The Zorn Effect
By Arnold Kling
Management systems degrade. As a manager or a regulator, if you stand still you fall behind.
This year, the Washington Redskins hired a new coach, Jim Zorn. They started out 6-2, but they have since lost 5 out of 6 games. For the purpose of metaphor, I am going to assume that Zorn’s management system started out well but degraded rapidly. Note to commenters: I could not care less about the real reason for the Redskins’ collapse. Take your insights about football to Sports Talki 980. I just want to talk about management systems degrading in general, using Zorn as a metaphor.
Management systems can degrade externally and internally. Externally, your competitors copy your strengths and exploit your weaknesses.
Internally, your motivational tactics, including compensation systems, lose their effectiveness. Your goal is to get maximum impact on worker behavior for minimum pay, and your employees want the reverse. Over time, they learn to game your compensation system, and your management effectiveness degrades.
In health care, there is a lot of talk about reforming the compensation system. One thought is to move away from paying for procedures and moving toward paying for outcomes. Given that doctors have had fifty years to adapt to a system of pay for procedures, a sudden change might lead to a more cost-effective health care system in the short run. Pretty soon, however, doctors would figure out how to game an outcomes-based system. So my guess is that we would see a strong Zorn effect.
In finance, after the S&L crisis, we instituted a great regulatory system to prevent a repeat of that crisis. We hamstrung depository institutions, particularly with respect to holding mortgages. The result was a mortgage finance system that relied heavily on securitization, even to the point of absurdity, with banks required to hold less than half the capital for mortgage securities that they had to hold for plain old-fashioned loans. Over the past year, we have seen how that regulatory system degraded–another illustration of the Zorn effect.