A Note on the Concentration of Power
The oligarchy signal in marketcap
As of the closing auction before Thanksgiving, thirty-seven of the largest companies listed on the NYSE or NASDAQ had a market capitalization of seventeen trillion dollars, a third of total market capitalization of all US equities of fifty trillion. Could this have anything to do with the increasing prominence of American oligarchs in public affairs? From SBF to Elon to Trump, it sure seems like the airwaves are dominated by the megarich over the past few years.
As I mentioned in my note on the FTX debacle, Elon may now be the most powerful man on the planet. It seems that he’s going to take on the president and the Democratic Party, and quite possibly, prevail. This is not just due to his $200bn war chest — he is not responsible for Dems’ self goals, for instance. But the $200bn war chest is not secondary either. In fact, I see the Elon Musk “dramedy” as a particularly hilarious combination of systematic and idiosyncratic structures. He may be eccentric. But there is nothing eccentric or idiosyncratic about this degree of concentration of power at the very top. This is a systematic feature of our present moment.
In what follows, I will show that, over the past few years, the very largest corporations — those with a financial size at least as great as Elon’s — have become the masters of the scene. Market capitalization contains straightforward information about the distribution of power in the system. In a market society, the most powerful actors are the ones with the highest net worth, preferably marked-to-market. This is what the system is designed to do.
The Elon’s, the SBF’s, etc, are a feature not a bug. The unprecedented dominance of the megacorps is not just any anomaly. All evidence points to a stronger concentration of power in American capitalism; perhaps Western and maybe even global capitalism. I will show that this restructuring in favor of superstar firms has taken place recently; since 2016. The mighty are more powerful today than they have been for a century. In effect, we have a new “Trust Question” at hand, with all that implies about American political economy.
Piketty has argued that the ratio of capital-to-GDP (which he denotes by the Greek symbol beta) contains a signal of wealth concentration; which is important because it contains information on ‘the weight of history’, to use Braudel’s turn of phrase—of the power of the owners of property. We use the mark-to-market capitalization of all stocks traded on the NYSE and the NASDAQ as the numerator to construct what we may call the Piketty Index. The total market cap of US equities is now 200% of US GDP. At the peak of the bubble in 2021Q4, it was 265%. But 200% is close to previous peaks in 2000 and 2007.
The total marketcap of all public companies may be a poor proxy of wealth concentration because it may be confounded by the dynamism of small and medium-sized regional firms that do well when the wealth distribution is getting depolarized — think of many small midwestern firms doing well under conditions where the global giants are losing. What we may call the Winters Index — the ratio of megacap marketcap-to-GDP — contains a stronger signal of oligarchy. (We use FINRA’s size brackets. Megacaps are companies whose market value is $200bn or higher. Roughly speaking, these are firms have a financial size at least as large as Elon’s.) The Winters Index peaked at 99% in 2021Q4. The previous peak was 48% at the height of the dot-com bubble in 2000Q1. By this measure then, the largest corporations are twice as large as they have been since the days of Morgan and Rockefeller.
As a reference frame, the FINRA size classification yields a very dramatic pattern. There is no outsized cycle to speak of in the recent past in large-cap. Most of the action has been in megacaps.
There are some twenty thousand stocks that have traded on the main US exchanges since 1999. On any given NYSE trading day, there are around five thousand tickers being traded. Of these five thousand, some two thousand are microcap (smaller than $250m); another two thousand are smallcap ($250m-$2bn); about a thousand are midcap ($2-10bn); some seven hundred are largecap ($10-200bn); with some fifty megacaps ($200bn or larger). So, two-thirds of all publicly traded stocks are smallcaps or microcaps, while less than 1 percent are megacaps.
As of the end of 2021Q4, roughly four thousand small and microcaps accounted for 3% of market capitalization, or $2 trillion, while roughly fifty megacaps accounted for 37%, or $25 trillion. Even now, the 37 megacaps account for 33% of the financial firepower of all publicly traded companies in the United States. This situation is unprecedented. Even at the peak of the dot-com bubble, the share of the megacaps was shy of 22%. At the bottom of the cycle, in 2011, the megacap share fell as low as 10%.
I want to emphasize the recency of this development. It was not until after the GFC, and especially after 2016, that the megacaps took off. Most the valuation cycle of the past two years was driven by fluctuations in the fortunes of the megacaps. We pretend that the SPY is a proxy of the market as a whole. The irony is that would’ve been more right in the past few years than before.
