Who controls the world?
-
0:01 - 0:03"When the crisis came,
-
0:03 - 0:08the serious limitations
of existing economic and financial models -
0:08 - 0:10immediately became apparent."
-
0:12 - 0:16"There is also a strong belief,
which I share, -
0:16 - 0:21that bad or oversimplistic
and overconfident economics -
0:21 - 0:23helped create the crisis."
-
0:23 - 0:26Now, you've probably all heard
of similar criticism -
0:26 - 0:29coming from people
who are skeptical of capitalism. -
0:30 - 0:31But this is different.
-
0:31 - 0:34This is coming from the heart of finance.
-
0:34 - 0:37The first quote
is from Jean-Claude Trichet -
0:37 - 0:40when he was governor
of the European Central Bank. -
0:41 - 0:46The second quote is from the head
of the UK Financial Services Authority. -
0:47 - 0:49Are these people implying
-
0:49 - 0:51that we don't understand
the economic systems -
0:51 - 0:54that drive our modern societies?
-
0:55 - 0:56It gets worse.
-
0:56 - 0:59"We spend billions of dollars
-
0:59 - 1:03trying to understand
the origins of the universe, -
1:03 - 1:09while we still don't understand
the conditions for a stable society, -
1:09 - 1:12a functioning economy, or peace."
-
1:14 - 1:17What's happening here?
How can this be possible? -
1:17 - 1:20Do we really understand more
about the fabric of reality -
1:20 - 1:24than we do about the fabric
which emerges from our human interactions? -
1:25 - 1:27Unfortunately, the answer is yes.
-
1:27 - 1:30But there's an intriguing solution
-
1:30 - 1:34which is coming from what is known
as the science of complexity. -
1:36 - 1:38To explain what this means
and what this thing is, -
1:38 - 1:41please let me quickly take
a couple of steps back. -
1:42 - 1:44I ended up in physics by accident.
-
1:44 - 1:47It was a random encounter
when I was young, -
1:47 - 1:52and since then, I've often wondered
about the amazing success of physics -
1:52 - 1:55in describing the reality
we wake up in every day. -
1:56 - 1:59In a nutshell, you can think
of physics as follows. -
1:59 - 2:02So you take a chunk of reality
you want to understand -
2:03 - 2:06and you translate it into mathematics.
-
2:06 - 2:08You encode it into equations.
-
2:09 - 2:12Then, predictions can be made and tested.
-
2:13 - 2:16We're actually
really lucky that this works, -
2:16 - 2:19because no one really knows
why the thoughts in our heads -
2:19 - 2:22should actually relate to the fundamental
workings of the universe. -
2:24 - 2:27Despite the success,
physics has its limits. -
2:28 - 2:31As Dirk Helbing pointed out
in the last quote, -
2:31 - 2:36we don't really understand the complexity
that relates to us, that surrounds us. -
2:37 - 2:41This paradox is what got me interested
in complex systems. -
2:41 - 2:43So these are systems which are made up
-
2:43 - 2:46of many interconnected
or interacting parts: -
2:46 - 2:49swarms of birds or fish,
-
2:49 - 2:53ant colonies, ecosystems,
brains, financial markets. -
2:54 - 2:55These are just a few examples.
-
2:58 - 3:03Interestingly, complex systems
are very hard to map -
3:03 - 3:05into mathematical equations,
-
3:05 - 3:09so the usual physics approach
doesn't really work here. -
3:09 - 3:11So what do we know about complex systems?
-
3:11 - 3:18Well, it turns out that what looks
like complex behavior from the outside -
3:18 - 3:21is actually the result
of a few simple rules of interaction. -
3:23 - 3:27This means you can forget
about the equations -
3:27 - 3:30and just start to understand the system
-
3:30 - 3:31by looking at the interactions,
-
3:31 - 3:34so you can actually forget
about the equations -
3:34 - 3:36and you just start to look
at the interactions. -
3:36 - 3:40And it gets even better,
because most complex systems -
3:40 - 3:42have this amazing property
called emergence. -
3:43 - 3:47So this means that the system as a whole
suddenly starts to show a behavior -
3:47 - 3:50which cannot be understood or predicted
-
3:50 - 3:52by looking at the components
of the system. -
3:52 - 3:56So the whole is literally
more than the sum of its parts. -
3:57 - 3:58And all of this also means
-
3:58 - 4:03that you can forget about
the individual parts of the system, -
4:03 - 4:04how complex they are.
-
4:04 - 4:09So if it's a cell or a termite or a bird,
-
4:09 - 4:11you just focus on the rules
of interaction. -
4:14 - 4:20As a result, networks are ideal
representations of complex systems. -
4:21 - 4:26The nodes in the network
are the system's components, -
4:27 - 4:29and the links are given
by the interactions. -
4:31 - 4:33So what equations are for physics,
-
4:33 - 4:36complex networks are for the study
of complex systems. -
4:38 - 4:41This approach has been
very successfully applied -
4:41 - 4:44to many complex systems
in physics, biology, -
4:45 - 4:47computer science, the social sciences,
-
4:47 - 4:49but what about economics?
