Tuesday, September 23, 2014

What Metric Are We Optimizing For?

If we choose metrics unwisely, we create self-destructive choices, policies and goals.

Yesterday, I explained why GDP = Waste. This raises a larger issue: we shape our choices and goals to optimize what we choose to measure.

If cholesterol is established as a critical metric of health, for example, then we naturally focus on our cholesterol levels and adjust our diet or take medications to optimize our cholesterol level to the ideal levels.

Do cholesterol levels really reflect health? Are they really critical metrics of well-being, longevity, etc.? If I take a handful of pills to optimize my cholesterol levels, have I become healthy, or does the optimization of that metric create the illusion that we've reached our goal of health?

If 3% GDP growth is established as the optimimum, we shape our choices, policies and systems to reach that goal--even if the process of optimizing that metric is destructive to the economy and society. In other words, if we choose metrics unwisely, we create self-destructive choices, policies and goals.

Correspondent Lew G. recently submitted a fascinating article that describes our propensity for optimizing whatever metric is presented as critical: Economists Don't Understand The Information Age, So Their Claims About Today's Economy Are A Joke.

When we have a bad metric, even if we know it's a bad metric, we still tend to optimize for that metric, because that's what we have to measure progress, success, etc.

There are plenty of examples of questionable metrics: GDP (gross domestic product) as opposed to Gross Domestic Happiness, unemployment (rather than full-time jobs that can support families), and even test scores in education.

When the metrics--and the way they are measured--are both perverse, we get perverse incentives and perverse outputs.

By measuring GDP in the current way, it makes sense to burn the last of our cheap oil paying people to dig holes and then fill them, because the wages paid (even if they're paid with borrowed money) are counted as "growth."

For a variety of reasons, the agendas, priorities and incentives established by metrics such as GDP are rarely made explicit. For example, by focusing on test results rather than life-skills and professionalism, our schools incentivize optimizing test scores anmd cheating, as part of an implicit assumption that scoring well on tests prepares students for jobs in the real economy.

Yet the evidence strongly suggests that scoring well academically is poorly correlated to on-the-job performance, innovation, leadership, etc.

What if our education system stated this set of choices explicitly rather than implicitly? Then we'd have a clearer idea of the consequences of the metrics we've chosen to optimize. The explicit statement would be something like this: Instead of teaching you life-skills that are essential for successful adulthood and the eight essential skills of professionalism, we're teaching you how to take tests that advance your career in academia.

The same kind of perverse priorities and incentives are easily found in healthcare, defense, and of course economics.

Consider GDP: if I decide to ride a $100 used bicycle to work instead of buying a $30,000 auto with mostly borrowed money, the impact on GDP is horrendously negative: I didn't spend $30,000 on the car, thousands of additional dollars on insurance and fuel, didn't pay a bank thousands of dollars in interest and fees, and didn't pay bridge and highway tolls, or excise taxes on the vehicle, fuel, maintenance, etc.

The benefits to me and society at large of riding my used bicycle to work are not even counted: by riding a used bike instead of driving a new auto, I can save capital to invest in productive enterprises, I've taken one vehicle off the road, lessening traffic, I've conserved precious fuel for following generations, and my health will improve from the daily exercise, very likely reducing the costs of my healthcare and the burden on wage-earners of caring for me.

But these unalloyed health benefits are a disaster for GDP as currently measured:GDP would rise only if I become ill and need medications, procedures, tests, etc. on a regular basis.

In other words, in the current way we measure "prosperity" (i.e. "growth"), healthy living, low-cost lifestyles and capital accumulation are catastrophes for the economy rather than tremendous benefits.

Clearly, we need an entirely new set of metrics and ways of measuring them. This will instantly create an entirely new set of agendas, priorities and incentives that change day-to-day choices without any central-state coercion, bureaucracies or top-down Central Planning.

This essay was drawn from Musings Report 36. The weekly Musings Reports are emailed exclusively to subscribers and major contributors.

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