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.
“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.”
Now that’s the kind of rationalist spirit that I like to see.
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.”
I was under the impression that there was ample evidence that concentration of power is a risk factor in and of itself, at least when it comes to humans. Lord Acton’s “Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority, still more when you superadd the tendency or the certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it.” tirade seems so uncontroversial as to practically be an Applause Light. Why would bankers be an exception?
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.
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.
Well, people have been warning about the natural and spontaneous concentration of capital for quite a while now, and I am thrilled to see a mathematical model free of political baggage taking a stab at stating the problem in non-controversial terms. A step towards rationalizing the Dismal Science of Economics?
This is silly. Of course asset managers own other companies—that’s what their job is. They don’t own them for themselves though—they own them on behalf of pension funds, insurance funds, etc., who in turn own them on behalf of individuals. This doesn’t mean there isn’t plenty of competition though—if I’m a PM at Fidelity, and I own Vanguard stock, I still want clients to come to me rather than Vanguard. Capital accumulation is the phenomena of individuals or institutions coming to own more and more for their own ends, not as a mere intermediary. You might as well accuse FedEx of being dangerously connected.
Using “this is obvious”, “you should know this already”, or “how dumb can you get, really?” are not constructive approaches to informing the ignorant of their mistakes, and helping them update. The same goes for “of course X does Y, it’s their job/it’s what they do”, with the implication that, because it’s their chosen function, it’s a function worth doing. Especially since, here, I’m not too sure what mistake you are pointing out.
Nevertheless, if you’re going to lecture me on economics, please go ahead, because I have a couple of questions, and I feel disquiet and anguish about these topics, and if you could reassure me that all is well, I would be thankful:
“if I’m a PM at Fidelity, and I own Vanguard stock, I still want clients to come to me rather than Vanguard.” I cannot make sense of this. Why own Vanguard stock in the first place? How can I go all out competing with another company, if I have stakes in it? What happens when they go bankrupt? Is it good for me? Is it bad?
asset managers own other companies: do you think it would be a bad thing if the “other companies” that they could legally own parts of excluded other asset managers?
they own them on behalf of pension funds, insurance funds, etc., who in turn own them on behalf of individuals: I guess what I’m uncomfortable with here is that the degree of interconnection leads to both a dilution of responsibility (“Who knows who negotiates what in the name of whom anymore?” “Are my savings being somehow invested in child labour somewhere down the line, and how could I know?”) and an increase in fragility (Instead of the network compensating for and buffering any huge failures, they propagate and damage the entire system).
does it really matter if wealth is concentrated in a nebulous spontaneously-formed conglomerate as opposed to the pockets of The Man or The Omniscient Council Of Pennybags or any individual? Isn’t “being an intermediary as an end in itself” a bit of a problematic role?
If you’d like to learn economics, I’d recommend reading economics blogs, textbooks, or The Economist, rather than New Scientist; the latter, while good at many things, is sensationalist and very bad at economics.
Why own Vanguard stock in the first place?
Because you think Vanguard is going to do well.
How can I go all out competing with another company, if I have stakes in it?
You compete with them by competing with them for customers. For each individual customer, you prefer they come to you rather than Vanguard. If possible, you’d like to persuade every single Vanguard customer to come to you (though this would never happen), even though this would cause Vanguard to go bankrupt; Vanguard’s not going to be more than 1% of your portfolio,* you get the full benefit of each new client, and only a small part of Vanguard’s loss. And you could always sell your Vanguard stock.
do you think it would be a bad thing if the “other companies” that they could legally own parts of excluded other asset managers?
Assuming we think asset managers perform a useful service, it’s good that they’re able to access capital markets to fund growth. But basically the only way to access equity capital markets is to allow other asset managers to own you. If you didn’t, there wouldn’t be many potential buyers, and even those who could would be put off by the fact that they’d have trouble buying you. You’d suffer from the same problems which infect small, closed stock markets.
I do think it’s weird that stockbrokers put out reports on other stockbrokers, but I also don’t see how this could be avoided.
Are my savings being somehow invested in child labour somewhere down the line, and how could I know?
There are funds which will do that for you—there are at least a dozen ethical investment funds which avoid alcohol, tobacco, companies with union problems, etc.
