Capitalism’s Pallbearers: The Companies That Run, & Could Destroy, The Global Economy

November 2, 2011Marketsby David Smith

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Capitalism’s Pallbearers: The Companies That Run, & Could Eventually Destroy, Th

Systems analysts have shown that a “super entity” of interconnected transnationals dominate the world economy. Their political power is such that even politicians fear the consequences of breaking their monopoly. But unless something can be done, the whole system is a ‘house of cards’ that could collapse at any moment.

According to a recent study conducted by the world-renowned Swiss Federal Institute of Technology in Zurich, the global economy is presently dominated by a “super-entity” made up of 147 transnational companies (TNCs), all of which possess an immense level of economic and political power.

The analysts first began by using sophisticated mathematical analysis, provided by Swiss systems theorists, to narrow down a list of 43,060 TNCs, plucked from a database of 37 million companies and investors worldwide, to a central core of 1,318 companies with interlocking ownerships. The 1,318 companies represented 20 percent of global operating revenues; and significantly, also owned collectively through shares most of the world’s biggest industrial and manufacturing companies. In other words, not only were these companies controlling the financial economy, but they were also controlling the real economy as well, which represented a further 60 percent of global revenues.

Upon further analysis of the data, the Swiss researchers soon traced the interconnectedness back to a “super-entity” of 147 companies controlling 40 percent of the network. Of these companies, most were financial institutions, including the world’s number one - Barclays Bank, as well as JPMorgan Chase & Co, and The Goldman Sachs Group. The Western world also dominated the list, with 28 out of the top 50 being American companies, while a further 8 came from the UK. Only five companies from outside the Western world were represented, with four from Japan and one from China.

Professor Bill Carroll, a sociologist at the University of Victoria in Canada, and the author of The Making of a Transnational Capitalist Class, had this to say:

“The research shows the dangers of corporate cross-shareholding. Financial institutions own pieces of each other and also lend to each other, so the whole system is like a house of cards. Once debt is considered major it can have an enormous impact, there is a freezing up of the world’s credit system due to lack of trust.”

The Zurich study also made it clear to Professor Carroll why the capacity for financial panic was so strong in the world economy.

“The financial institutions don’t know if they can trust the institutions they’ve been lending to,” he said. “The sole purpose of a small group of investment management companies is to own and trade shares. They have investments in many companies and move them around agilely. This is casino capitalism - changing bets often on an opportunistic basis. And it is a major part of the instability in the global system.

Professor Carroll added that the trend towards financialization – reducing value to financial instruments, or derivatives - was destabilising.

“The paper economy, which is represented by the core companies in the Zurich study, now dominates the ‘real economy’. Various claims to profit like corporate shares, derivatives, hedge funds, and other financial instruments have been invented to deal with a structural problem, which is the over-accumulation of capital. As capital is accumulating, new profit has to be placed back into profit investment and there are limited possibilities in the real economy.”

Like Professor Carroll, Professor Jerry Epstein, an economist at the University of Massachusetts Amherst, is also studying the dangers of concentrating enormous financial power in a few institutions. He is producing a study for New Economic Thinking of the US banks, considering the question: “Just How Big Is Too Big”.

Professor Epstein said the most striking aspect of the Swiss research was the revelation of extreme interconnectedness between the financial and industrial sectors, which no previous study had exposed. He said it helped to clear up an intriguing puzzle about political power that had perplexed many economists.

Many of us were wondering why industrial and manufacturing corporations have not been more overtly hostile politically to financial institutions. After all, financial institutions crashed the global system with their reckless behaviour.

“When that happened in the 1930s, it wasn’t just labour in England and the US that rose up against finance, but also industrial corporations. They supported the move towards a more social-democratic regime, which included stricter regulations of financial markets. So far today that’s not happening.

 “This time around the big industrial corporations have been quiet about the problems of the financial sector and didn’t come out strongly favour of the Dodd-Frank financial reforms in the US. The Zurich study’s analysis of the cross-holding of equity, which emanates from a lot of large financial institutions, helps to explain why there isn’t more political division between finance and industry. This has serious political ramifications because new forms of social democracy traditionally emerged from the coalition between labour and industry against financial capital.”

The political power of the dominant financial institutions is also implemented through what Professor Epstein calls “structural blackmail”.

The Swiss study shows contagion can bring down the whole system through interconnectedness. This crucial role gives the financial firms leverage for structural blackmail. They can say to regulators ‘if you do anything to harm us, we are able to take the whole sucker down’. That’s exactly what has been happening at the bargaining table in Brussels. The Germans and French make demands and they say ‘you will bankrupt the whole economy’. The data in the Zurich report gives real empirical evidence of dangerous interconnectedness, which gives them more political power.”