I would like to plot the share of all size classes in the same graph. But the more numerous but smaller firms are not visible to the naked eye if we do that. Instead, the basic pattern of the fortune-size gradient can be grasped from the following panel. The megacaps have been gaining ground since 2009, even as all other size classes have lost “market share” since then. In the following panel, I have merged midcap and small cap into smallcap.
The secular decline of small and microcaps is of great interest. It is clear from the graphs that the decline of small and microcaps precedes the rise of the megacaps by at least a decade. What we see here is a kind of “separability” — the decline of the small began well before the rise of the big, perhaps due to unrelated causes. The negative trend dates all the way to the dot-com era. There were four thousand microcaps in 1999. By 2012, that number had been cut by half. This period of decline corresponds to the end of the last productivity boom at turn of the century.
To regain a sense of scale, let’s retrain our eyes on the capital census. Megacap used to be the scale of small caps; now it is closer to large-caps. The “market share” of the 700-odd large-caps has declined from about 70% in 2008-2012, to about 50%; that of megacaps has increased from 10% to 30%.
Perhaps midcap can serve as a “natural denominator” or “detrender” of megacap. In any case, the megacap-to-midcap ratio reveals the cycle clearly. The recency is clear. There’s an inflection point at 2016, even if the upward movement begins right after the financial crisis. What this signal captures is the articulation of new structures of power during and following the Euro-American financial crises that were consummated only after the Trump reflation trade. Very interesting pattern. Recency in the thick sense.
The polarization in favor of the biggest firms peaked at the end of last year. The megacap-to-midcap ratio of marketcap has been cut from four to three in the course of 2022. But three is far from a collapse of the megacap boom.
Not only does market capitalization remain extremely polarized in favor of the great predators, the specific diachronic pattern of the post-financial crisis upcycle, with an inflection point in 2016, and a turning point at the end of 2021, is robust to different choices for the denominator.
The next graph shows megacap share of total market capitalization. The 10-15% that was normal until 2016, have since given way to 30-35% of total capital controlled by the megacaps. I have used biweekly rolling averages for the graph. Note that this is a bottom up census, rather than an estimate. I am just adding up reliable third party data at the granular level; every single ticker for which there is price and market cap data. This is the broadest possible universe of US equities for which I can find kosher data.
Put bluntly, the forty or fifty largest corporations, as rich as Elon Musk or richer, now control a third of the total capital in the market for the world’s premier risk asset. All of a sudden, we’re in ‘a bag of potatoes’ world, instead of ‘a sack of grain’ one. You have pay attention to each particle because each particle is something like a great power in the scale of resources available at its disposal. This is the real fact about the world revealed by the invasion of the American imaginary by the plutocracy.
All of a sudden, we’re in ‘a bag of potatoes’ world, instead of ‘a sack of grain’ one.
The invasion of the American imaginary by the billionaires is not only an imagined reality. In an entirely objective sense, the mighty have suddenly become mightier, both in an absolute and a relative sense. This is true of publicly traded, marked-to-market, centers of private power and authority, as I have shown. And likely also true of “mark-to-model” private assets as well, as shown by AQR.
This is the straightforward link between oligarchy and stock market concentration: if the economics of scale are such that the very largest firms are getting richer and more powerful, then that would be the prior for the largest of the oligarchs.
As many intellectuals have recognized since the eighteenth century, the defense of private property is ‘the heart and the secret soul’ of Western civilization, to use Girard’s turn of phrase. This basic commitment is the ordering principle around which ensembles of systems of power are assembled over the carcasses and still-working-processes of previous systems of power. The superstar firms and the idiosyncratic oligarchs are the winners of the game as it has come to be played. What they’ve won, by acquiring such intimidating war chests in a system where, in the final analysis, only money counts, is the sort of power usually associated with great states. All legal and compliant, of course. It’s the free market.
What these alarming numbers mean is that we’re suddenly facing the ‘Trust Question’ again. These great predators roam freely over our public life and have invaded the American imaginary for keeps. They raise awkward questions for a civilization that celebrates financial success but fears such tremendous concentration of power in the hands of the few. They are unlikely to vanish into the shadows any time soon. The production of extreme wealth is the high performance end of our present arrangements, which may not altogether unjustly be described as a billionaire factory.
The reason capital continues to concentrate in the largest capitalized countries in spite of the law of diminishing returns, is because size gives the enterprise an outsized role in policy.
Like in the "nifty fifty" era, in a time of low returns and marginal business opportunities, access to the state can be the difference between continued viability and failure.
You should adjust for inflation. I don't think it would change the conclusion dramatically but the numbers of small-cap vs large-cap companies would surely change.