Concentration of capital: excellent find

[K. A. Pital]

http://www.newscientist.com/article/mg2 ... world.html

Revealed – the capitalist network that runs the world

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.

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)

An excellent illustration:


Kudos to guys from Zurich! More understanding where the heart of the beast lies.

[Number Theoretic]

A very interesting read indeed. I also stumbled across it, earlier this day. It's kinda telling how many banks are among these corporations. So after all, the Occupy Wall Streed crowd is not even wrong when they criticise the concentration of power in big banking corporations.

[Samuel]

I think banks, by their very nature have to be big concentrations of wealth.

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.

It isn't from a conspiracy. Capitalism inevitably leads to an accumulation of capital because money makes more money. Prior to globalization you had the same thing with national companies.

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.

This sounds sort of silly. Does agriculture not count as "the real economy"? Is shipping not a "real" industry? The idea that services aren't part of the real economy is silly.

[K. A. Pital]

It isn't from a conspiracy. Capitalism inevitably leads to an accumulation of capital because money makes more money. Prior to globalization you had the same thing with national companies.

Obvious to a commie but not to many others. Some prefer their conspiracy about a world government well-baked. Some have denied that capitalism inevitably results in a mega-oligopoly - well, here's some data to prove the point, rub it in, so to say. A world oligopoly! How sweet the sound.

This sounds sort of silly. Does agriculture not count as "the real economy"? Is shipping not a "real" industry? The idea that services aren't part of the real economy is silly

Real sector includes all of the "real" goods and services in econ-speak. Real economy is a synonim. "The part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets". However, "real economy" has been abused by adherents of economics and neoclassicism as a colloquial term for the manufacturing sector and a manufacturing-dominated economy (and long before the current crisis). Personally I chalk it up to bad econ. But then, I think neoclassical theories are mostly discredited since the late 60s and "economics" is not doing relevant research on the nature of the current system, its possible evolution, etc.

[Zixinus]

Not just communists knew this, although sometimes more as a guess than anything.

Of course, I mostly hear it with connection of Jews around here (that is, that ultimate top 1% are all Jews because.... well, damn Jew!).

I am concerned at how much of a problem they caused to the financial crisis and how much they are contributing to it as a problem (although, I am willing to bet that it is around "quite a lot"). However, I shy away to the unspoken implication (and I'm not directing this necessarily at Stas) that just killing them all would solve the problem.

[MKSheppard]

Ooh, graeph!

Can I show one of mine too?

[Simon_Jester]

Not just communists knew this, although sometimes more as a guess than anything.

Of course, I mostly hear it with connection of Jews around here (that is, that ultimate top 1% are all Jews because.... well, damn Jew!).

I am concerned at how much of a problem they caused to the financial crisis and how much they are contributing to it as a problem (although, I am willing to bet that it is around "quite a lot"). However, I shy away to the unspoken implication (and I'm not directing this necessarily at Stas) that just killing them all would solve the problem.

If you ask me, a non-corporate power bloc strong enough to break up this oligopoly would not need to kill the executives who run it, and killing the executives wouldn't in and of itself get rid of the oligopoly.

Killing them wouldn't solve the problem; solving the problem wouldn't kill them.

[Shroom Man 777]

The apparatus is huge and it doesn't hinge on one person, any more than any organization does.

Shep, since when did Northrop Grumman end up being under Lockheed?

[K. A. Pital]

Not just communists knew this, although sometimes more as a guess than anything.

I meant that Marxism makes a clear prediction that concentration of capital should be rising, capital would not decentralize; and that the concentration of capital is not an unnatural process driven by a "conspiracy of the Jews/Masons/whatever", but a natural result of market interactions in this massive system, and not only that, but it is the only possible outcome of a market system. In essence, that oligopolization is a natural process and not a conspiracy; an integral feature of the system and not an abberation. However sad that may sound. This is why. We weren't "guessing" that it would be so but instead considered it a testable hypothesis (and indeed, it was delighting to see that this hypothesis was tested).

