Who controls the world James B. Glattfelder

when the crisis came the serious

limitations of existing economic and

financial models immediately became

apparent there is also strong belief

which I share that bad or over

simplistic

and overconfident economics helped

create the crisis now you’ve probably

all heard of similar criticism coming

from people who are skeptical of

capitalism but this is different this is

coming from the heart of Finance the

first quote is from jean-claude Trichet

when he was governor of the European

Central Bank the second quote is from

the head of the UK Financial Services

Authority are these people implying that

we don’t understand the economic systems

that drive our modern societies it gets

worse we spend billions of dollars

trying to understand the origins of the

universe what we still don’t understand

the conditions for stable society a

functioning economy or peace what’s

happening here how can this be possible

do we really understand more about the

fabric of reality than we do about the

fabric which emerges from our human

interactions unfortunately the answer is

yes but there’s an intriguing solution

which is coming from what is known as

the science of complexity to explain

what this means and what this thing is

please let me quickly take a couple of

steps back I ended up in physics by

accident it was a random encounter when

it was young and since then I’ve often

wondered about the amazing success of

physics in describing the reality we

wake up in every day in a nutshell you

can think of physics as follows so you

take a chunk of reality you want to

understand and you translate it into

mathematics you encode it into equations

then predictions can be made and tested

we’re actually really lucky that this

works because no one really knows why

the thoughts in our heads should

actually relate to the fundamental

workings of the universe despite the

success physics has its limits as dear

Calvin pointed out in the last quote we

don’t really understand the complexity

that relates to us that surrounds us

this paradox is what got me interested

in complex systems so these are systems

which are made up of many interconnected

or interacting parts swarms of birds or

fish and colonies ecosystems brains

financial markets these are just a few

examples interestingly complex systems

are very hard to map into mathematical

equations so the usual physics approach

doesn’t really work here so what do we

know about complex systems well it turns

out that what looks like complex

behavior from the outside is actually

the result of a few simple rules of

interaction this means you can forget

about the equations and just start to

understand the system by looking at the

interactions so you can actually forget

about the equations and you just start

to look at the interactions and it gets

even better because most complex systems

have this amazing property called

emergence so this means that the system

as a whole so he starts to show behavior

which cannot be understood or predicted

by looking at the components of the

system so the whole is literally more

than the sum of its parts

and all of this also means that you can

forget about the individual parts of the

system how complex they are so if it’s a

cell or a termite or a bird you just

focus on the rules of interaction as a

result networks are ideal

representations of complex systems

the nodes in the network are the

system’s components and the links are

given by the interactions so what

equations are physics complex networks

offer the study of complex systems this

approach has been very successfully

applied to many complex systems in

physics biology computer science the

social sciences but what about economics

where economic networks this is a

surprising and prominent gap in the

literature the study we published last

year called the network of global

corporate control was the first

extensive analysis of economic networks

the study went viral on the internet and

it attracted a lot of attention from the

international media this is quite

remarkable because again why did no one

look at this before similar date has

been around for quite some time what we

looked at in detail was ownership

networks so here the nodes are companies

people governments foundations etc and

the links represent the shareholding

relation so shareholder a has X percent

of the shares in Company B and we also

assign a value to the company given by

the operating revenue so ownership

networks reveal the patterns of

shareholding relations in this little

example you can see a few financial

institutions with some of the many links

highlighted now you may think that no

one’s looked at this before because

ownership networks are like really

really boring to study well as ownership

is related to control as I shall explain

later

looking at ownership networks actually

can give you answers to questions like

who are the key players how are they

organized are they isolated are they

interconnected and what is the overall

distribution of control in other words

who controls the world I think this is

an interesting question and it has

implications for systemic risk this is a

measure of how vulnerable a system is

overall a high degree of

interconnectivity can be bad for

stability because then distress can

spread through the system like an

epidemic

scientists have sometimes criticized

economists who believe ideas and

concepts are more important than

empirical data because a foundational

guideline in science is let the data

speak okay let’s do that so we started

with a database containing 30 million

ownership relations from 2007 this is a

lot of data and because we wanted to

find out who rules the world we decided

to focus on transnational corporations

or TNC is for short these are companies

that operate in more than one country

and we found 43,000 in the next step we

built the network around these companies

so we took all the TNCs shareholders and

the shareholders shareholders etc all

the way upstream and we did the same

downstream and ended up with a network

containing 600,000 nodes and 1 million

links this is a TNC network which we

analyzed and it turns out to be

structured as follows so you have a

periphery and a center which contains

about 75% of all the players and in the

center there’s this tiny the dominant

core which is made up of highly

interconnected companies to give you a

better picture think about the

metropolitan area so you have the

suburbs in the periphery you have a

center like a financial district then

the core would be something like the

tallest high-rise building in the center

and we already see signs of organization

going on here thirty-six percent of the

TNCs are in the core only but they make

up 95% of the total operating revenue of

all TNCs

okay so now we analyze the structure so

how does this relate to the control well

ownership keeps voting rights to

shareholders this is the normal notion

of control and their different models

which allow you to compute the control

you get from ownership if you have more

than 50% of the shares in a company you

get control but usually it depends on

the relative distribution of shares and

the network really matters about 10

years ago mister truncated Rivera had

ownership and control in a small company

which had ownership and control in the

bigger company you get the idea this

ended up giving him control in Telecom

Italia with a leverage of 26 so this

means that with each euro he invested he

was able to move 26 euros of market

value through the chain of ownership

relations now what we actually computed

in our study was the control over the

TNCs

value this allowed us to assign a degree

of influence to each shareholder this is

very much in the sense of Max Labor’s

idea of potential power which is the

probability of imposing one’s own will

despite the opposition of others if you

want to compute the flow in a ownership

network this is what you have to do it’s

actually not that hard to understand

let me explain by giving you this

analogy so think about water flowing in

pipes where the pipes have different

thickness so similarly the control is

flowing in the ownership networks and is

accumulating at the nodes so what did we

find

after computing all this Network control

well it turns out that the 737 top

shareholders have the potential to

collectively control 80 percent of the

TNCs value now remember we started out

with 600,000 nodes so

these 737 top players make up a bit more

than 0.1% they most mostly financial

institutions in the US and the UK and it

gets even more extreme there are 146 top

players in the car and they together has

the potential to collectively control 40

percent of the TNCs value what should

you take home from all of this well the

high degree of control you saw is very

extreme by any standard the high degree

of interconnectivity of the top players

in the car could pose a significant

systemic risk to the global economy and

we could easily reproduce the TNC

network with a few simple rules this

means that its structure is probably the

result of self-organization

it’s an emergent property which depends

on the rules of interaction in the

system so it’s probably not the result

of a top-down approach like a global

conspiracy our study is an impression of

the moon surface it’s not a street map

so you should take the exact numbers in

our study with a grain of salt yet it

gave us a tantalizing glimpse of a brave

new world of finance we hope to have

opened the door for more such research

in this direction so the remaining

unknown terrain will be charted in

future and this is slowly starting we’re

seeing the emergence of long term and

highly funded programs which aim at

understanding our networked world from a

complexity point of view but this

journey has only just begun so we will

have to wait before we see the first

result now there is still a big problem

in my opinion ideas relating to finance

economics politics society are very

often tainted by people’s personal

ideologies

I really hope that this complexity

perspective allows for some common

common ground to be found it would be

really great if it has the power to help

end the gridlock created by conflicting

ideas which appears to be paralyzing our

globalized world morality is so complex

we need to move away from dogma but this

is just my own personal ideology thank

you