The Labor Market As Ultimatum Game

Introduction: Labor Market as Ultimatum Game

In the standard neo-classical economics that I was taught in college, labor contracts are assumed to be negotiated between parties who have an equal ability to refuse the terms of any proposed contract and walk away from the agreement. Each party to the contract is also assumed to have the same amount of information available to them; for instance, the working conditions and the amount of surplus created by the production process. It follows from these assumptions that each party to the labor contract (i.e. the worker and the employer) will only agree to contracts which provide each with the value of their contribution to the production process. So long as there is competition among both employers and employees, capitalists will not be able to exploit workers (by paying them less than they are worth) and workers will not be able to exploit capitalists (by demanding more than they contribute).

Of course, this description of the labor market sounds patently absurd to anyone who has spent time toiling in the low-wage sectors of our economy. The statement that both parties to a labor contract have an equal ability to walk away from the agreement recently elicited a well deserved guffaw from one of my friends.

An alternative model of the labor market is offered by scholars such as Prof. Ellen Dannin¹, who describe at-will employment as a “dictator game²” in which the employer tells the worker the terms of the agreement and the worker has no choice but to accept³. While Dannin's description is closer to lived reality for most of us, it too, like the neo-classical description above, fails to capture the nuanced real-life interaction of employers and their employees (at least, to this humble observer).

A better description can be had, I think, by conceptualizing the labor market as a variety of ultimatum game⁴. In a standard ultimatum game, two players are given the task of dividing a sum of money between them. The first player (the 'proposer') makes an offer to the second player (50/50, 60/40, 99/1, etc) and the second player decides whether to accept or reject that offer. If the second player accepts the offer both keep the amounts agreed upon, but if the second player rejects the offer neither receives anything. Usually, the game is only played once by any test subject or pair of subjects and both players know what the stakes are (that is, they know what the total amount being divided is). The ultimatum game bears many resemblances to my experience working in low-wage sectors (janitorial, retail sales, food service); however, there are a number of tweaks that could be made to the standard ultimatum game that would make it much more closely resemble what people like myself face when we go out to look for a job.

First, and most obviously, the ultimatum game is only played one time by any given individual in an experiment, while employment negotiations are (for most of us) a 'repeated game.' Not only do workers seek employment at multiple establishments and employers interview multiple job candidates, but the 'ultimatum game' continues even after employment as workers and employers negotiate for adjustments of wages, benefits and working conditions/requirements. Besides being a repeated game, labor contract negotiations also have distinct 'informational asymmetries.' Workers and employers do not have the same amount of information regarding what the actual value of the product or service that the worker will be making or providing is; nor do they have equal information regarding the relative share of revenue that labor is responsible for creating. Workers and employers bargain for shares of revenue created by the productive process, but only the employer knows what that revenue actually is. Contrariwise, employers have no way of knowing for sure ex ante what the individual characteristics of an employee are, and therefore what their productivity will actually turn out to be.

Another difference between the actual labor market and the standard ultimatum game experiment is that players in the ultimatum game do not suffer any personal economic consequences if the game ends in refusal, both players simply walk away in the same economic position that they were before. No one had gained, but neither has anyone lost. In the real world, on the other hand, people seeking employment are often in no position to refuse any offer, however small. This is why my friend laughed at the notion that workers and employers are on equal footing in negotiating labor agreements and why Prof. Dannin has characterized the at-will labor market as a dictator game. Different individual workers will have differing degrees of ability to refuse low proposals, based on things like their accumulated savings, strength of social and familial 'safety nets,' relative slack or tightness in the labor market, and their individual psychologies. Because these factors (and many others) are unique to each individual 'player' in the labor market ultimatum game, generalizations about workers abilities to refuse proposals must be made with a great deal of caution. My preference is to assume some sort of distribution of player's ability to reject low offers, random or otherwise. I have tried to encapsulate these realities into two concepts which I will explain in more detail later: ability to refuse (ATR) and economic effects of refusal (EER).

So, we might conceptualize the labor market (or at least large portions of it) as a modified ultimatum game; one in which players repeat the game indefinitely with multiple other players in an environment of informational asymmetry, and in which players experience differing consequences as a result of games that end in refusal. It is on this basic conceptual framework that I will build in what is to follow.

Differential Ability to Refuse

We start with the last difference between the standard ultimatum game and real life that I mentioned above, i.e. that in the ultimatum game neither party suffers economic consequences for a refusal to accept the offer. The worst-case scenario for either player is that they leave the experiment in exactly the same economic condition as when they entered it. In real life, on the other hand, the refusal to accept an offer of employment can have very real economic consequences for the players involved. Failing to reach an acceptable arrangement with another party in the labor market can lead players to lose not only money, but homes, families and self-respect as well.