However, opacity has little to do with interconnectedness. Even if there was no central cluster of asset managers who own each other, it’d still be hard to see who was working with whom, and who was the ultimate beneficary of your funds.
On the whole though, I wouldn’t worry. If you don’t invest in ChildCorp, someone else will—there are also sin funds which invest in alcohol, tobacco etc. You should try to make the world better with your spending, not your investment, because the of the fungability effects.
(Instead of the network compensating for and buffering any huge failures, they propagate and damage the entire system).
I’m not sure why you think this shows that. Fidelity doesn’t own most of Vanguard, nor is Vanguard most of Fidelity’s holdings. If the latter goes bankrupt tomorrow, Fidelity won’t, no more than the bankruptcy of any other large company would kill it. The sorts of interconnectedness worries we saw in ’07-’08 are due to access to overnight borrowing markets and soon—debt rather than equity, and banks rather than asset managers.
In the extreme, I guess we would be more safe from financial contagion if we were all subsistence farmers.
does it really matter if wealth is concentrated in a nebulous spontaneously-formed conglomerate as opposed to the pockets of The Man or The Omniscient Council Of Pennybags or any individual?
Would it matter if FedEx carries everyone’s paycheques? It wouldn’t mean they were the only employer. Asset managers don’t have free reign to do whatever they want with the companies they own; they need to get return. Many don’t interfere with the corporate governance of the companies they own at all.
If you’re looking for worrying concentrations of power, I think states, or international entities, as the actual monopolists on violence, are far more concerning.
*Ok, so Fidelity might have some PM’s who are very overweight Vanguard. But it’ll also have some who are shorting Vanguard, so on average it’ll be neutral Vanguard.
“the sorts of interconnectedness worries we saw in ’07-’08 are due to access to overnight borrowing markets and soon—debt rather than equity, and banks rather than asset managers.”
What are those? Also, I thought it was banks managing assets?
″ I guess we would be more safe from financial contagion if we were all subsistence farmers.”
This is silly; “safe sex is abstinence”? Not to mention false, in case of actual crop epidemics. Please don’t strawman. I’m asking about buffer mechanisms. Protectionism is one such mechanism, although it is getting rather deprecated.
“I think states, or international entities, as the actual monopolists on violence, are far more concerning.”
I borrow some money on the overnight market to fund some activity of mine. For years, I’ve always been able to do this, so I come to rely on this cheap, short-term funding. Then, one day, trust breaks down and people aren’t willing to lend to me anymore, so I have to stop doing whatever it is I was doing—probably some form of lending to someone else.
A similar issue is with aggressive deleveraging. If I’ve levered up a lot (used a lot of debt to fund a transaction), small losses can wipe me out and force me to close the transaction prematurely. This’ll harm others doing similar trades, making them delever, and so on.
This is about very short term deals. If I buy some shares intending on selling them in the morning, I’m not influencing any control over the business.
Also, I thought it was banks managing assets?
Banks might have asset management wings, but they’re different things. Banks are sell-side, asset managers are buy-side. The terminology is confusing, yes.
How so? [are states more concerning]
There’s little ability to exit, they blatantly try and form cartels (e.g. attacking tax havens), they regularly and credibly use/threaten lethal force...
What are these effects? [fungability]
If there’s a good return available from investing in, say Philip Morris, and you abstain on ethical grounds, someone else will invest instead. You probably haven’t actually reduced the amount of funding they get; only changed who gets the return.
If there’s a good return available from investing in, say Philip Morris, and you abstain on ethical grounds, someone else will invest instead. You probably haven’t actually reduced the amount of funding they get; only changed who gets the return.
So boycott is useless. What actual alternatives are there to stop ChildCorp from childcorping?
Boycotting their goods could work. Or you could offer their child workers better alternatives.
However, it’s important to note that just because (not buying their stock doesn’t stop them) doesn’t mean there’s something else that works better. It might just be there is no way of doing it, at least without violating other moral norms.
It is a situation that relates to exercising power to change the behavior of others with non-negligible power. Larks has a reasonable expectation that you could fill in the blanks yourself and took the tactful option of not saying anything that could be twisted to make it appear that Larks was advocating various sorts of violence or corruption.
I am fairly certain that, between the ineffectual consumer and investor boycotts, and calling Frank Castle, there must be an entire spectrum of actions, only a fraction of which involve “violence” or “corruption”. Because of my ignorance and lack of creativity, I do not know them, but I see no reason to believe they don’t exist.
