The late economist Hyman Minsky was a pioneer in understanding finance’s grip on the US economy – and the consequences for society. In the 1980s, he predicted the rise of “money manager capitalism” and foresaw that institutional investors would become masters of the universe. Today, we are in a world of “money machine manager capitalism”, where algorithms control the buying and selling of securities. Those paid to pick shares, mindful perhaps that their sales pitch was being undermined, claim such passive investing is “worse than Marxism”. The rise of the robots has been undeterred by such criticism.
The pioneer of this approach is the US firm BlackRock, which is the world’s largest asset manager and last year became Britain’s biggest one too. Humans still set the rules that computers follow. But artificial intelligence is blurring the distinction. Computers run investment portfolios offering cheap “exchange-traded funds” that automatically track indices of shares and bonds. This has been so successful that the big three – US firms BlackRock, Vanguard and State Street – now manage $19tn in assets, roughly a tenth of the world’s quoted securities.
A report this week for Common Wealth, a thinktank, will show that the big three’s average stake in FTSE 100 companies almost doubled in the past decade to 12%, with traditional funds losing ground. BlackRock and Vanguard together now control 10% or more of two-thirds of FTSE 100 companies. In the US, the trio on average own a fifth of S&P 500 companies. There’s more money in tracking the US S&P index, which has risen by about 150% post crash, than the FTSE, which is only up around 5%.
The big three hold a company’s shares because an index they are tracking requires it, rather than to improve – or green – a firm’s performance. Firms such as BlackRock wield considerable shareholder-voting power yet, as one analysis showed, they tend to “blindly” follow the recommendation of management to approve excessive CEO pay packages. If they hold stakes in several big companies, some ask, why would they promote competition between them? BlackRock says it will push boards to protect the environment, but offers no meaningful consequences for those that do not.
Minsky worried that money manager capitalism would not produce investment sufficient to create full employment, nor be enough to generate substantial innovation. That remains the case: the state is largely the driving force behind technological revolutions, and worker insecurity seems to be the flipside of passive investing’s coin. In Britain, using share ownership as a guide, BlackRock extracts about £5bn in dividends from its FTSE holdings, worth about £1,000 each to every worker employed, globally, in the UK’s biggest companies. BlackRock’s dominance could be its downfall. It may explain why the firm paid the former Tory chancellor George Osborne £650,000 a year and lobbies against regulations that would curb its activities.
On the influential Notes on the Crises blog, Johannes Petry, Jan Fichtner and Eelke Heemskerk warned last year of a new era where “indices, not investors increasingly shape financial markets”. In a paper, the academics describe capitalism today as being in the grip of “new permanent universal owners” who invest indefinitely in thousands of firms that are members of international stock indices and only divest when the composition of an index changes. The effects are globally transformative and disruptive.
The academics point out that within a week of announcing that Tesla would be included in the S&P 500 index last December, its share price rose by 33%, as passive funds were forced to buy more than $70bn of its stock. It made Elon Musk, briefly, the richest person in the world despite analysts saying his company was overvalued. Markets are supposed to allocate capital efficiently. They plainly do not. Society is experiencing inequality and financial instability. Minsky contended that market behaviour had to be constrained to ensure the “economic underpinnings of democracy”. His advice seems truer today than ever.