February 19, 2013

Last week, the expression "processed food" acquired a whole new meaning, redolent of medieval alchemy. Hugh Carnegy and Neil Buckley report that, convinced no such processing can alter the DNA of its inputs, "President François Hollande has demanded stiff penalties for those guilty of passing off horsemeat as beef" (*).

It is not the first fraud to find its way on our table. At roadside inns of yore the world over, cooks had often been suspected of far less savory switches, feeding the unwary with dogs, cats and the occasional rat. Even Coca-Cola famously claimed its Dasani brand had the power to change Thames water into spring water. Since these fillips have had many a time to look at fraud in the past, what could possibly be new in the latest scam?

One salient benefit of the case is how convincingly it conveys the truth globalization favors fraud as much as commerce.

"Romanian horsemeat, shipped via a Dutch intermediary based in Cyprus, made its way to a food-processing plant in north-east France [...] and on to supermarket shelves [...] in Britain, France, Germany, Switzerland, Ireland and Norway" (**). Scheherazade Daneshkhu and Hannah Kuchler did not say "the tainted products were made [...] in Luxemburg". Perhaps they ran out of steam to grind and of space to pack it into their summary?

World powers in their own rights, corporations ignore state borders. It is only natural crime follows suit. "Mr. Tan, a shadowy figure living in Singapore [...] is suspected of fixing dozens of [soccer] games" report Gaia Pianigiani and Thomas Fuller (***). No less than "680 matches worldwide [are] considered suspicious by European law enforcement". States themselves are partly responsible for manipulating what they call crime. Haven't the United States made foreign gambling illegal mainly to protect their prosperous domestic industry?

By turning to all digital logistics, our Information Age can only increase the spread of international fraud. Take ransomware in which a virus prompts Internet users with a guilty conscience to pay fake fines. Following the arrest of "the Russian head of the crime network [...] in Dubai", "the Spanish police arrested 10 other people - six Russians, two Ukrainians and two Georgians - along the Costa del Sol", writes Raphael Minder (****).

Yet the meat of the case lies elsewhere. Quoted by John Gapper in his analysis of the sinuous supply chain caught "swapping a horse for a cow" (*****), Sion Roberts, a consultant, explains "retailers don't have much information and the relationships are transactional".

Like the gnomic sayings of the ancient, this sentence carries the kind of clarity which calls for a commentary.

When Sion Roberts speaks of a "transactional relationship", he refers to what markets deliver. Whether on price or value markets, a trade is normally made full and final. Although less glamorous than deal making, fulfillment is necessary as ideally it insures the trade is made as promised.

Even in the simplest of transactions involving a commodity completely characterized by unit price and volume, "as promised" means "free of fraud" only when the commodity is unadulterated. The latter is an information which may or may not be in the possession of the buyer or even the seller.

It is useful to contrast these traditional, market transactions with what I dubbed incompletable transactions. One reason the latter cannot be properly valued and thus must fail to complete is simply because the required information is lacking. No one is able to measure, let alone verify, what is truly exchanged. How for instance can two parties contemplating marriage know what they get when they cannot know what they give, i.e. themselves?

Between these two extremes, however wide open the spectrum of information implicit in any transaction may be, and so the potential for fraud, time is a common factor. It contributes information, possibly even the truth. Hence, if the two parties to a transaction agree it is part of a continuing series, both must logically assume truth will come out eventually. A sustained relationship is more secure than its contrary, the purely "transactional" kind.

The devil is said to be in the details. Actually her cunning is at its best as it so confuses simple principles her victims claim contradictory positions.

Sarah O'Connor documents how Amazon warehouses turned human labor into a real transactional commodity (******). Thanks to the hand-held computers which tell workers what to do, Amazon does have the information to track down would-be slackers in real time. "We have performance expectations for every [...] employee and we measure actual performance against those expectations". Thus in no need of sustained relationships, Amazon relies mostly on temporary contracts with which it can optimize worker output at a given price and adjust its costs to match any load level.

While Amazon cannot be faulted for being efficient, its success does create a serious issue. "A single young woman got a job there but lost it again after she became ill halfway through a shift. She struggled [...] while she waited for her jobseeker's benefits to be reinstated". Commodity labor cannot exist without human beings nor they without having a life but nobody is ready to acknowledge this inconvenient externality in practical terms.

Instead of clinging to an economic model built on permanent jobs, made obsolete by the Information Age, social solidarity should be reengineered to free its citizens from seeking rarefied jobs, let them take on rewarding transactional tasks and enable compensation for personal recommendations. Where is the state visionary to tackle new externalities, raise taxes corporations cannot avoid and grant personal ownership on personal data?

Amazon turns workers into commodities but fights states over taxes, denying them the wherewithal to compensate for the externalities it exploits. It also pirates personal data on a large scale. It is not the devil's only client, so are consumers. John Gapper reminds us they "demand low prices" for meat. Again they should not be blamed for leading to an increased reliance on commodity markets and transactional relationships. But what about the relevant information? "For most, that is a luxury", an externality to be redressed by state inspections while everyone clamors for less taxes.

It is true that, rich enough to pay for food traceability and sustained relationships for themselves and their retainers, the stars ready to forsake their own country can complain about high tax rates without contradiction and selfishly let the poor be damned. But even they nurture opposing wishes.

They want to marry, the ultimate incompletable transaction, but insist on a straight deal, which can only mean a transactional relationship as repeated transactions make no sense. Enters former commodity trader "Inga Verbeeck, head of European operations at Berkeley International, a dating agency for the very wealthy" (*******). Hugh Carnegy tells us "about 60 per cent [of the clients who seek her services for matchmaking and vetting] are divorced". But isn't what fraction breaks the very matches she brokers the more relevant information? Poor rich people. Time will tell.

Try to get the low price of transactional relationships and the high value of sustained or incompletable ones, it may leave a bad taste in your mouth.

Philippe Coueignoux

• (*) ............. Romania strikes back at French allegations of fraud, by Hugh Carnegy and Neil Buckley (Financial Times) - February 12, 2013
• (**) ........... French meat chain inquiry points finger at wholesaler, by Scheherazade Daneshkhu and Hannah Kuchler (Financial Times) - February 15, 2013
• (***) ......... Soccer Fixing Inquiry Hinges On a Shadowy Singaporean, by Gaia Pianigiani and Thomas Fuller (New York Times) - February 14, 2013
• (****) ....... Cybercrime Network Based in Spain Is Broken Up, by Raphael Minder (New York Times) - February 14, 2013
• (*****) ..... The perils of supermarket cost-cutting machines, by John Gapper (Financial Times) - February 14, 2013
• (******) ... Amazon unpacked, by Sarah O'Connor (Financial Times) - February 9, 2013
• (*******) . Cupid at work in the C-suite, by Hugh Carnegy (Financial Times) - February 15, 2013