I understand that connecting 'upwards' is better (I'm connected with all my former bosses). But if my boss's former colleagues got into the habit of shopping for new employees in his current workforce, they would not remain connected for very long. Perhaps this is a regional difference (I am not in SV). After I'm no longer a current employee (and socially OK to extend a job offer to), I still get all the benefits you mention, except that I also have the benefit (in several cases) of my former bosses sending me tips about jobs in their network that aren't listed on LinkedIn, and I don't have the downsides of announcing to my current boss if I'm shopping around.
I'm not in SV either (AU mech. engineer). My industry (rail) is pretty insular however, so there's usually a lot of crossflow between the various parties involved in it.
I agree with you that the inability to customise who your updates go to is pretty bad. That's a pretty basic feature and I'd expect to be more integral to LinkedIn than, say, Facebook.
