From Science News

Financial world dominated by a few deep pockets
Economic "superentity" controls more than one-third of global wealth
By Rachel Ehrenberg 
September 24th, 2011; Vol.180 #7 
(p. 13)


POWER BALL A central core of extremely powerful actors (red dots) 
dominates international corporate finance, a new mathematical analysis 
finds.Vitali et al, 2011

Conventional wisdom says a few sticky, fat fingers control a 
disproportionate slice of the world economy's pie. A new analysis 
suggests that the conventional wisdom is right on the money.

Diagramming the relationships between more than 43,000 corporations 
reveals a tightly connected core of top economic actors. In 2007, a mere 
147 companies controlled nearly 40 percent of the monetary value of all 
transnational corporations, researchers report in a paper published 
online July 28 at

"This is empirical evidence of what's been understood anecdotally for 
years," says information theorist Brandy Aven of the Tepper School of 
Business at Carnegie Mellon in Pittsburgh.

The analysis is a first effort to document the international web of 
relationships among companies and to examine who owns shares --- and how 
many --- in whom. Tapping into the financial information database Orbis, 
scientists from ETH Zurich in Switzerland examined transnational 
companies, which they defined as having at least 10 percent of their 
holdings in more than one country. Then the team looked at upstream and 
downstream connections, yielding a network of 600,508 economic actors 
connected through more than a million ownership ties.

This network takes on a bowtie shape, with a large number of diffuse 
actors in the wings and a few major players tangled up in the tie's 
knot. So while it's true that ownership of publicly held corporations is 
broadly distributed, says complex systems scientist James Glattfelder, a 
coauthor of the new work, "take a step back and it's all flowing into 
the same few hands."

While any man on the street may have predicted this outcome, the 
economic literature portrays markets as so dynamic that they lack hot 
spots of control, Glattfelder says.

Researchers aren't sure what to make of the core's interconnectedness. 
On the one hand, it could expose the whole network to risk.

"Imagine a disease spreading," says Aven. "If you have a high school 
where everyone's sleeping together and one person gets syphilis, then 
everyone gets syphilis."

But on the flip side, she notes, interconnectedness can lead to better 
self-policing and positive behaviors, such as fair labor practices or 
environmentally friendly policies.

And even though the status of many players in the analysis has changed 
drastically since 2007 (now-defunct Lehman Brothers is a key element of 
the core), the analysis shows that ownership is becoming increasingly 
concentrated and increasingly transnational, says Gerald Davis of the 
University of Michigan in Ann Arbor.

Because interpreting and analyzing these kinds of data is difficult, he 
says, the analysis serves more as "an impression of the moon's surface 
you get with a telescope. It's not a street map."

Ownership can be difficult to study internationally because holding 
shares in a mutual fund doesn't necessarily mean the same thing in the 
U.S. as it does in communist China. And even within a single country 
ownership can be hard to tease out, says economist Matthew Jackson of 
Stanford University. For example, when an individual invests in a mutual 
fund or even purchases shares through an institution like Merrill Lynch, 
the firm is often still the official owner of the assets. And even when 
shareholders do have voting rights, they may not exercise them.

"This becomes worrisome if everyone is like me and says I'll let 
Vanguard do the voting," says Jackson. "Maybe we should be a little bit 
worried. I don't know if we should be."