This started off as a comment on Bill's post "Departmental Specialization" but just got too darn long for a comment.
I agree that there seems to be an instability, if you will, that would lead departments to specialize. The more success a department has in a certain field, the easier it will be to get funding, high-quality grad students/faculty, and good facilities in that field. I think what saturates this instability in most departments is that the popularity and funding levels for the various sub-fields wax and wane on time scales of ~10 years while faculty hires operate on time scales of ~30 years. This means that while one field, say cosmology, might be really hot right now, if you devote all of your faculty hires and facilities to cosmology for the next few years then in 10 years you may be unable to adapt to whatever new sub-field has become hot because you have a faculty full of cosmologists.
I saw first-hand an example of this at an university that we shall refer to as High Tc U. In the mid- to late-1980's, high temperature superconductors were a really hot area of research. Funding was plentiful and breakthroughs were coming at an amazing rate. High Tc U. jumped onto the superconductor band-wagon and hired quite a few experimentalists and theorists in the field. For a while, High Tc U. was swimming in grants and publishing papers like political parties publish annoying mailers. It was a Mecca for superconductivity research and superconductivity research was where everybody wanted to be.
Fast forward to a few years ago when I got to know the department. High Tc U. is still a Mecca for superconductivity research, but now the funding is hard to come by and the breakthroughs are few and far between. Because of the slew of hires in one sub-field, some of the other sub-fields suffered and the department wasn't able to keep pace in some other areas. To be honest, High Tc U. is only now, 20 years later, regaining the balance it had before the superconductor revolution. The only way to regain that balance was to wait for 20 years for retirements and growth in the department to bring in a critical mass of new people in areas like nuclear, condensed matter, and AMO that can compliment and collaborate with the superconductivity people while focusing on their sub-fields that are better funded and more popular today.
My theory is that while there are some departments like UIUC's physics department that can continue to thrive with one dominant sub-field, there are others that try to become "the superconductor department" or "the supernova department", hire a bunch of faculty for ~30 years in that one area, and then watch as the field cools off after 5-10 years. By having a broad department, you can react to whatever new fields show promise quickly and weather the ~10 year fluctuations in funding levels for various fields.
I think you're quite right on that post. That's a very good point. Furthermore, I was thinking about it just from your title, and I do think that department specialization can get saturated. For example, here I really can't imagine the condensed matter groups getting that much bigger -- the infrastructure just wouldn't hold it -- so it looks like the growth is moving to other areas like bio and (yay!) AMO. (Not to mention a lot of others too.)
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