Guest Post: Horsemeat Economics

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

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The British (and now Europe-wide) scandal of corporations selling horse meat as beef is emblematic of many of the problems with big, unwieldy systems.

The similarity between horse meat and subprime have already been noted in a Financial Times editorial:

The food industry has long known that processed meat is susceptible to fraud. While it is relatively easy to verify whole cuts of meat taken from a carcass, this is not the case for the bits left behind. These are gathered up and shipped out to thousands of outlets for processing into lower-value products. In Britain, monitoring this industry is left to local authorities and the retailers themselves.

 

Yet this surveillance has become virtually impossible in the modern world of food production. Consumers want ever lower prices. But food margins are already wafer thin. The drive to cut costs has sent retailers scouting for cheaper suppliers in far-flung parts of the world. Supply chains have become vast and unwieldy. And internet tenders drive prices down even further.

 

This has brought big benefits to consumers who until recently enjoyed consistently falling prices. But in a disturbing parallel to the financial sector’s subprime crisis, the growing distance between supermarkets and their suppliers has also opened the door to fraud on a scale that as yet can only be guessed at. The meat used in these products now travels across multiple borders and through myriad companies. Regulators do not have the resources to keep up. Only those who buy the processed products and sell them under their own brands can apply the pressure that will limit chances for fraud.

Just as with subprime, complicated, impersonal systems have bred fraud. Once upon a time, banks were impelled to lend responsibly, because if they did not their balance sheets would become filled with trash, and they would face bankruptcy. Then they discovered that they could pull a ruse — lend irresponsibly, and pass off the risk to someone else. Purchasers of subprime mortgage-backed securities thought they were buying a AAA grade product, as that is what ratings agencies passed them off as being. But it turns out they were just buying unsustainable trash. It is, of course, possible that the subprime crisis could have been avoided had the price of oil and other commodities not risen so steeply and precipitously, squeezing consumers’ budgets.

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But sooner or later, the banks’ irresponsibility would have come home to roost, and the ruse would have collapsed. If it hadn’t been ballooning commodities prices, it would have been something else.

Similarly, in an equally sprawling and disconnected system — the global food supply chain — anonymity has bred irresponsibility once again. Retailers claim to have been misled. Meat processors and food manufacturers claim to have been misled too. But somewhere along the line, someone is lying. Someone, at some point decided that horse was a cheaper alternative to beef, someone tested it for taste, to affirm that it would be taken as an acceptable substitute. And someone decided that horse would enter the food chain, and that consumers could be fooled into thinking that it was beef. Would that be possible with a local butcher? Would it be possible for unwanted substances to penetrate the food chain if the supply chain was much shorter?

Maybe, but there are strong disincentives. With a shorter supply chain, it is not so easy to pass off the blame to someone else. If a local British butcher decides to substitute horse for beef, it would be more easily discoverable than if a sprawling multinational — whose abattoirs are located in Romania or Cyprus, but its customers in Britain, Spain, France and Italy — decided to do so. British abattoir workers would know, and might dissent. Butchers would be able to tell the difference, and most would have a serious problem with deceiving customers who they see face to face. A supermarket that sells meals packaged in plastic containers by other companies, has no such problem with deception. Customers don’t ever get to meet the person who butchered or cooked or shipped their ready meal. This provides a barrier of anonymity. There is no immediate embarrassment in deception carried out at distance. Simply, anonymity makes deception easier, and big, complex systems create anonymity.

In 2010, The Telegraph reported on some empirical research supporting this idea:

There is a growing body of research to support the logically obvious idea that humans become increasingly dishonest as cheating becomes easier:

 

From finding a £50 note on the floor to being accidentally given the answers to test questions, even normally honest people can suddenly become dishonest, it found.

 

But they will only cheat if it does not involve any work, said the academic study for the journal Psychological and Personality Science.

 

In an experiment on 84 students, researchers set up a trial involving a maths test on a computer, without telling them the reasons why they were doing it.

 

Half the students were warned the system was not working properly. If they pressed the space bar on the keyboard the answers would come up.

 

The other half were told that if they did not press the enter key immediately after seeing the question, then the answer would come up.

 

Overall, few cheated at all. But those who did not have to press a key to cheat were almost TEN times as likely to do so, said the researchers from the University of Toronto.

 

They said it was because pressing a key was like ‘intentionally’ trying to cheat while those who didn’t acted as if they were cheating by accident, so they did not feel they were making an immoral choice.

 

In a second test, the volunteers were tested on their willingness to help a fellow student with a disability complete an exam paper.

 

Half were told the way to volunteer was to follow an online link, the other half simply had to click ‘yes’ or ‘no’ on the screen.

 

Those who had to follow the link were five times less likely to volunteer to help, because it was easier for them to get out of it than the others who had a clear choice to make.

 

Study author Rimma Teper said: “People are more likely to cheat and make immoral decisions when their transgressions don’t involve an explicit action.”

I am coming to believe very strongly that as this century continues, and as systemic interconnectivity and complexity increases, we will see many more horse meat and subprime style scandals exploiting the anonymity of big systems.

Meanwhile, those who do not wish to be exposed to such counterparty risk will avoid such complexity like the plague.