However, I shy away to the unspoken implication (and I'm not directing this necessarily at Stas) that just killing them all would solve the problem.

Killing the people at the top solves nothng (as does allowing them to continue their business as usual). Reconstruction of society takes more than just "killing bad people". I'm not sure I advocated "killing them all" anyway - see above.

If it is not some sort of "unnatural process" driven by "evil conspirators", then clearly it is merely the system itself giving birth to the oligopoly and oligarchy; by killing select people you solve nothing because the system remains unchanged.

Why so sad? Natural process. The weaklings die, the strong survive.

[Starglider]

Why so sad? Natural process. The weaklings die, the strong survive.

Existing companies failing is not the problem. When this happens in say software, new companies form to replace the old ones. The primary problem is barriers to entry preventing new entrants to the market; high in aerospace to start with, but in this case the government has made things worse by having a corrupt and byzantine procurement process.

[K. A. Pital]

Existing companies failing is not the problem. When this happens in say software, new companies form to replace the old ones. The primary problem is barriers to entry preventing new entrants to the market; high in aerospace to start with, but in this case the government has made things worse by having a corrupt and byzantine procurement process.

Absolutely irrelevant, as both open and closed markets have produced concentration of capital and oligopolization. Oligopolization seems to be a natural result of the market regardless of whether there are artificial barriers to entry or only purely natural barriers to entry (economy of scale) plus the Darwinian selection process. Diseconomy of scale (plus perhaps a limited influence of the superstructure, i.e. oligarchy itself) limits the oligopoly from collapsing into total monopoly, but only at the very last stages of the concentration process. The speed, probability, rate and scope of rotation of oligopolistic agents is also irrelevant since the overall structure is unchanged.

Moreover, mergers and acquisitions do not implicate necessarily that either of the companies is "failing". Concentration can occur without failure of companies, but through a string of purely mutually beneficial mergers until the economy of scale reached is optimal (see picture below). That is to say, in theory you may not even need to coerce the companies to merge, they can merge in a purely uncoercive way and an oligopoly would result anyway.

Open markets:

Closed market:


Ir-re-le-vant. *laughs* Well, well, I love to have my moments.

Some more stuff to ponder at:
++monthlyreview.org/2011/04/01/monopoly-and-competition-in-twenty-first-century-capitalism
++redalyc.uaemex.mx/pdf/866/86612461006.pdf

Shares of the "top thousand" (which Dembinski uses):

Share and number of industries where top 4 companies comprise 50 or more percent of the market share:

Share of US' top 200 revenues in total revenues:

Global scale - income of top 500 in world income:


That's nice.

[Guardsman Bass]

I thought this was an interesting short blog response to the paper:

This paper, by Vitali, Glattfelder, and Battiston, has been getting a lot of publicity, here is part of the abstract:

…We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.

I did not find this paper easy to follow, but I can show you the top few control holders, with Wikipedia links supplied by me:

1. Barclays, 2. Capital Group Companies, 3. FMR (Fidelity), 4. AXA, 5. State Street Corporation, and 6. JP Morgan.

The rest of the list, especially the top 25, is heavily financial, see a reproduction of it here. What does Barclays own on the commercial side? The paper is silent on this. CGC is a batch of mutual funds, far more decentralized than the aggregate measure from this paper would suggest; lately it’s been doing major layoffs. Fidelity is also a batch of investment funds and it is misleading to think of Fidelity shareholders as exercising control over what is held through the various funds, even though they are appointing managers to run the funds. AXA is a French insurance company and financial conglomerate. State Street is another umbrella of funds and investment companies, again proxying for a wide degree of dispersed investment. JP Morgan Co., chartered as a bank in the United States, faces serious limits on what it can own commercially, although it does run private equity services for clients.

Think about it: Fidelity proxies for millions of individual (and institutional) investors, and so it is not a corporate Blofeld in disguise. That it “owns itself” does not change this basic fact. Here is an interesting new paper on the role of mutual funds in current corporate governance; here is a somewhat older paper.