Of course, this is motivated continuing on my part: I think of sweatshops, workhouses, and modern-day slavery, and I feel compelled to make it stop. Telling me “there are no solutions, that I know of, that are both moral and effectual” won’t result in me just sitting down and saying “ah, then it can’t be helped”.
This article got me rather curious
Extracts:
Now that’s the kind of rationalist spirit that I like to see.
I was under the impression that there was ample evidence that concentration of power is a risk factor in and of itself, at least when it comes to humans. Lord Acton’s “Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority, still more when you superadd the tendency or the certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it.” tirade seems so uncontroversial as to practically be an Applause Light. Why would bankers be an exception?
Well, people have been warning about the natural and spontaneous concentration of capital for quite a while now, and I am thrilled to see a mathematical model free of political baggage taking a stab at stating the problem in non-controversial terms. A step towards rationalizing the Dismal Science of Economics?
This is silly. Of course asset managers own other companies—that’s what their job is. They don’t own them for themselves though—they own them on behalf of pension funds, insurance funds, etc., who in turn own them on behalf of individuals. This doesn’t mean there isn’t plenty of competition though—if I’m a PM at Fidelity, and I own Vanguard stock, I still want clients to come to me rather than Vanguard. Capital accumulation is the phenomena of individuals or institutions coming to own more and more for their own ends, not as a mere intermediary. You might as well accuse FedEx of being dangerously connected.
Using “this is obvious”, “you should know this already”, or “how dumb can you get, really?” are not constructive approaches to informing the ignorant of their mistakes, and helping them update. The same goes for “of course X does Y, it’s their job/it’s what they do”, with the implication that, because it’s their chosen function, it’s a function worth doing. Especially since, here, I’m not too sure what mistake you are pointing out.
Nevertheless, if you’re going to lecture me on economics, please go ahead, because I have a couple of questions, and I feel disquiet and anguish about these topics, and if you could reassure me that all is well, I would be thankful:
“if I’m a PM at Fidelity, and I own Vanguard stock, I still want clients to come to me rather than Vanguard.” I cannot make sense of this. Why own Vanguard stock in the first place? How can I go all out competing with another company, if I have stakes in it? What happens when they go bankrupt? Is it good for me? Is it bad?
asset managers own other companies: do you think it would be a bad thing if the “other companies” that they could legally own parts of excluded other asset managers?
they own them on behalf of pension funds, insurance funds, etc., who in turn own them on behalf of individuals: I guess what I’m uncomfortable with here is that the degree of interconnection leads to both a dilution of responsibility (“Who knows who negotiates what in the name of whom anymore?” “Are my savings being somehow invested in child labour somewhere down the line, and how could I know?”) and an increase in fragility (Instead of the network compensating for and buffering any huge failures, they propagate and damage the entire system).
does it really matter if wealth is concentrated in a nebulous spontaneously-formed conglomerate as opposed to the pockets of The Man or The Omniscient Council Of Pennybags or any individual? Isn’t “being an intermediary as an end in itself” a bit of a problematic role?
If you’d like to learn economics, I’d recommend reading economics blogs, textbooks, or The Economist, rather than New Scientist; the latter, while good at many things, is sensationalist and very bad at economics.
Because you think Vanguard is going to do well.
You compete with them by competing with them for customers. For each individual customer, you prefer they come to you rather than Vanguard. If possible, you’d like to persuade every single Vanguard customer to come to you (though this would never happen), even though this would cause Vanguard to go bankrupt; Vanguard’s not going to be more than 1% of your portfolio,* you get the full benefit of each new client, and only a small part of Vanguard’s loss. And you could always sell your Vanguard stock.
Assuming we think asset managers perform a useful service, it’s good that they’re able to access capital markets to fund growth. But basically the only way to access equity capital markets is to allow other asset managers to own you. If you didn’t, there wouldn’t be many potential buyers, and even those who could would be put off by the fact that they’d have trouble buying you. You’d suffer from the same problems which infect small, closed stock markets.
I do think it’s weird that stockbrokers put out reports on other stockbrokers, but I also don’t see how this could be avoided.
There are funds which will do that for you—there are at least a dozen ethical investment funds which avoid alcohol, tobacco, companies with union problems, etc.
