The "Cripes!" growth model

I first heard about this growth model back in the 1980's, applied to management consulting firms. Only the expletive wasn't "Cripes!".

It's a 2-stage growth model:

Stage 1: "Cripes! We've got all these consultants on the payroll! How are we ever going to pay for them all? Better get some more contracts."

Stage 2: "Cripes! We've got all these contracts! How are we ever going to complete them all? Better get some more consultants."

Repeat.

I've seen the same growth model at work in universities, with "students" replacing "contracts", and "professors" replacing "consultants". And "Cripes!" can of course be replaced with whatever expresses panic and urgency sufficiently strongly.

Anyone with better dynamic stochastic maths skills than me could model the growth process more formally. Actual growth might be shortsighted, with decision-makers at stage 1 being unable to foresee stage 2, and vice versa; but it doesn't have to be. I think it's perfectly consistent with rational expectations and optimising behaviour, provided you make the right assumptions:

1. Demand is a stochastic function of marketing investment, so you cannot predict how many future customers you will get for a given investment.
2. That marketing investment is irreversible. (You cannot recoup your marketing investment by selling an over-abundant catch of customers to another consulting firm/university, for example.)
3. There are costs to firing consultants/professors. (Or the investment in hiring them is irreversible too.)

So the size of the firm sometimes increases, but never decreases. It slowly and stochastically ratchets bigger.

Those three assumptions probably apply to a greater or lesser degree to nearly all organisations. Perhaps that's one of the forces causing all organisations to tend to grow, or else die if they cannot grow.

Can it also work at the aggregate level, and explain (part of) macroeconomic growth? It's different at the macro-level, because an individual firm can expand by hiring existing resources away from other firms, but they can't all do this at once. In the long run, macroeconomic growth has come from investment in capital and improved technology. But there is no reason why stage 2 could not be a push to invest in capital or technology, rather than hire more workers (whose wages are anyway bid up by firms' attempts to hire more).

Just another application of economics to my day job in university admin., or vice versa. Thanks DW.

Comments

[DW]

A currently fashionable alternative to your macro story is that a bubble develops, which increases the error in your forecasting (in one direction on the way up, and in another on the way down when the bubble bursts).

Of course, Baumol's cost disease means that it has been historically much easier for academic insitutions to 'inflate' their way out of a bubble.