I say “can” because the degree to which failing to accept an offer (or failing to make an acceptable offer) will effect a particular player is dependent on all sorts of things, many of which are not susceptible to economic analysis, even of the rather “soft” variety I am attempting here. We can, however, sketch the broad outlines of what conditions, at least here in the United States, we might expect to diminish or enhance a person's ability to refuse any given offer (hereinafter, ATR). Strictly speaking, only workers should have an ATR, since they are the ones who accept or refuse the labor contract offered by the employer. However, we might also speak of the employer's ATR as their ability to refuse to increase their offers as a result of not finding any takers at their current offer level. ATR then, for both employers and workers represents their ability to wait for a better deal to come along.

Many different variables, so to speak, go into an individual's ATR. The one that we will be most concerned with here is the economic effects on an individual of refusal to accept an offer or to make an acceptable offer (hereinafter EER, economic effects of refusal). By economic effects, I mean real effects on an individual's standard of living and their ability to maintain that standard into the foreseeable future. While we would expect an individual's EER to have a relatively strong negative correlation to an individual's ATR, even extremely high EERs can be overridden by other constituents of a person's ATR. As a dramatic example, I offer the experience of my homeless friend Dave (known to the transient community in Missoula, MT as “Crazy Dave”). Dave used to work as a cook at a local restaurant. The sheer quantity of food wasted by the establishment became increasingly troubling to him until one day he decided that he would rather live off the incredible waste of our society than continue to contribute to it. He walked off the job and never looked back (although he has done a fair bit of work since then, just not paid work). For Dave, the economic effects of his refusal to accept any wage offered, dramatic as they were, were far outweighed by the negative psychological effects that he experienced as a result of acceptance. Most of us, however, do not posses David's ethical rectitude, and so our ATR will likely largely reflect our EER.

As a general proposition, we might expect workers to have higher EERs than employers, and low-wage workers have higher EERs than high-wage workers. Labor market conditions will also differentially effect players' EERs. A tight labor market (low unemployment) will tend decrease EERs for workers, since the odds of finding another at-least-as-good offer in a relatively short period of time will be high. Coversely, tight labor markets will tend to increase EERs for employers, since it will be relatively harder for them to find additional players to make their offer to. However, this will only be true for some employers, i.e. those that require a continual stream of revenue to maintain their standard of living. Employers with large personal fortunes may have an EER of zero, regardless of labor market conditions; the same is true for wealthy workers. Accumulated savings and assets are what largely determine a players' EER, since they are what must substitute for an income or profit stream in the absence of achieving a 'successful' ultimatum game outcome (which is why we would expect EERs to be highest for poor workers and lowest for rich employers).

One last thing that seems pertinent to this analysis is that workers and employers face different 'transaction costs' in finding opponents (or, perhaps, partners) with whom to repeat the labor market ultimatum game. While workers generally must seek out potential employers, employers can generally wait for potential employees to come to them. For many low-wage employers, even the simple expedient of a classified ad is unnecessary as unemployed workers will regularly present themselves for consideration whether the business is advertising a vacancy or not. The result is that these kinds of transaction costs will tend to lower the ATRs of workers more than of employers.

Having a high EER means having a low ATR, and having a low ATR means that you will accept pretty much any offer that is made to you. If your bank account is flirting with zero and rent is due in a week, you are much more likely to accept wages and conditions that, in other circumstances, you would not even consider. In the labor market ultimatum game then, having a low ATR means being ripe for exploitation. For all of the reasons stated above, it seems reasonable to assume that, on the whole, a worker will have a lower ATR than an employer in any given iteration of the labor market ultimatum game.

Informational Asymmetries

In the standard version of the ultimatum game, both players are aware of the full amount being divided. This informational symmetry has obvious implications for the outcome of the game. If I am in the position of player two, i.e. I have to decide whether to accept or reject the offer, and I know that the ten dollars being offered to me is only 10% of the total amount at stake, I may reject the offer to punish my opponent/partner for their unfairness. However, if I am offered the ten dollars without knowing the full amount in play, i.e. without knowing whether my opponent/partner was given $20 or $1000 to divide, I will be more likely to accept it, since I cannot judge the “fairness” of the deal.

