The Fortune 500 Teller
strategy+business: Having applied the logic of physics to predict the life expectancy of biological creatures and cities, Geoffrey West is now searching for the scientific principles that dictate the life spans of companies.
Although the infrastructure of cities follows a sublinear scale, at 0.85, the scientists found that the output of cities does the opposite. Socioeconomic quantities that experts associate with the interaction of human beings — number of patents, restaurants, AIDS cases, incidences of violent crime — all scale in a superlinear fashion, at 1.15. “If you double the size of the city [in population], instead of doubling wages, AIDS, etc., you actually get an extra 15 percent, which is increasing returns,” says West. “What was mind-boggling was it seemed to work for quantities that had nothing to do with each other, like AIDS cases and patents.” Their studies showed the same curve in the U.S., Europe, Latin America, Japan, and China. And this curve can be seen in large and small cities within these countries.
West and his colleagues provided a theoretical explanation for what countless people who have moved to big cities from rural areas have found: There’s just more going on there. “The reason cities keep growing is the bigger you are, the more you get, on an individual level,” West says. “People see that they get higher wages, there’s a greater buzz, more cultural events, more job growth.” And as they produce higher feedback loops, cities become more efficient — because the amount of infrastructure growth doesn’t need to keep pace with population growth.
West contributed to the paper The mortality of companies published by the Royal Society:
The firm is a fundamental economic unit of contemporary human societies. Studies on the general quantitative and statistical character of firms have produced mixed results regarding their lifespans and mortality. We examine a comprehensive database of more than 25 000 publicly traded North American companies, from 1950 to 2009, to derive the statistics of firm lifespans. Based on detailed survival analysis, we show that the mortality of publicly traded companies manifests an approximately constant hazard rate over long periods of observation. This regularity indicates that mortality rates are independent of a company’s age. We show that the typical half-life of a publicly traded company is about a decade, regardless of business sector. Our results shed new light on the dynamics of births and deaths of publicly traded companies and identify some of the necessary ingredients of a general theory of firms.