Professor Carroll agrees that the “structural power of capital” gives the financial institutions huge political influence.

“Now the corporations and financial institutions operate globally, they have a trump card which is the threat of a ‘capital strike’,” he said. “When capital strikes it loses confidence in a particular economy, or currency, and withdraws its capital rather than labour. It’s a disciplinary measure used against reform-minded governments. The last government to put forward a fairly ambitious reform package was France’s Mitterand government, and it succumbed to a ‘capital strike’. Financial institutions threatened to desert France and forced the Government to abandon its reforms. When capital has options in a globalised world, it can quickly move out of one currency and into another.”

The pressure against government reforms is increased by the fact that financial donors are usually paying for election campaigns, added Professor Caroll.

In the US, any elected president who comes into office with plans for reforms - and this was true of Bill Clinton as well as Barack Obama - soon gets things explained to them.”

As a result of the political restrictions, Governments in Europe and the US have not dared to address the problems of financialization and the extreme concentration of economic power since the 2008 crash.

We are left with a ticking time bomb and it’s likely we are on the verge of another major crash,” said Professor Carroll.

Dealing With Globalised Financial Capitalism

“The Euro zone is under great stress and that has global implications. The Zurich study shows how the cross ownership of global businesses links the two parts of the north Atlantic – Europe and US - together. Whatever happens in Europe has enormous ramifications for the rest of the world. Just as the trigger for the 2008 crisis was the prime mortgage crisis, now we have another trigger. It seems unlikely we will re-establish the conditions for stable capital accumulation, economic growth and mutual trust.”

Professor Carroll, however, argues that there are some measures that would help to limit the dangerous concentration of power in the hands of a few companies.

“The measures I favour are ones which erode the structural power of capital and curb ‘casino’ capitalism. We could introduce global anti-trust measures, or tax companies’ interconnectedness. But it’s hard to envisage. As there is no global state, global antitrust legislation is difficult to put into place and administer. We need to ask who is ‘we’ when asking what measures ‘we’ need. Clearly, those who benefit from globalised financial capitalism – what the Occupy movement calls the 1% - wouldn’t like to see such restrictions.”

Another measure which Professor Carroll favours is the ‘Tobin tax’ which places a penalty on short-term financial round-trip excursions into another currency.

“It’s intended to slow down the speculative churching of the world economy. The EU is looking at this seriously, so it’s not a pipe dream. It’s on the agenda.”

Better still, though far more radical, would be to follow the advice of the Canadian political scientist Leo Panitch and convert the financial institutions into public utilities.

“Panitch argued that it was better not to bail out the banks at public expense, but to run them for the benefit of people and communities,” said Professor Carroll. “This makes it possible to direct capital away from speculative measures which are not socially useful and tend to destabilise the global economy, into measures that actually help.”

In support of Panitch’s argument, Professor Carroll points to the way China’s state-run capitalist system rode out the crisis. 

“After the 2008 crash, China was able to take advantage of the crisis to some extent, even though it’s tremendously dependent on exports. I would not offer it as a model, except to say there is more control over what capital can do. Unfortunately, it’s not democratically based control.”

Professor Epstein agrees that finance has to be brought under control and “serve the economy rather than lead it”. But he says one of the dilemmas is what to do about international trade, particularly with respect to China and Asia.

As long as we have a totally open trading system which can be manipulated by this group of interconnected multi-nationals in the ways pointed out by the Zurich study, the system is unsustainable. Multinationals can harness relatively cheap labour from Asia to sell products that undermine production in the EU and the US. There has to be more managed trade. Otherwise, the older rich countries, like the US and England, won’t prosper in the new world.”

The politicians may have been slow to address the structural issues, but another major crisis would force their hand. “In that situation I think the politicians will have to turn to other groups for political support, including the Labour unions and people out in the street, which may break the political monopoly of the banks. I hope it doesn’t happen because it will be very messy, but it is possible,” said Professor Epstein.

And what would emerge from the mess would be a different system entirely.

“The best solution would be for communities and governments to have an alternative strategy that provides jobs and what people need without so much reliance on the financial sector. In rich countries, like England and the US, I think we could see more local control and ownership, cooperatives and community development, all in combination with the national guidance necessary for a modern economy. Plus, it will have to be harnessed to a new industrial revolution, which is the green economy. There’s lots of stuff to be done, and lots of profit to be made.”

Professor Epstein said the fact that the large multi-national finance companies were almost all in the West could make it easier to reform the system.

“There’s only the US, the UK and the rest of the EU. It’s not as if the whole world is involved. They are talking to each other now and trying to avert financial meltdown,” he said.