In the labor market ultimatum game, the total amount to be divided between the employer and the employee is any revenue left over after all of the non-labor operating expenses (inventory, rent, power, licensing, etc.) have been covered. In general, employees and potential employees can have only a weak grasp of what the total amount in play actually is. Because the firm's accounting is not usually made available to employees either before or after being hired, employees are placed at a necessary disadvantage in wage negotiation ultimatum games. Employers will always be able to claim that “we can't afford” increases in wages or benefits and employees will not be in a position to verify, much less gainsay, these claims. The workplace taboo against employees discussing their relative wage levels creates further informational asymmetries, as only employers know what the total wage bill for the firm is, while employees are left to speculate. In the absence of this taboo, workers might be able to piece together some idea of the company's overall accounting, but in it's presence this is almost impossible⁵.

The asymmetries also flow in the other direction, so to speak, although to an apparently lesser degree. Employers, as noted above, have no way of knowing ex ante whether a worker will be more or less efficient than average. Having been on a couple of hiring committees in my day, I know from experience: the description of goods given in a job interview does not necessarily have anything to do with the actual goods that will eventually be delivered.

However, employers can mitigate this problem, especially in low-wage jobs, through routinization and automation; something the fast-food industry seems to have refined to an exact science. Employers can also monitor the productivity of the worker after hiring, which will be discussed below.

Looking for a Job/Employee as Repeated Ultimatum Game

As I said before, unlike the usual ultimatum game experiment, players in the labor market ultimatum game play repeatedly, both with different partners, while in the search mode, and with the same partner, after hiring has occurred. The manner in which this repetition is performed differs for employers and employees. While employees tend to entertain employment offers sequentially (one at a time), employers generally make their offers in batches, interviewing many candidates for a position and selecting from a group of interested individuals. This makes “comparison shopping” easier for employers than for employees and thus serves as another advantage for employers (although this might not be the case in a tight labor market).

Another disadvantage faced by employees is that difficulty in comparing different wage and benefit packages (if one is lucky enough to have multiple options). Suppose a worker is offered three jobs: one with a relatively high wage but no health benefits and inconvenient hours, a second with some health benefits but a lower wage, and a third with an even lower wage but full health coverage and convenient hours. How is the worker to estimate the relative values of the different health plans, or determine how to weigh wages and benefits against being available for family members, friends and children? It becomes a matter of trying to compare apples with oranges, bananas and pomegranates.

Employers, however, do not face this conundrum, since they are the ones structuring the offers. If an employer cannot find any takers for a given wage and benefit package, they can simply increase the wage by a given amount and try another iteration. Once again, we find that informational asymmetries inherent in the structure of the game tend to favor employers over employees.

Repeating the Game After Acceptance

In a sense, the labor market ultimatum game is continually repeated even after employer and employee have reached a mutually acceptable division of revenue. This is true because the effective offer from the employer goes down if pay-raises do not keep pace with inflation, work requirements are increased ex post, or rises in productivity are not reflected in wage and benefit gains. Here again we have informational asymmetries that favor the employer, since workers do not have direct knowledge of the revenue created or their overall contribution to it.

Conversely, an employer's effective offer goes up if pay increases outstrip inflation, if workers successfully “slack off,” or if workers can bargain for a greater percentage of revenue (through unions, exploiting the value of their personal experience to the firm, etc.). In general though, it would seem that employers will be able to get a better idea of a worker's productivity than the worker him/herself, and thus ensure that the employee's remuneration never exceeds their contribution to the value of the finished product or service. Workers, however, have no direct way of observing their own contribution to said value and thus no easy way of knowing what percentage of the value they create that they are receiving.

Conclusion

The labor market can be conceived of as a modified, repeated ultimatum game between employers and employees. Most the of the divergences between the real-life labor market and the idealized experiment, serve to advantage employers and disadvantage employees. As a result, in the labor market ultimatum game it's easier to get away with under-paying than it is to get away with under-working.

1Professor of Law, Wayne State University Law School

2https://en.wikipedia.org/wiki/Dictator_game

3https://papers.ssrn.com/sol3/papers.cfm?abstract_id=524382

4https://en.wikipedia.org/wiki/Ultimatum_game

5Some of these asymmetries, of course, can be addressed through union tactics in workplaces where workers are organized. Trade union representation, however, seems to be decidedly on the decline and, at any rate, cannot ameliorate all of the asymmetries and disadvantages that workers face under the current, capitalist arrangement.

The Problem of Perspective

If you ever happen to find yourself on the campus of Montana Tech, in Butte, and your eyes happen to wander to the east, your gaze will be greeted by a stunning scenic display. Historic gallows frames from the old mining days dot the foreground, while the hillside behind them appears as artistic horizontal bands of orange, red, yellow, and brown. I know of at least one artist who made that hillside the subject of a rather pretty series of oil paintings.