-
4:50 - 4:51Where are economic networks?
-
4:52 - 4:56This is a surprising
and prominent gap in the literature. -
4:57 - 5:03The study we published last year, called
"The Network of Global Corporate Control," -
5:03 - 5:07was the first extensive analysis
of economic networks. -
5:09 - 5:11The study went viral on the Internet
-
5:11 - 5:15and it attracted a lot of attention
from the international media. -
5:16 - 5:20This is quite remarkable, because, again,
why did no one look at this before? -
5:20 - 5:24Similar data has been
around for quite some time. -
5:24 - 5:27What we looked at in detail
was ownership networks. -
5:29 - 5:35So here the nodes are companies,
people, governments, foundations, etc. -
5:36 - 5:39And the links represent
the shareholding relations, -
5:39 - 5:44so shareholder A has x percent
of the shares in company B. -
5:44 - 5:48And we also assign a value to the company
given by the operating revenue. -
5:50 - 5:54So ownership networks reveal the patterns
of shareholding relations. -
5:56 - 6:00In this little example,
you can see a few financial institutions -
6:00 - 6:03with some of the many links highlighted.
-
6:04 - 6:07Now, you may think that no one
looked at this before -
6:07 - 6:11because ownership networks
are really, really boring to study. -
6:12 - 6:16Well, as ownership is related to control,
-
6:16 - 6:18as I shall explain later,
-
6:18 - 6:19looking at ownership networks
-
6:19 - 6:22actually can give you
answers to questions like, -
6:22 - 6:23who are the key players?
-
6:23 - 6:26How are they organized?
Are they isolated? -
6:26 - 6:27Are they interconnected?
-
6:27 - 6:30And what is the overall
distribution of control? -
6:31 - 6:34In other words, who controls the world?
-
6:34 - 6:37I think this is an interesting question.
-
6:37 - 6:40And it has implications for systemic risk.
-
6:41 - 6:46This is a measure of how vulnerable
a system is overall. -
6:47 - 6:51A high degree of interconnectivity
can be bad for stability, -
6:52 - 6:56because then the stress can spread
through the system like an epidemic. -
6:58 - 7:01Scientists have sometimes
criticized economists -
7:01 - 7:06who believe ideas and concepts
are more important than empirical data, -
7:06 - 7:09because a foundational
guideline in science is: -
7:10 - 7:13Let the data speak. OK. Let's do that.
-
7:13 - 7:19So we started with a database containing
13 million ownership relations from 2007. -
7:20 - 7:23This is a lot of data,
and because we wanted to find out -
7:23 - 7:25"who rules the world,"
-
7:25 - 7:28we decided to focus
on transnational corporations, -
7:28 - 7:30or "TNCs," for short.
-
7:30 - 7:33These are companies that operate
in more than one country, -
7:33 - 7:35and we found 43,000.
-
7:37 - 7:40In the next step, we built
the network around these companies, -
7:40 - 7:42so we took all the TNCs' shareholders,
-
7:43 - 7:44and the shareholders' shareholders, etc.,
-
7:44 - 7:47all the way upstream,
and we did the same downstream, -
7:47 - 7:52and ended up with a network
containing 600,000 nodes -
7:52 - 7:53and one million links.
-
7:53 - 7:56This is the TNC network which we analyzed.
-
7:57 - 7:59And it turns out to be
structured as follows. -
7:59 - 8:02So you have a periphery and a center
-
8:02 - 8:06which contains about 75 percent
of all the players, -
8:07 - 8:11and in the center,
there's this tiny but dominant core -
8:11 - 8:14which is made up of highly
interconnected companies. -
8:15 - 8:17To give you a better picture,
-
8:17 - 8:19think about a metropolitan area.
-
8:19 - 8:21So you have the suburbs and the periphery,
-
8:21 - 8:24you have a center,
like a financial district, -
8:24 - 8:26then the core will be something like
-
8:26 - 8:28the tallest high-rise building
in the center. -
8:30 - 8:33And we already see signs
of organization going on here. -
8:34 - 8:4036 percent of the TNCs
are in the core only, -
8:40 - 8:46but they make up 95 percent of the total
operating revenue of all TNCs. -
8:47 - 8:49OK, so now we analyzed the structure,
-
8:49 - 8:52so how does this relate to the control?
-
8:54 - 8:57Well, ownership gives
voting rights to shareholders. -
8:57 - 9:00This is the normal notion of control.
-
9:00 - 9:01And there are different models
-
9:01 - 9:05which allow you to compute
the control you get from ownership. -
9:06 - 9:09If you have more than 50 percent
of the shares in a company, -
9:09 - 9:10you get control,
-
9:10 - 9:14but usually, it depends
on the relative distribution of shares. -
9:15 - 9:17And the network really matters.