However, opacity has little to do with interconnectedness. Even if there was no central cluster of asset managers who own each other, it’d still be hard to see who was working with whom, and who was the ultimate beneficary of your funds.
On the whole though, I wouldn’t worry. If you don’t invest in ChildCorp, someone else will—there are also sin funds which invest in alcohol, tobacco etc. You should try to make the world better with your spending, not your investment, because the of the fungability effects.
I’m not sure why you think this shows that. Fidelity doesn’t own most of Vanguard, nor is Vanguard most of Fidelity’s holdings. If the latter goes bankrupt tomorrow, Fidelity won’t, no more than the bankruptcy of any other large company would kill it. The sorts of interconnectedness worries we saw in ’07-’08 are due to access to overnight borrowing markets and soon—debt rather than equity, and banks rather than asset managers.
In the extreme, I guess we would be more safe from financial contagion if we were all subsistence farmers.
Would it matter if FedEx carries everyone’s paycheques? It wouldn’t mean they were the only employer. Asset managers don’t have free reign to do whatever they want with the companies they own; they need to get return. Many don’t interfere with the corporate governance of the companies they own at all.
If you’re looking for worrying concentrations of power, I think states, or international entities, as the actual monopolists on violence, are far more concerning.
*Ok, so Fidelity might have some PM’s who are very overweight Vanguard. But it’ll also have some who are shorting Vanguard, so on average it’ll be neutral Vanguard.
“the sorts of interconnectedness worries we saw in ’07-’08 are due to access to overnight borrowing markets and soon—debt rather than equity, and banks rather than asset managers.”
What are those? Also, I thought it was banks managing assets?
″ I guess we would be more safe from financial contagion if we were all subsistence farmers.”
This is silly; “safe sex is abstinence”? Not to mention false, in case of actual crop epidemics. Please don’t strawman. I’m asking about buffer mechanisms. Protectionism is one such mechanism, although it is getting rather deprecated.
“I think states, or international entities, as the actual monopolists on violence, are far more concerning.”
How so?
“because the of the fungability effects”
What are these effects?
I borrow some money on the overnight market to fund some activity of mine. For years, I’ve always been able to do this, so I come to rely on this cheap, short-term funding. Then, one day, trust breaks down and people aren’t willing to lend to me anymore, so I have to stop doing whatever it is I was doing—probably some form of lending to someone else.
A similar issue is with aggressive deleveraging. If I’ve levered up a lot (used a lot of debt to fund a transaction), small losses can wipe me out and force me to close the transaction prematurely. This’ll harm others doing similar trades, making them delever, and so on.
This is about very short term deals. If I buy some shares intending on selling them in the morning, I’m not influencing any control over the business.
Banks might have asset management wings, but they’re different things. Banks are sell-side, asset managers are buy-side. The terminology is confusing, yes.
There’s little ability to exit, they blatantly try and form cartels (e.g. attacking tax havens), they regularly and credibly use/threaten lethal force...
If there’s a good return available from investing in, say Philip Morris, and you abstain on ethical grounds, someone else will invest instead. You probably haven’t actually reduced the amount of funding they get; only changed who gets the return.
So boycott is useless. What actual alternatives are there to stop ChildCorp from childcorping?
Boycotting their goods could work. Or you could offer their child workers better alternatives.
However, it’s important to note that just because (not buying their stock doesn’t stop them) doesn’t mean there’s something else that works better. It might just be there is no way of doing it, at least without violating other moral norms.
Such as?
It is a situation that relates to exercising power to change the behavior of others with non-negligible power. Larks has a reasonable expectation that you could fill in the blanks yourself and took the tactful option of not saying anything that could be twisted to make it appear that Larks was advocating various sorts of violence or corruption.
(eg. Stab them to death with Hufflepuff bones.)
I am fairly certain that, between the ineffectual consumer and investor boycotts, and calling Frank Castle, there must be an entire spectrum of actions, only a fraction of which involve “violence” or “corruption”. Because of my ignorance and lack of creativity, I do not know them, but I see no reason to believe they don’t exist.
Of course, this is motivated continuing on my part: I think of sweatshops, workhouses, and modern-day slavery, and I feel compelled to make it stop. Telling me “there are no solutions, that I know of, that are both moral and effectual” won’t result in me just sitting down and saying “ah, then it can’t be helped”.