That hillside, of course, is the Berkley Pit: America's biggest superfund site and once known as “the richest hill on earth.” Those beautiful bands of color are the end result of environmental pillaging on an almost unimaginable scale; the lovely hues that paint the terraced hillside come from over a century of mining waste and pollution. The richest hill on earth has become its foulest pit, but from a distance it looks sorta pretty. If you get a little closer, down inside of it, say, the view isn't nearly so pleasant.

This is by way of making a point about perspective, description and knowledge. The perspective from which one views the world has necessary consequences on one's description of the world. One's description of the world dictates which facts about the world one can become aware of, and which facts one cannot (because they fall outside of one's description). Any economist necessarily views the economy from a particular perch within the economic system which s/he is describing. The location of this perch is an over-determining factor in the economist's economic thinking and outlook. It largely determines which phenomena they see as problematic and which as salutary, which problems they consider relatively minor, to be safely ignored, and which need immediate addressing.

Most of those whose occupations consist of describing the economy and its functioning occupy perches that are, at the very least, situated well within the top half of the income distribution. Even relatively low-paid adjunct professors, if not especially affluent, are at least part of the white-collar, professional world. This uniformity of perspective has important effects on economic theory and knowledge. It is as if economists were trying to describe the Berkley Pit, but never venturing any closer to it than the Montana Tech campus. This is not to imply that there is nothing important that one might discover from that perspective, but rather to point out that many important aspects of reality are simply not accessible from that vantage point.

In the same way, economists whose entire experience of the labor market consists of holding one or another academic post, can hardly be expected to have much to contribute to discussions about the low-wage service sector. From behind a desk in the ivory tower the psychological suffering faced by “the working poor” on a daily basis probably doesn't seem like such a big deal. For a tenured academic, it might be difficult to understand the psychic toll that a lifetime of having little-to-no control over one's work takes on a person. There is knowledge about the workings of our economy, vital, relevant knowledge, that is simply “invisible” to most economists because they've only seen the view from the hilltop, not from the valley.

In order to overcome this blindness, economists need to learn to listen to people who occupy other perches in our economy, especially perches below their own. We would have very different economic policy prescriptions if economists spent less time in the tower and more time in the street, examining those things which aren't visible from the faculty lounge.

A Mobius Model of Reality

The sciences, both physical and social, attempt to understand reality by first breaking it into parts, and then studying each part, each aspect, individually.  This is the method of analysis.  There is much to be gained from this method of enquiry and understanding, as the current state of our technology readily attests to.  This method, however, also has its limitations and its built-in blind-spots.  It can lead us to conclusions about the nature of reality which are incorrect, despite their being based on apparently logical foundations.

Imagine that two people, Mike and Maya, are confronted by a very large mobius strip.   It's so large, in fact, that they can't even see the whole thing from where they're standing. 

Mike says to Maya, "Weird.  I wonder what that thing is?"

Maya responds, "You know, it kind of looks like a big mobius strip to me."

Mike: Mobius strip, what's that?

Maya: It's something I heard about once.  It's a form that only has one side and one edge.

Mike: What?!? That's ridiculous!  How is that even possible?

Maya: I don't really understand the details, but I'm pretty sure it is possible and that this is one of them, just a really big one.

Mike: Well, how about we test out this little hypothesis of yours?  Obviously this thing is too big to consider all at once, but we can cut sections out of it and examine them.  If we look at a bunch of sections, we should be able to get an idea about the whole thing, right?

Maya: I don't know if that will work or not.

Mike: Why not?

Maya: I can't really say for sure, it just doesn't feel right to me.

Mike: Whatevs.  If you don't have any other suggestions, I'm going to start studying this thing one section at a time.  We'll see how many sides this "mobius strip" really has.

[Mike pulls a pair of scissors out of his pocket and begins cut sections out of the strip]

Maya: Why do you have a pair of scissors in your pocket?

Mike: Because this is a hypothetical situation.  Are you gonna help me or not?

Maya:  I think I'll let you handle this one.

Mike: Fine. [begins to examine the pieces of strip he's cut out]

Mike: Maya, come here and look at this.  I've got all these pieces here and every single one of them has two sides and four edges.  How is it possible to take a bunch of two-sided things, put them together, and come out with a one-sided thing?

Maya: I don't know how, but I still think it only has one side.

