Re-examining Global Economics, Occupy Wall Street, and National Security

Doubtless, if you’ve been paying any attention to news – either online, broadcast or print – you’ve had to at least heard something about the Occupy Wall Street movement. And no matter where you fall along the political spectrum – arch-conservative, neo-conservative, raging liberal, classical liberal, Austrian liberal, middle of the road, pragmatist, mash-up, federalist, states rights, moderate, or any conglomeration of the above, or even none at all – you certainly have some opinion – good, bad, or indifferent – about the message, the messengers, and the movement – no matter what you may hold to be true about it.

The movement has also spread to various cities throughout the United States, including Boston, Los Angeles, Chicago and other areas. None, however, have had as much action and publicity as the New York City movement.

The movement is innervated by several ideals, some of which have been castigated, and praised – depending, of course, upon one’s political persuasion.

Generally speaking, participants in the movement are highly computer & Internet savvy, and have established the movement’s online presence through various online mediums, including Twitter, FaceBook, YouTube, a website, and a veritable host of other electronic avenues. There’s even a Wikipedia page about the movement.

And in a recent OpEd in L’Osservatore Romano – the Vatican newspaper – even the Holy See has weighed in on some topics of concern.

The justness or injustice of any claims made by the group notwithstanding, there is a perspective, the significance of which has been previously unconsidered – and it is one of economic instability.

Combining mathematical models used to analyze natural systems and comprehensive corporate data to identify ownership among the world’s TransNational Corporations (TNC), a recent study performed “by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich,” revealed some phenomenally fascinating findings.

From a database totaling over 37 Million worldwide companies and investors, they found 43,060 TNCs and the ownerships linking them. From that, a core of 1318 companies with interlocking ownerships emerged, each which on average were connected to 20, and had ties to at least two or more companies.

Together, the revenue from those 1318 companies represented 20% of all Global Operating Revenues, and appeared to collectively own a majority of the world’s Blue Chip and Manufacturing firms – sometimes also referred to as “the real economy” – which itself represented 60% of all Global Revenues.

Further untangling the web of ownership, researchers found much ownership could be traced back to a “super-entity” of 147 even more tightly knit companies – meaning that all of their ownership was held by other members of the super-entity – which controlled 40 per cent of the total wealth in the network, most of which were financial institutions – the top 20 which included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

Researcher/Analyst Dr. James Glattfelder said that, “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network.”

From that point, they further identified significant areas of concern.

In domino-like fashion, each successive entity contracted and expanded in sympathetic response to any other firm that experienced any type of movement. New Scientist magazine contacted some complex systems analysts to identify areas that could be modified to prevent such widespread, and panicked reactions.

The analysis demonstrated that by identifying the architecture of global economic power, it could help make the global economy more stable.

By finding the system’s vulnerable aspects, economists could suggest measures to prevent future economic collapses from spreading throughout the entire economy. Dr. Glattfelder suggested that global anti-trust rules may be needed – which now exist exclusively at national levels – to limit hazardously extreme connections among TNCs. The analysis suggests one possible solution: firms should be taxed for excess interconnectivity to discourage such risk.

Read the full article here – or read it below.

Revealed – the capitalist network that runs the world

• Updated 13:15 24 October 2011 by Andy Coghlan and Debora MacKenzie
• Magazine issue 2835.
• For similar stories, visit the Finance and Economics Topic Guide

AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters’ worst fears. 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 (see photo). 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).

“Reality is so complex, we must move away from dogma, whether it’s conspiracy theories or free-market,” says James Glattfelder. “Our analysis is reality-based.”

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, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). 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.

The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue (Image: PLoS One)

The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue (Image: PLoS One)

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.”

“It’s disconcerting to see how connected things really are,” agrees George Sugihara of the Scripps Institution of Oceanography in La Jolla, California, a complex systems expert who has advised Deutsche Bank.

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.

When this article was first posted, the comment in the final sentence of the paragraph beginning “Crucially, by identifying the architecture of global economic power…” was misattributed.

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
9. UBS AG
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

Graphic: The 1318 transnational corporations that form the core of the economy

(Data: PLoS One)        

http://www.newscientist.com/article/mg21228354.500-revealed–the-capitalist-network-that-runs-the-world.html