The Second Law of Corporate Dynamics

If you have ever wondered why your life seems increasingly chaotic, and your desk ever more cluttered, you might find a good answer in one of the most basic laws of physics. The law is the second law of thermo dynamics, and was perfected by Ludwig Boltzmann in 1871. This law guarantees that entropy never decreases in nature. In other words everything either stays the same (which is rare) or grows increasingly more chaotic. This has always been the case, from the very low entropy, well ordered singularity of the big bang, to the ever increasing, and cooling universe we are a part of. It is also true in everyday life. Not only do your things become more cluttered, unless you arrange them, an omelet never becomes an egg again.

The 20^th century physicist and science/art advocate CP Snow loved to encourage all of society to think creativity about the way nature behaved. He was an admirer of Einsteinein thought experiments, and a rebelliousness amongst people to try to prove the laws of nature to be wrong. Even with this adventurous, and risky mentality, Snow said something to the effect that you can prove anything wrong, but if you find evidence that the second law of thermo dynamics is wrong, your results must be in error. For physicists, material scientists, and biologists, there is nothing more important than this law.

Since this is so well established in science, and its analogies fit so well, I wonder whether certainty of moving towards a more chaotic state doesn’t also apply to our society, especially to businesses. I watched the major Bank CEOs testify before congress last month about the financial crisis of 2008, and was left with one of two possibilities about these businesses. Either the businesses were so large that the CEO had no idea what each division was doing, or the businesses were so large that they needed to keep growth at such a high level that they were willing to compromise good business practices. Though I can’t speak to the intentions of these leaders, I would guess that both of these apply. During the same time that the banks were receiving TARP funds, General Motors was getting a bailout from Washington, because it was either, too big and bureaucratic to keep up with a quickly changing marketplace, or it was too big and bureaucratic to keep up with its own research. Again, I would guess that both of these statements are true. Large companies by nature become more difficult to manage. They become slower, and like the once densely hot universe, they become colder. This is why when you read Wired Magazine, or MIT Technology Review, so few of the summaries of new inventions come from large companies. Start-ups have greater potential energy. They are not spread across the universe of board rooms, and private jets. They are crammed in garages and studios, building up Intellectual Property, and exploding outward.

So, is the inefficiency and cluttered landscape of large corporations as inevitable as the second law of thermo dynamics? It might very well be, except that there is a caveat in the law which large businesses often don’t acknowledge. The law states that entropy will never decrease. It is possible to stay the same. Not changing is looked at as the enemy of innovation, as innovation itself is a change in doing things. What is neglected in this is that as companies become larger they are changing automatically due to size. This change in size is happening regardless of what the leadership does. If a company then does nothing dramatically different in the way the company operates, you will have enormous change. If however this were acknowledged, it may very well be possible for a company to retain the energy it had during its big bang to success. In a way Google is doing this by continuing to require employees to work on independent ideas during work hours. Toyota did this by having employee feedback through its ground breaking production systems. What neither of these examples did was to succumb to increasing entropy, but rather to remain ideologically stagnant. It may well be though that this cannot last forever. Toyota is now the largest car company in the world, and experiencing quality problems.

When I look at corporations, and the government explanation that certain companies are too big to fail, I recognize that naturally the opposite is true. At some point a company can be too big not to fail. The only hope of keeping entropy at bay is to explode again the way they did the first time. This knowledge is not obvious, and is not what most business people believe. It requires that quarterly profits and growth not be stressed above all. It requires a self awareness that as growth occurs so does the tendency towards chaos. This might be a hard sell to a group of investors or a board of directors; unless that group is made of physicists.