the executive team, who are much more motivated by fear of scandal than by satisfying customers.”
Our leading organizations are doing the precise opposite of what Saban says excellence demands. They do not have his freedom.
The box-tickers are the main body of mediocrity. They are a drag on performance.
Perhaps it is a natural consequence of what complexity scientist Peter Turchin calls “elite overproduction” coupled with the inequality-priming massive wealth generated by leading tech companies.
“The next big question is how are elites produced and reproduced? They’re reproduced by ambitious young people, or, to use the technical term, ‘elite aspirants’, who want to gain positions of power. Elite overproduction occurs when, during some historical periods, we get too many elite aspirants for the slowly changing number of power positions. That creates intense competition, and while some competition is very helpful and good, excessive competition is harmful as it corrodes the social norms and institutions of the society.”
This is then coupled with what he called the “wealth pump” in which elites shape society for their benefit.
“What we see in the historical record is that all complex societies go through periods of good times, maybe a century or so long on average, and then periods of disintegration. During the good times, after a couple of generations, the elites get used to the fact that life is good and stable, and that’s when the iron law of oligarchy kicks in. The elites are very strongly tempted to convert their power into goodies for themselves — and if there’s nothing stopping them, that’s what they do. They basically reconfigure the economy in a way that depresses the wages of workers and creates a ‘wealth pump’ that funnels riches directly to the owners and managers of corporations.”
Our universities are factories for the production of these elites, many of whom are mediocre and unproductive. It turns out that today’s elite isn’t nearly as intelligent as conventional wisdom assumes.
“According to a widespread belief, the average IQ of university students is 115 to 130 IQ points, that is, substantially higher than the average IQ of the general population (M = 100, SD =15).
“…
“We conducted a meta-analysis of the mean IQ scores of college and university students samples tested with Wechsler Adult Intelligence Scale between 1939 and 2022. Results. The results show that the average IQ of undergraduate students today is a mere 102 IQ points and declined by approximately 0.2 IQ points per year. The students' IQ also varies substantially across universities and is correlated with the selectivity of universities (measured by average SAT scores of admitted students).”
So many kids go to university now that the intellect of graduates has reverted to the mean. As for those who would argue that selectivity is a meaningful way to sort the elites produced by universities, there is reason to believe that this has suffered its own second-order dumbing-down.
Looking at Yale University shows remarkable grade inflation since 2010. Imagine how it compares to the 1980s.
“Yale College’s mean GPA was 3.70 for the 2022-23 academic year, and 78.97 percent of grades given to students were A’s or A-’s.”
There is also tremendous variation in the percentage of A’s and A-‘s by subject.
Economics, mathematics, psychology, and engineering ranged from fifty-two percent As to fifty-seven percent As. If you want to label yourself as a true member of the over-achieving, credentialed elite while enjoying an academic cushion of safety, then you should consider studying subjects like African American Studies; Regional Studies; Ethnicity, Race & Migration; Education Studies; Women’s Gender & Sexuality Studies; and History of Science, History of Medicine. In these programs the proportion of As awarded ranges from eighty-two percent to ninety-two percent.
Graduating summa or magna cum laude is statistically more likely in these latter disciplines.
Everyone gets a trophy.
As universities produce more graduates and more award-winning graduates, it’s easy to see how the ranks of the elite are bursting.
They’ve got to go somewhere.
The delusional cocktail of actual averageness and elite self-identification means that society must create positions that can meet the exaggerated financial and status expectations of these little Napoleons, or suffer the consequences.
Large successful companies that create tremendous value leading to Croesus-like cash generation have the wherewithal to accommodate these people. They pay them in a combination of cash and status. Do a quick search of LinkedIn and you’ll find a host of people describing themselves first and foremost as ex-Google, or ex-Facebook, or ex-Apple. Nobody claims to be ex-McDonald’s.
MIT’s Andrew McAfee describes this status currency:
“We human beings have this very deep-rooted desire to want status. And one way to get status in a big, complicated organization is to be a gatekeeper or some person in the decision loop.”
In essence, the boards of these companies poach money from the pockets of shareholders, transferring it to the excess elites they absorb and employ in made-up gatekeeper roles, presumably as a quid pro quo for being able to operate in a regulatory environment shaped for the companies’ benefit.
Not only do these elites go into large organizations in the private sector, they also get recycled back into non-teaching university bureaucracies.
“In recent decades, the growth in university bureaucracies has far outpaced the growth in faculties and student bodies. From 1985 to 2005 the number of professors grew about 50% nationwide, while administrators increased by 85% and their attendant staff by 240% — with particularly pronounced growth at private schools. According to Department of Education data, between 1993 and 2009, administrative positions at colleges swelled by 60%, a rate of growth ten times that of the growth in tenured faculty positions at the same colleges.”
There is an argument to be made that these bureaucrats are crowding out the most productive academics who themselves are fleeing for the greener pastures of the private sector.
Here’s an interesting fact from Jason Sheltzer:
“Among the top 10 national winners at the Intel/Westinghouse Science Fair from 1990 to 2002, 66% of them are now in academia. Among the same group from 2003 to 2014, less than a third are academics.”
Nate Silver ascribes it to the allure of the private sector:
“Academia has always been a haven for weird smart misfits, that's part of what makes it great, but now the weird misfits with high math GREs are working for Google or for quant hedge funds.”
