Horsemeat Economics

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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 has 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.

crisis-economy-commodity-instability-will-hit-china-and-india-who-remain-import-dependent

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.

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29 thoughts on “Horsemeat Economics

  1. Pingback: Horsemeat Economics | Fifth Estate

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

    You mean like blogging with people from several continents over advanced computer networks? :)

    People have been trying to rip-off other people forever, but, I do agree with you, John, that increasing complexity leads to increasingly poor outcomes for the majority, as the first law of common knowledge should be that, Absolute Simplicity = Absolute Truth.

    As is the case with all things, do not be distracted by that which is illegal, as 99.999% of the on-going scams are PERFECTLY LEGAL, government sanctioned, have the Good Housekeeping Seal of Approval, endorsed by the Boy Scouts, the Girl Scouts, the PTA, the SPCA, and the Daughters of the American Revolution.

    • My relationship with my readers is very simple.

      I am one person. I have no corporate sponsors. I just write what I think.

      Unlike various other media I am a real person. If someone disagrees with me they can argue it out with me in the comments section. If you show me I am wrong (or vice verse), all the better for both of us. If you disagree with some guy from big media they will just usually ignore you.

      So in some ways technology can make the world simpler and more local, as well as more complex.

  3. Pingback: Guest Post: Horsemeat Economics | Financial Fall

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  5. Everything is too big, too complex in the UK. The recent scandal regarding the National Health Service hospital in Mid Staffs, which caused the deaths of hundreds of patients, some in hospital for routine treatments proves this. These institutions are managed by highly educated managers…all of them are looking at the world in a particular way. a way that is all about quantity, processing and targets…they have lost the ability to see the world in a different way, so care for the sick is lost in favor of, targets, paperwork and monitoring and observation of staff, all else was lost.

  6. Aziz says, “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.”

    Good point. And Warren Mosler advocates a ban. See his item No.1 here:

    http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html

    But do we go as far as banning the collateralising of mortgages? I’m not sure. After all, multi million dollar chunks of collateralised mortgages weren’t sold to low income pensioners: they were sold to so called “professional” investors (aka twits with more money than sense).

    Also collateralising EVERY BANK LOAN has a merit. It dispenses with the central flaw in banking: that’s the fact that banks promise to return to depositors a SPECIFIC SUM OF MONEY, while lending that money on in a manner which means the value of the latter loans may fall below the above specific sum of money. In which case the bank is insolvent (and taxpayers come riding to the rescue).

    In contrast, if depositors who want their money loaned are forced to take an equity stake in such loans, then its almost impossible for the bank to go bust. There is much to be said for forcing those who want to act in a commercial manner (i.e. the latter depositors) to face all the usual risks involved in commerce: including losing a pile of money.

    • “But do we go as far as banning the collateralising of mortgages? I’m not sure.”

      I am ABSOLUTELY sure that we should ban banks. There is no use for institutions, that while creating money out of thin air, spend the rest of their time conjuring up ways to separate the common man from his labor-value earned.

      These are people who produce no economic value what-so-ever, while [in the same breath] destroying potential real capital by luring the ignorant into their house of financial horrors, and stealing what little these people attempt to save.

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  8. I worked in a butcher shop and an abattoir when I was younger. I also don’t trust other farmers.

    That is why i have my own land, and butcher my own meat. You have to control the process to get real quality.

  9. We go to a local Amish farm to get our meat during specific holidays and fresh produce during summer month. Every time we drive to these farms I see a number of immigrant families who are slaughtering their meat of choice. I wonder why it is only immigrants who go to the farms… is that because they want a) halal, b) they dont want any pink slime, c) they dont trust the meat in the stores. Obviously its not because of the price, normally the animals in these farms a lot costlier, the process itself is messy and takes time and you have to have enough storage space for the meat when you get home.

    • Proper Halal is actually humane and does not taint the meat with fear adrenaline (This is strictly required for devout Muslims, anything else approved is a money earner for Kosher/Halal councils). Kosher/Halal in the store is not Halal, because the animals are terrified before being killed.

      I buy lambs from the market, and the Halal buyer does not choose the best lambs, it is all about price.

      If you want it done right, do it yourself.

  10. We go to local farmers’ markets and local farms which sell their own home raised meat. If everyone now made the effort to get to these and support them it would have an enormous positive impact on the local economy. We now have (nearly) 4 supermarkets in our small local market town. It is easier to do all your shopping under one roof and have easy free parking. Maybe one day we will be able to get truly local food in these places. It seems to work with fruit which we can buy from local farms at the supermarkets.
    What I can’t stand is the way they push all the rubbish from the corporate conglomerates. Even the co-op. I just get angry because I do not want aspartame, HFCS, MSG or GMO’s.

    I want real food!

    • There’s plenty of real food out there and it is relatively cheap. If you eat for nutrition instead of pleasure, buy fresh veggies, grains, and fruits, you can eat quite well for not so much money.