Mathematically derived linkages do not equal control or necessarily point in that direction. This paper needed a big dose of verstehen, it is more misleading than illuminating. Start again, distinguishing between ownership/control and financial intermediation and see what comes out of the mix. Comcast does own and control NBC and that relationship is different from the large network of assets held through Fidelity mutual funds. The real lesson of this paper is simply that a large chunk of financial intermediation is run through a few dozen firms, hardly a revelation.

There are a fair number of links in the original post that I haven't copied over, such as the "Here is a somewhat older paper". The point, basically, is that it's a mistake to look at linkages in ownership and investment and assume that means there must be organized control.

[Surlethe]

I see Vanguard and Fidelity listed. These are mutual fund companies, which means that their stock is non-controlling, which means that it's likely the article is being dishonest when it equates "control" with "financial stake in."

Anyway, when speaking of how much "control" an object has, one must also account for the claims on the object: how constrained is its action? For example, a bank does not have much agency of its own; it's merely a venue for its creditors, who ultimately own its assets.

Seems to me this is more a list of bottlenecks in the world's financial flows than an unveiling of the shadowy puppetmasters.

Edit: this post inspired by http://marginalrevolution.com/marginalr ... ntrol.html

[K. A. Pital]

Seems to me this is more a list of bottlenecks in the world's financial flows than an unveiling of the shadowy puppetmasters.

Um...

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.

Mathematically derived linkages do not equal control or necessarily point in that direction.

Sure, because capital passes linkages uncontrollably - is that what he's trying to argue? "These are not the droids you're looking for". If I needed a reminder why I dislike marginalists, I just got one. Uh well, at least this one is polite and acknowledges we can be 'decent dissenters'. *laughs* They love to portray financials as nothing but inanimate tools devoid of any direction and "control", as mere oil for the economic machine. That depiction has been there waay before, and I don't think it holds much water even now. Also "decentralized" control does not necessarily mean the scope of the issue is decreased by appealing to that - in fact, large entities may rely on decentralized control to a great degree, yet all the parts of the entitity will function coherently as capitalist production units and the "weak" links will enable them to become more powerful vis-a-vis competitors who do not have such ties. It would be rather silly to overlook the power of such ties, those are constantly pointed at by detractors of the system (e.g. Samir Amin) and yet people still find the need to invent apologetic explanations which somehow (implied!) make it morally better, except the paper wasn't about morals at all. The system is analyzed, it does not need moral apologetics under the guise of perfectionism.

But let's put the question bare: can financials and investment companies, e.g. State Street which is mentioned as "decentralized" and is pointed to as nothing but inanimate lube for teh capitalists (which I'm sure marginalists would love to depict all capital like; not just financials! - it is all a tool, it is not as if a tool can have power right?), direct the flow of capital or can they not?

If they can, the whole attempt to claim "no control" by marginalists is just ridiculous and falls apart like a house of cards - directing the flow of capital is a more powerful weapon than sending your soldiers, it is the flow of capital that often decides what happens here and there with a greater degree of certainity than anything else. I mean, it isn't like State Street is incapable of even determining the policy of the organizations it invests into, if I read the wikipedia right (though little reason to trust it). However, the paramount question is whether financials can direct the flow of capital or not.

If someone can present this "no control" argument in a coherent form, I'm all ears.

This paper needed a big dose of verstehen, it is more misleading than illuminating.

This guy, however, needs to lay off his posh and vainglorious attempts at acting with condescendence by putting German words here and there.

Start again, distinguishing between ownership/control and financial intermediation and see what comes out of the mix. Comcast does own and control NBC and that relationship is different from the large network of assets held through Fidelity mutual funds. The real lesson of this paper is simply that a large chunk of financial intermediation is run through a few dozen firms, hardly a revelation.

Because the paper didn't introduce finer differentiations (which I guess it should), it doesn't mean the findings are "worthless" or worse yet, "misleading" as they imply. Centralization as a process has been well observed in the last decades, and many studies of "financialization" as a phenomena suggest that financier-power and financier-control are not mirages, but phenomena that require analysis. The extent of that may be overblown by the bombastic language used by New Scientist, but the point stands.