-
9:18 - 9:21About 10 years ago, Mr. Tronchetti Provera
-
9:21 - 9:25had ownership and control
in a small company, -
9:25 - 9:28which had ownership and control
in a bigger company. -
9:28 - 9:29You get the idea.
-
9:29 - 9:35This ended up giving him control
in Telecom Italia with a leverage of 26. -
9:36 - 9:40So this means that,
with each euro he invested, -
9:40 - 9:44he was able to move 26 euros
of market value -
9:44 - 9:46through the chain of ownership relations.
-
9:47 - 9:53Now what we actually computed in our study
was the control over the TNCs' value. -
9:54 - 9:58This allowed us to assign
a degree of influence to each shareholder. -
10:00 - 10:04This is very much in the sense
of Max Weber's idea of potential power, -
10:05 - 10:08which is the probability
of imposing one's own will -
10:08 - 10:10despite the opposition of others.
-
10:12 - 10:17If you want to compute the flow
in an ownership network, -
10:17 - 10:19this is what you have to do.
-
10:19 - 10:21It's actually not that hard to understand.
-
10:21 - 10:24Let me explain by giving you this analogy.
-
10:24 - 10:29So think about water flowing in pipes,
where the pipes have different thickness. -
10:30 - 10:35So similarly, the control is flowing
in the ownership networks -
10:35 - 10:37and is accumulating at the nodes.
-
10:39 - 10:43So what did we find after computing
all this network control? -
10:43 - 10:48Well, it turns out
that the 737 top shareholders -
10:49 - 10:54have the potential to collectively control
80 percent of the TNCs' value. -
10:56 - 10:58Now remember, we started out
with 600,000 nodes, -
10:58 - 11:05so these 737 top players
make up a bit more than 0.1 percent. -
11:06 - 11:10They're mostly financial institutions
in the US and the UK. -
11:11 - 11:13And it gets even more extreme.
-
11:14 - 11:17There are 146 top players in the core,
-
11:19 - 11:22and they together have the potential
to collectively control -
11:22 - 11:2640 percent of the TNCs' value.
-
11:28 - 11:30What should you take home
from all of this? -
11:30 - 11:37Well, the high degree of control you saw
is very extreme by any standard. -
11:39 - 11:44The high degree of interconnectivity
of the top players in the core -
11:44 - 11:49could pose a significant systemic risk
to the global economy. -
11:50 - 11:52And we could easily
reproduce the TNC network -
11:52 - 11:54with a few simple rules.
-
11:55 - 11:58This means that its structure is probably
the result of self-organization. -
11:59 - 12:05It's an emergent property which depends
on the rules of interaction in the system, -
12:05 - 12:09so it's probably not the result
of a top-down approach -
12:09 - 12:10like a global conspiracy.
-
12:12 - 12:15Our study "is an impression
of the moon's surface. -
12:15 - 12:16It's not a street map."
-
12:16 - 12:20So you should take the exact numbers
in our study with a grain of salt, -
12:20 - 12:26yet it "gave us a tantalizing glimpse
of a brave new world of finance." -
12:28 - 12:32We hope to have opened the door
for more such research in this direction, -
12:32 - 12:37so the remaining unknown terrain
will be charted in the future. -
12:37 - 12:39And this is slowly starting.
-
12:39 - 12:44We're seeing the emergence of long-term
and highly-funded programs -
12:44 - 12:47which aim at understanding
our networked world -
12:47 - 12:49from a complexity point of view.
-
12:50 - 12:52But this journey has only just begun,
-
12:52 - 12:55so we will have to wait
before we see the first results. -
12:57 - 13:01Now there is still
a big problem, in my opinion. -
13:02 - 13:07Ideas relating to finance,
economics, politics, society, -
13:07 - 13:11are very often tainted
by people's personal ideologies. -
13:13 - 13:17I really hope that this
complexity perspective -
13:18 - 13:21allows for some common ground to be found.
-
13:23 - 13:25It would be really great
if it has the power -
13:25 - 13:30to help end the gridlock
created by conflicting ideas, -
13:30 - 13:34which appears to be paralyzing
our globalized world. -
13:36 - 13:39Reality is so complex,
we need to move away from dogma. -
13:40 - 13:43But this is just my own personal ideology.
-
13:43 - 13:44Thank you.
-
13:44 - 13:50(Applause)
- Title:
- Who controls the world?
- Speaker:
- James B. Glattfelder
- Description:
-
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. (Filmed at TEDxZurich.)
- Video Language:
- English
- Team:
- closed TED
- Project:
- TEDTalks
- Duration:
- 14:10
Krystian Aparta commented on English subtitles for Who controls the world? | ||
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Krystian Aparta edited English subtitles for Who controls the world? | ||
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Morton Bast edited English subtitles for Who controls the world? |
Krystian Aparta
The English transcript was updated on 12/12/2016.