Who controls the world? | James B. Glattfelder | TEDxZurich

James Glattfelder studies complexity: how an interconnected system -- say, a swarm of birds -- is more than the sum of its parts. And complexity theory, it turns out, can reveal a lot about how the economy works. Glattfelder shares a groundbreaking study of how control flows through the global economy, and how concentration of power in the hands of a shockingly small number leaves us all vulnerable.

"When the crisis came,

the serious limitations
of existing economic and financial models

immediately became apparent."

"There is also a 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 U.K. 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

while we still don't understand
the conditions

for 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 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 I 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 Dirk Helbing 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, ant 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.

And it gets even better,
because most complex systems

have this amazing property
called emergence.

So this means that the system as a whole

suddenly starts to show a 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 for physics,

complex networks are for 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 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 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 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 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

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 the stress
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

13 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 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 nodes

and 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 center

which contains about 75 percent
of all the players,

and in the center there's this
tiny but dominant core

which 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 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 percent
of the total operating revenue

of 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 compute

the 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 Provera

had 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 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 Weber'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 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 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 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 control

40 percent of the TNCs' value.

To wrap up, 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 core

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's 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 the 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.

Like the Future ICT flagship initiative,

which is actually spearheaded from Zurich.

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 tainted

by people's personal ideologies.

I really hope
that this complexity perspective

allows for some 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.

Reality is so complex,
we need to move away from dogma.

But this is just my own personal ideology.

Thank you.

(Applause)