I also love the claim that Barclays is listed among the companies that apparently "control" nothing and apparently must not influence the flows of capital in any fashion! Along with the Wikipedia article, of course:

Nuclear power

Barclays shares, on par with Citigroup, the second and third place as biggest bank in the nuclear sector, with over € 11,4 billion in investments. BNP Paribas is, according to Profundo, number one, with more than € 13,5 billion.[80]
[edit] Food speculation

Barclays' investment banking division, Barclays Capital, is one of the world's largest speculator on food commodities, along with Goldman Sachs and Morgan Stanley. A report by World Development Movement published in April 2011, shows that Barclays makes up to £340 million a year from speculating on food, making it the largest food speculator in the UK.

[Plushie]

I remember reading an article about this a little while ago and noticing that the graphic of a spherical network that described these connections was missing some key elements: The central banks of the world that rest at the center of this vast net.

Which is coincidental, considering the Marxist who made this topic, when you note that Marx was in favor of the creation of central banks.

[Lord Zentei]

Actually, I was more surprised that the concentration wasn't higher, 20% operating revenues controlling the majority of blue-chip? Whatever. And 1% of the entities controlling 40% of the network? That seems no more than the wealth distribution in the US.

Unless the actors are all of the same size, it's pretty much inevitable that some will control more than others, even without scale-free network emergence. It doesn't in and of itself prevent competition.

[Alerik the Fortunate]

This is 2007 data. I could be mistaken, but hasn't further consolidation taken place since then, i.e. Bank of America and Merril Lynch?

[K. A. Pital]

Actually, I was more surprised that the concentration wasn't higher

Same here, but in fact, the world concentration process has been far less uniform than in the developed nations.

That seems no more than the wealth distribution in the US.

I think these aren't the limits of the global oligopoly (I think it will come down to an 80-20 proportion or something like that), but yeah.

Unless the actors are all of the same size, it's pretty much inevitable that some will control more than others, even without scale-free network emergence. It doesn't in and of itself prevent competition.

Nah, it does not. In fact, sometimes it makes competition more fierce both among VLEs and SMEs. Which is paradoxical only at first glance. But it also carries the danger, which any oligopoly carries inherently, of destabilizing the entire system through the actions of one or two very large agents. The more they control, the more destabilizing their actions can be. Their position as price givers and yet at the same time great care about not deviating from a "set" price (I'd sum it up as "oligopolistic price war fear", a totally reasonable behaviour for VLEs) makes the pricing process rather complicated and not easily predictable.

This is 2007 data. I could be mistaken, but hasn't further consolidation taken place since then, i.e. Bank of America and Merril Lynch?

As one could see with the picture in the OP, consolidation among financials has continued throughout the crisis, although it is also probable that some de-concentration in other sectors may have occured (I put some graphs in a post above).

[madd0ct0r]

so consolidation continues as long as the economies of scale remain positive (and no outward restraint such as anti-monopoly legislation)

But the economies of scale change with time, can it ever decrease, and would that result in de-concentration?

I'm sure i've heard of large companies splitting up into smaller parts to better concentrate(hah!) on their appointed task.

[K. A. Pital]

I'm sure i've heard of large companies splitting up into smaller parts to better concentrate(hah!) on their appointed task.

There are different types of economies of scale. The economy of scale in manufacturing is one thing, and that can run out pretty fast if technologies change. Large dineries may be replaced by small fast-food outlets and large steel mills may be replaced by smaller factories, etc. However, if the ownership is still being consolidated, that means the economies of scale in administration have not yet reached a level where they become disadvantageous. So if companies split up their production units, that is one thing, if companies are broken up, that's another thing.

Rarely is the breakup of a megacorp natural. For example, AT&T was broken up through government action. But even with natural breakups, their number*scale must be smaller than the number*scale of mergers and acquisitions for concentration to rise.