      Most everything that is expensive [in general] is completely unnecessary. Imagine if the economy got back to the time when business attempted to meet people’s needs instead of their desires [pre- Edward Bernays].

    • In Australia, farmers markets are growing. The local government economic officer in my area was talking about a co-op slaughter house, like the old days. I said great idea, but you will have to get past the vested (Health and safety etc etc) interests first.

      In Ukraine meat markets have a butcher who slaughters your animal on site and you then sell the cut pieces to the public. Health and Safety is a scam to raise prices.

  11. I live in Maine and go to the farmers market all year. We now have farmers with green houses that are able to grow vegetables all year, we also have many farmers who feed their livestock grass instead of grains. It is not that much more expensive and the quality is great.

    A troubling thing I just found out is vitamin C is manufactured from corn. I do not want GM vitamins. The other bad vitamin news I discovered is most vitamins are manufactured in China. I am beginning to think it is more healthy to not take vitamins.

  12. If you like lamb, demand heirloom breeds such as Suffolk or Southdown. The meat is the Wagyu of lamb. Marbled and tender.

    Also if you are into green houses, I am experimenting with hermetically sealed designs where you can lower the barometric pressure, via vacuum to stimulate a low pressure system before a storm, I am finding the plants respond better.

    Also adding beneficial microbes and funghi to the soil and use of worms to take organic matter deep into the soil structure (No till system) is proving better, as the microbes fix nitrogen and extract minerals better.

    Support your local farmers markets. I have a customer who trades home made cordial for other products that are sold at farmer markets. Critical mass is required to starve to monopolistic supermarket chains, that only sell budget no label brands anyway.

  13. “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.”

    I think there is a correlation between rising commodity prices and subprime – but not because of consumers’ budgets being squeezed.

    IMO, the source of both of these issues is high income inequality. When too much of the income goes to the top, it results in a glut of investment capital. After stocks and bonds became too overvalued, investors looked for alternatives. In this case, they moved into commodities and MBSs. Now they’re snapping up homes in places like Phoenix. I don’t expect investing to be rational again until much of that excess investment capital goes away, which will only happen when income inequality returns to reasonable levels.

    • Sub-prime is a consequence of a debt-money system in its death-throes. When the system must create more debt than would be supported by qualified borrowers, then you must look to non-qualified borrowers, that is, sub-prime.

      Whether they ever pay back the loans is unimportant in a system where creating the debt [money] is paramount. As long as enough debt [money] is created to pay the current interest on the over-all debt, the system lives another day.

      • That was not a shooting star, it was me leaving this blighted planet before it implodes and restarts. Goodbye to taxation, political parties, religion, TV, the celebrity cult, royalty, uncle Sam, uncle Tom, racism, money, sub prime, pre-packed meals, the Jones’s, the mid East, fatwah, fat folks, and on and on………

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  15. I think it’s about time, the supermarkets got a taste of their own medicine…
    Get back to the local butcher, baker, candlestick maker, days……
    Buy British…
    And if you cant cope with the meat, don’t eat it…there are plenty of chickens out there !!!
    Stop being so anal and everything in moderation…
    One point though, i must add….The bottom of the food chain, stuff their kids full of ready-meals etc……and we wonder why , so many cases of ADHD etc…
    Something unheard of in our childhood days !!!
    Maybe it is the diet…time for folk to learn and become more aware and waken up to, this sh*te…lets start educating the poor !!
    I am at the bottom of the chain but fortunately I know better…
    I educated myself ..
    P.s forget Vitamins , we never had them in times past..Just another FAD !!
    Back to Basics folks x

    • Demand the right to buy fresh food. Lobby your politician to allow a repeal of local by-laws preventing a butcher from opening up in a park, with a simple tent, and refrigerator.

      When people specialise in one type of product, e.g. meat, then it would be economic suicide to sell a bad product.

      Health and Safety laws are a way for the big companies to squeeze out the little guys.

      I have home slaughtered a goat from a shearing shed, and I have never been sick.

  16. Pingback: Food-fraud a multi-billion dollar business. Horsemeat scandal continues. | Barbados Free Press

  17. Pingback: How Bankster Fraud is Influencing Food Fraud - Save $$ on Premium Thrive Freeze Dried Foods

  18. Horse meat is healthier than pork and better tasting than beef, so where is the “scandal”? Please reserve your ire for the nationwide mislabeling of fish that passes on low food value tilapia et al. or worse unhealthy escolar as good fish from red snapper to cod or salmon. That is more comparable to the toxic derivatives for which none of the perps has gone to prison, only meaningless fines paid by companies at shareholders’ expenses while exec compensation keeps on increasing to stratospheric values. As to regulators who ignored ample warnings about Madoff or BP misdeeds for years, they should go to prison as well. Only then will the tremendous Moral Hazard start fading out making sleaze controllable.

  19. Pingback: Laptop Millionaire Blog » Blog Archive » Tyrannosaur devours unsuspecting tourists in Jurassic Park!

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