25 October 2011

The tentacles of capitalism

The last issue of the New Scientist(issue 2835) has a fascinating article which seem to confirm what many of us fear regarding the corporate control of the world's wealth.

 An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study's assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York's Occupy Wall Street movement and protesters elsewhere. But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world's transnational corporations (TNCs).

Previous studies have found that a few TNCs own large chunks of the world's economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy - whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power.

The work, revealed a core of 1318 companies with interlocking ownerships. Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

John Driffill of the University of London, a macroeconomics expert, says the value of the analysis is not just to see if a small number of people controls the global economy, but rather its insights into economic stability.

Concentration of power is not good or bad in itself, says the Zurich team, but the core's tight interconnections could be. As the world learned in 2008, such networks are unstable. "If one [company] suffers distress," says Glattfelder, "this propagates."

Yaneer Bar-Yam, head of the New England Complex Systems Institute (NECSI), warns that the analysis assumes ownership equates to control, which is not always true. Most company shares are held by fund managers who may or may not control what the companies they part-own actually do. The impact of this on the system's behaviour, he says, requires more analysis.

Crucially, by identifying the architecture of global economic power, the analysis could help make it more stable. By finding the vulnerable aspects of the system, economists can suggest measures to prevent future collapses spreading through the entire economy. Glattfelder says we may need global anti-trust rules, which now exist only at national level, to limit over-connection among TNCs. Sugihara says the analysis suggests one possible solution: firms should be taxed for excess interconnectivity to discourage this risk.

One thing won't chime with some of the protesters' claims: the super-entity is unlikely to be the intentional result of a conspiracy to rule the world. "Such structures are common in nature," says Sugihara.

Newcomers to any network connect preferentially to highly connected members. TNCs buy shares in each other for business reasons, not for world domination. If connectedness clusters, so does wealth, says Dan Braha of NECSI: in similar models, money flows towards the most highly connected members. The Zurich study, says Sugihara, "is strong evidence that simple rules governing TNCs give rise spontaneously to highly connected groups". Or as Braha puts it: "The Occupy Wall Street claim that 1 per cent of people have most of the wealth reflects a logical phase of the self-organising economy."

So, the super-entity may not result from conspiracy. The real question, says the Zurich team, is whether it can exert concerted political power. Driffill feels 147 is too many to sustain collusion. Braha suspects they will compete in the market but act together on common interests. Resisting changes to the network structure may be one such common interest.

The top 50 of the 147 superconnected companies
1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc
27. Invesco plc
28. Allianz SE 29. TIAA
30. Old Mutual Public Limited Company
31. Aviva plc
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company
40. Massachusetts Mutual Life Insurance
41. ING Groep NV
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company

* Lehman still existed in the 2007 dataset used

I am no conspiracy theorist but this dies make disturbing reading even if it does not surprise. Ach there is a lot that one could say about it. I think I will come back on that later.


Claude said...

I hate it. But what's the answer? What's the alternative? Socialism has been tried, and it doesn't work.

jams o donnell said...

The barefaced greed at the top of the pile is not the answer either Claude

Claude said...

I know, Jams. I'm usually so good at finding answers to problems. But I'm sinking here.

CherryPie said...

I too found that article fascinating.

jams o donnell said...

I know what yo mean Claude but we can't go on like this.

It is utterly fascinating isn't it Cherie

Claude said...

I posted a quote from Elie Wiesel on Facebook.

But I still think that there should be a solution.

jams o donnell said...

Elie Wiesel is spot on!

Kay Dennison said...

Sighhhhhhhhhhh . . . greed is one of the Seven Deadly Sins. I'd rather they get what deserve now.

jams o donnell said...

Amen Kay.. Far better than another obscene payrise

Andrew said...

The problem is not the market aspect of capitalism, it's that the people who climb to the top get to decide how much they should be rewarded and rather naturally grossly overestimate what they deserve (or blatantly just take what they can). Like most "either/or" false choices, such as "socialism or capitalism", the best answer is generally a blend of both. Hence, "Cooperativism" is an under-exploited middle way. I wish many of the talented young unemployed and experienced recently redundants would combine to form true Cooperatives, spreading the risks and genuinely sharing the rewards. Social media and the internet should promote it. But people need to stop thinking the choice is either to find a job or go it alone. The more sensible choice may often be for smallish groups to "go it together". But even in Cooperatives begun with the best of intentions, greed has a way of rising up to spoil things, somewhat. But still... these "tentacles" you display have vastly improved the lives of most of us relative to all who came before (if not necessarily the health of the planet) however much unfairness and greed they also embody... And through pensions (whether private or state) most of us are effectively part owners of quite a few of these companies, one way or another, without realising it. We are fed by these tentacles and are part of them. But whatever, it all doesn't last very long, for any of us, so try not to worry. It all comes out in the wash, and often sooner than we think. "Brief candles", and all that. Time for a nice walk in the woods (if I survive the night).

CherryPie said...

Wise and truthful thoughts.

So how do we get out of that cycle?

jams o donnell said...

Actually Andrew I agree. The either/or approach that we are straitjacketed in (or we straijacket ourselves into) is foolish in that if fails to allow for hybrid or other viable options.

In reality I believe in a mixed economy. A Command economy is a disaster but so is free market capitalism...

We have benefitted to a fair extent from the market but t's face it if it were not for progressive legislation we would no have seen many of the advances. And these benefits for us do not benefit all. People in the Third World often pay the price for our prosperity.

I do like the idea of setting up cooperatives. They are a good idea. Something that should be encouraged

jams o donnell said...

Wish I knew the answer Cherie!

Andrew said...

With a Google search on Cooperativism, a reading around, then thinking about spreading tentacles of cooperation and trying to get groups of unemployed and underemployed working together instead of competing for jobs. Much to be done... Trouble is everyone is too busy either working for others or looking for jobs. All there really is in the economy is stuff needing done and people who could do it. Money is often a rather clumsy way of matching them up.

jams o donnell said...

It would be great if more could and would go down that path. I agree there must be a fair bit of scope for people to set up businesses in that way

susan said...

Taxing the rich would be a good start. The French government has proposed adoption of a global Financial Transaction Tax, also known as the Robin Hood Tax, at the G20 Summit they will be hosting later this year.

Andrew said...

Ah, but the rich find ways of avoiding tax, such that an increased tax rate can lead to a reduced tax take. A thousand loopholes to be closed first, and little will to close them.

jams o donnell said...

Perhaps that would be a way to get corporations to pay their tax dues Susan.

With a bit of will I am sure that that the loopholes can be shut down.. and the new ones too