Sunday, February 17, 2013

TED Talks-James B. Glattfelder: Who controls the world?

The following information is used for educational purposes only.



























































Transcript:



"When the crisis came,the serious limitations of existing economicand financial models immediately became apparent.""There is also a strong belief, which I share,that bad or oversimplistic and overconfident economicshelped create the crisis."

Now, you've probably all heard of similar criticismcoming 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 Trichetwhen he was governor of the European Central Bank.The second quote is from the headof the U.K. Financial Services Authority.Are these people implyingthat we don't understand the economic systemsthat drive our modern societies?It gets worse."We spend billions of dollarstrying to understand the origins of the universewhile we still don't understand the conditionsfor a 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 realitythan we do about the fabricwhich emerges from our human interactions?Unfortunately, the answer is yes.But there's an intriguing solution which is comingfrom 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 I was young,and since then, I've often wonderedabout the amazing success of physicsin 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 understandand 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 headsshould actually relate to the fundamental workings of the universe.Despite the success, physics has its limits.As Dirk Helbing pointed out in the last quote,we don't really understand the complexitythat relates to us, that surrounds us.This paradox is what got me interested in complex systems.So these are systems which are made upof many interconnected or interacting parts:swarms of birds or fish, ant colonies,ecosystems, brains, financial markets.These are just a few examples.Interestingly, complex systems are very hard to mapinto 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 behaviorfrom the outside is actually the resultof a few simple rules of interaction.This means you can forget about the equationsand just start to understand the systemby looking at the interactions,so you can actually forget about the equationsand you just start to look at the interactions.And it gets even better, because most complex systemshave this amazing property called emergence.So this means that the system as a wholesuddenly starts to show a behaviorwhich cannot be understood or predictedby 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 aboutthe 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 representationsof complex systems.The nodes in the networkare the system's componentsand the links are given by the interactions.So what equations are for physics,complex networks are for the study of complex systems.

This approach has been very successfully appliedto many complex systems in physics, biology,computer science, the social sciences,but what about economics?Where are 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 Internetand 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 data 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 relations,so Shareholder A has x percent of the shares in Company B.And we also assign a value to the companygiven by the operating revenue.So ownership networks reveal the patternsof shareholding relations.In this little example, you can seea few financial institutionswith some of the many links highlighted.

Now you may think that no one's looked at this beforebecause ownership networks arereally, really boring to study.Well, as ownership is related to control,as I shall explain later,looking at ownership networksactually 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 interconnectivitycan be bad for stability,because then the stress can spread through the systemlike an epidemic.

Scientists have sometimes criticized economistswho believe ideas and conceptsare 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 containing13 million ownership relations from 2007.This is a lot of data, and because we wanted to find outwho rules the world,we decided to focus on transnational corporations,or TNCs 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 nodesand one million links.This is the TNC network which we analyzed.

And it turns out to be structured as follows.So you have a periphery and a centerwhich contains about 75 percent of all the players,and in the center there's this tiny but dominant corewhich is made up of highly interconnected companies.To give you a better picture,think about a metropolitan area.So you have the suburbs and the periphery,you have a center like a financial district,then the core will be something likethe 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 percent of the total operating revenueof all TNCs.

Okay, so now we analyzed the structure,so how does this relate to the control?Well, ownership gives voting rights to shareholders.This is the normal notion of control.And there are different models which allow you to computethe control you get from ownership.If you have more than 50 percent 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, Mr. Tronchetti Proverahad ownership and control in a small company,which had ownership and control in a bigger company.You get the idea.This ended up giving him control in Telecom Italiawith a leverage of 26.So this means that, with each euro he invested,he was able to move 26 euros of market valuethrough the chain of ownership relations.

Now what we actually computed in our studywas the control over the TNCs' value.This allowed us to assign a degree of influenceto each shareholder.This is very much in the sense ofMax Weber's idea of potential power,which is the probability of imposing one's own willdespite the opposition of others.

If you want to compute the flow in an 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 pipeswhere the pipes have different thickness.So similarly, the control is flowing in the ownership networksand is accumulating at the nodes.So what did we find after computing all this network control?Well, it turns out that the 737 top shareholdershave the potential to collectively control80 percent of the TNCs' value.Now remember, we started out with 600,000 nodes,so these 737 top playersmake up a bit more than 0.1 percent.They're mostly financial institutions in the U.S. and the U.K.And it gets even more extreme.There are 146 top players in the core,and they together have the potential to collectively control40 percent of the TNCs' value.

What should you take home from all of this?Well, the high degree of control you sawis very extreme by any standard.The high degree of interconnectivityof the top players in the corecould pose a significant systemic risk to the global economyand we could easily reproduce the TNC networkwith a few simple rules.This means that its structure is probably the resultof self-organization.It's an emergent property which dependson the rules of interaction in the system,so it's probably not the result of a top-down approachlike a global conspiracy.

Our study "is an impression of the moon's surface.It's not a street map."So you should take the exact numbers in our studywith a grain of salt,yet it "gave us a tantalizing glimpseof 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 the future.And this is slowly starting.We're seeing the emergence of long-termand highly-funded programs which aim at understandingour 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 results.

Now there is still a big problem, in my opinion.Ideas relating to finance, economics, politics,society, are very often taintedby people's personal ideologies.I really hope that this complexity perspectiveallows for some common ground to be found.It would be really great if it has the powerto help end the gridlock created by conflicting ideas,which appears to be paralyzing our globalized world.Reality is so complex, we need to move away from dogma.But this is just my own personal ideology.

Thank you.

(Applause)

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