by wjw on October 24, 2011

So . . . who owns the world economy?  Some systems analyst guys in Zurich (I suspect actual gnomes) have analyzed what they call “the network of corporate control.”

(Please note that economists didn’t even think of doing anything like this.)

As the New Scientist comments:

From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs [Trans-National Corporations] 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 G/n/o/m/e/s/ analysts point out that this is not the result of conspiracy, but a naturally-occurring hierarchy.

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.”

The problem, of course, is what happens when problems start to propagate across such a small network.

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.”

How much effort are these people putting into competing with each other?  How much into just keeping things stable?  How much does Groupthink affect their decisions?

Are they the brave Randian titans of finance, or are they a herd of lemmings?

Of the Top Fifty listed on the New Scientist, 49 are banks or other financial entities.  Only one— a Chinese energy company— actually produces anything.

Looking more like lemmings every day.

Oz October 24, 2011 at 11:07 am

A number of the 50 listed are institutional investors and the little people own shares of the mutual funds that own the companies. So that’s not really much of a surprise. What I want to see is directorship overlaps and ownership overlaps that AREN’T institutional investors.

Wm. Bainbridge October 24, 2011 at 12:36 pm

Saying that this kind of concentration of control is simply a logical phase of a self-organizing economy is not all that comforting when one remembers that collapses, depressions and social disintegration are also naturally recurring phases of complex and highly specialized economies and societies. Perhaps if more of these corporations were run by AIs concerned with preserving autonomy rather than people merely concerned with making money . . .

One hopes that at some point, Dagmar can game this back into a reasonable degree of dispersion and disorganization.

Patricia Mathews October 24, 2011 at 2:15 pm

And – it was pointed out to me that while this network is obviously highly efficient, it is about as resilient as a sheet of sun-dried cellophane (for those who remember cellophane.) That is, extremely brittle.

wjw October 24, 2011 at 10:04 pm

Oz>> Well yes, the institutional investors are investing the money of ordinary people, ostensibly under their direction.

The probably is that they’re all investing in each other, which makes the whole system vulnerable to a sudden shock.

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