I think Ruxandra Teslo is onto something with her theory of the “Failed Corporatist:”
“What I will add, is that in The Weird Nerd’s place, I have noticed the proliferation of a different type of species in academia: what I call The Failed Corporatist. This is someone who stumbles upon academia not so much out of a love for The Truth, as due to an inability to thrive in corporate settings for various other, unrelated reasons. But the Failed Corporatist has a very conventional, corporate like mindset anyway. It usually loves process, admin and adding more admin and adding more process and METRICS and social conformity. This skill set enables them to ascend the ranks of academic administration, often gaining significant influence and control over The Weird Nerd. Confronted with this altered habitat, The Nerd often finds itself in a state of distress and confusion. Its intrinsic motivation clashes with the newly imposed corporate-like order and the demand for conformity, leading to frantic efforts to assert its natural tendencies. Unfortunately, these efforts are often met with resistance or outright rejection, not only from The Failed Corporatist but also from the broader world that the academic reserve is a part of. All in all, I think this disturbance means the remaining Nerds are further driven away.”
What is a Failed Corporatist if not a bureaucrat free-rider?
Organizations suffer from a kind of adverse selection once bureaucracy gets too large.
Perhaps that explains the replication crisis and the plagiarism crisis in the academy. Many of the effective people leave. Not that the organizations they end up joining don’t have their share of bureaucracy. It’s just that the excellent workers might as well get paid if they have to put up with this kind of distracting, pointless, anti-productive tedium.
It must have been terrifying for many of these elite window-watchers to see Elon Musk cut eighty percent of Twitter staff without the service collapsing into outright and immediate failure.
“Musk was quoted as saying in the interview that the social media platform now has only 1,500 employees, down from under 8,000 who were employed at the time of his acquisition. The reduction equates to roughly 80% of the company’s staff.”
What were all these laid-off people doing? Musk focused on retaining anyone productive while firing everyone else. Here is one of the emails he sent on arriving at Twitter.
“’Anyone who actually writes software, please report to the 10th floor at 2 pm today. Before doing so, please email a bullet point summary of what your code commits have achieved in the past ~6 months, along with up to 10 screenshots of the most salient lines of code,’ Musk wrote in the first of three emails reportedly sent around midnight PT Friday.”
In a move inspired by Twitter’s financial straits, he exposed the great truth of our most profitable companies. They are full of benchwarmers.
This provides a powerful incentive for entrepreneurship. Some people who see themselves, correctly or not, as excellent will strike out on their own to evade the administrative burden bureaucracy imposes. Early-stage startups and quantitative hedge funds have the allure of potential financial gain but also the certainty of liberation from inane red tape, at least for a while. A separating equilibrium develops.
Putting it all together, we can construct a Bureaucracy Coefficient analogous to the Gini Coefficient.
“The Gini coefficient is an index for the degree of inequality in the distribution of income/wealth, used to estimate how far a country's wealth or income distribution deviates from an equal distribution.”
Mathematically, the Gini coefficient is a ratio.
“The Gini coefficient is usually defined mathematically based on the Lorenz curve, which plots the proportion of the total income of the population (y-axis) that is cumulatively earned by the bottom x of the population (see diagram).[21] The line at 45 degrees thus represents perfect equality of incomes. The Gini coefficient can then be thought of as the ratio of the area that lies between the line of equality and the Lorenz curve (marked A in the diagram) over the total area under the line of equality (marked A and B in the diagram); i.e., G = A/(A + B).”
We can construct a similar type of metric for the level of bureaucracy in an organization. For each individual, we give them a score from one to ten based on how removed they are from generating profit, either in driving revenue or controlling costs. One is someone who is in a line position. Ten is someone who is very far removed from the line. We sum the scores across the individuals and divide it by the number of individuals producing an aggregate score between one and ten. One is the least bureaucratic organization we can imagine. Ten is Sovietized administration.
Imagine a trading firm made up of three people: two traders and a financial administrator. The financial administrator takes care of processing the trades, ensuring the cash accounts balance, filing compliance reports, managing the accounting, and maintaining margin balances. Each person is vital to the generation of profit. Each person receives a score of one. The firm has a score of one. There is no bureaucratic drag here.
At the other end of the scale, imagine a university where the number of administrative staff outnumber faculty by a ratio of four-to-one. There are other clerical staff for ensuring that financial aid documents are correct or Title IX compliance is complete. There are facilities staff to make sure that the physical plant works well. Let’s assume the following proportions of the population: fifteen percent faculty with a blended score of 1.0, sixty percent administrative staff with a score of 6.3, five percent clerical staff with a score of 2.4, and twenty percent facilities staff with a score of 1.0. This leads to an organization score for our contrived example of 4.25, or more than four times the score of our entrepreneurial traders.
The Bureaucracy Coefficient gives us a simple, approximate sense of how much weight an organization attaches to administrative roles over direct productivity. If anything, it understates the distortion bureaucracy imposes on an organization’s behavior by weighting insufficiently the impact of the productive workers.
Corollary: there may be a critical mass of bureaucracy once reached that causes an organization to succumb to bland, second-tier stagnation.
Musk’s experience at Twitter teaches us that bureaucracy is a luxury. When the fur begins to fly, we cannot afford it and we discard it in the interests of self-preservation. Should there be a correction in the capital markets for technology companies akin to the Bubble of 2001, we should anticipate massive layoffs of underqualified, empurpled elites. Perhaps we are seeing it already, not something that the cheerleading media care to report loudly.
Post-Script
We predicted in a previous post increased regulatory volatility creating uncertainty for economic decision-makers. Here’s an OpEd from former Secretary of Labor Eugene Scalia consistent with that theory:
“So, to an extent, have they proved Chevron wrong. Once heralded as a way to use agency expertise to bring clarity and consistency to the law, the doctrine often is experienced by the public today as a series of sharp vacillations in the law, as one administration succeeds another. Presidents turn increasingly to the administrative state to implement priorities they can’t enact through Congress. Each administration improves on its predecessor’s playbook, becoming swifter and more adept at identifying legal positions it wants to change and issuing rules and decisions to do so.”