Optimal Churn

There is a new approach that studies systems as organisms and classifies them as super or sub linear.

The idea is simply to plot the growth against the rate of growth. In other words at each point what will the next increase look like. For instance, cities are systems that seem to have superlinear growth. That is once they start growing they keep growing. Because more people make create more opportunities and so this positive feedback cycle makes the city grow without dying. Of course any system with uncontrollable positive feedback will go out of control (like a petri dish where eventually the bacteria grow faster than the available food source and they all die mass extinction) luckily we have some negative feedback mechanisms namely prices. So when cost of living goes up near by areas become part of the City. And thus the boundary of the City expands. Though at times, it should be noted cities experience shrinkage (which the authors of this research seem to ignore )

However companies are sublinear. That is why they die. The claim is they usually they die because as an organization gets bigger its tolerance for diversity decreases and the administrative tasks don’t scale. These combined forces cause the company to become less competitive in their industry, especially when combined with an ecological shift. That is all the advantage of being large is lost when the competition can be nimble and this is highlighted when the landscape changes.
This article talks about how scaling works.

Another system entirely ignored in these studies, which I believe is revealing are universities. They tend not to die and they tend to not grow all that much. One of the ways that they maintain a steady state is that they have a constant stream of new students who want to contribute to the institution this keeps the institution alive and relevant.

Companies are often wary of churn,  but it can be a good thing. Especially when combined with the right incentives. If young employees come in work really hard get promoted and then retire but pass on their experience to the next generation and leave. That is actually a good thing. The faster you can train employees, the less bloated your bureaucracy can become. Also an additional benefit is that you get highly motivated employees who stay highly motivated until they leave.  Furthermore, adding to the work force becomes easier since jobs are well defined and adding people happens often.

An example of this is: the classical trading job. Most people fall into tracks from this job. Rise and retire or burn out. Few would rise and become senior managers. The knowledge that spots on top are constantly being vacated motivates employees to work hard to get those spots. The commmon practice of retiring or leaving in general provides some incentive to pass along experience to the next generation. The constant flow through the system provides feedback and molds it to be efficient at training and self maintaining the flow.
In fact, one possible causal mechanism for failure to adapt to technology by the banks was that the average age of traders rose during the 80s because of several trends. There was economic uncertainty and low birth rate during the 1970s. That meant that there wasn’t a significant enough flow through the companies so instead of adapting these companies, became conservative and static.


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