Mike: Think whatever you want. I've studied the matter and I can tell you, every piece of this thing has two sides, therefore the whole thing must also have two sides.  I don't know what a "one-sided form" even means.  Sounds like superstition to me.

The problem here is obvious.  The only way to directly verify that a mobius strip has only one side and one edge is to trace along its entire length, but in our hypothetical situation that is not possible.  So Mike tries to test Maya's claim through analysis, i.e. by breaking the whole down into its constituent parts.   But while this might be a good way to understand a car engine, say, it is not a valid way to understand a mobius strip (or at least not a valid way to answer the question of how many sides it has).  The act of analysis itself ensures that the incorrect conclusion will be reached.

The whole must be understood in terms of the whole, not in terms of the individual parts.  Inasmuch as the sciences claim to provide a comprehensive worldview, a perspective on the whole of reality (or at least to be working in that direction), their methodologies will ultimately, necessarily, lead them astray.

Someone may say to them, "Life and death are one," and they will respond, "Nonsense! Life is one thing and death merely the absence of life.  Your statement is meaningless and you are obviously a superstitious bumpkin!"  Another person may say, "There is no difference between rich and poor," and they will say, "Ridiculous! The rich live in palaces and buy yachts for their yachts, while the poor must scramble and scrape just to pay the rent.  You have no idea what you're talking about."

But they are trying to understand the whole through analysis of the parts.  The knowledge that they have gained by analysis is valid and true, but there also exist truths that cannot be had through analysis.  Denial of those truths is known as "scientism": the superstitious belief that the whole of reality can be understood through scientific analysis.  

Like Paint...

Commenter hermanas left this little gem in the comments section of this morning's post on Yves Smith's Naked Capitalism blog:

Like paint, ideology conceals a multitude of sins. Including criminal intent.

So of course, being a painter and an inveterate purveyor of metaphor, I couldn't help but flesh this thought out.  Here's my response:

Society, then, is like a wall, “sins” are like imperfections on the wall, and ideology is the paint that supposedly covers up those “sins.”

But as any (good) painter can tell you, a coat of paint doesn’t actually hide imperfections. In fact, it can make them more apparent. If you really want a beautiful wall, you have to spend a bunch of time scraping off all the imperfections first. Good painters spend more time scraping and sanding than actually painting. Only lazy painters neglect the tedious task of preparing the surface and just slap a coat of paint on it.

So, for purposes of the metaphor, if we want to end up with a “beautiful” society, we need to first spend a lot of time scraping away imperfections, i.e. removing all the crime and corruption, the systemic fraud, the captured regulators, etc. Only after we’ve done all that can we justifiably cover the whole thing with our preferred color, i.e. ideology.

But if we get lazy and just throw the ideology on without first concerning ourselves with the pre-existing flaws in society, we just end up highlighting the flaws and actually making them worse. So if we try to throw our “efficient markets” ideology on top of a system rife with informational asymmetry and manipulation, we only end up worsening those problems.

Like paint before it’s been applied, ideologies are pure. The world, OTOH, like all surfaces, is full imperfections, contradictions and paradox. Different ideologies are like different colors of paint, each pure, each unique, and each just as valid as any other. The problem arises when, mesmerized by the beauty of our preferred ideology, entranced by its pure, perfect hue, we become over-anxious and try to apply it to society before society has been adequately “cleaned up.” The results are predictable. If you stand back a bit and squint your eyes it looks OK. But if you put your glasses on and stand a little closer it just looks like absolute crap.

All of our arguing over ideologies amounts to this: screaming at one another over which color of paint is better (which is ridiculous, since this is essentially a matter of taste), without first having addressed ourselves to scraping, sanding and stripping all the dirt and grime and detritus off the wall we intend to paint. Regardless of who wins the “color war,” the end result is going to be a shoddy looking piece of work.

Here's what I'm reading today:

IV. The Vision of Local Stock Exchanges

Throughout most of this country’s history, securities were issued by local companies based in specific states, were traded on stock exchanges within each state, and were regulated by each state. Some state exchanges were efficient, honest, and successful, while others were sloppy, corrupt, and uneconomic. After the Great Depression hit, Congress stepped in to place the entire industry under national supervision. Mindful of the principles of federalism, it established a two-tiered regulatory regime—a national system, overseen by the Securities and Exchange Commission (SEC), for the creation and trading of stocks across the country, and state systems, overseen primarily by state regulators, for the creation and trading of local stock within a given state.

For a number of understandable reasons the state systems largely fell into desuetude. The priority of most companies selling stock was to get as much capital as possible from as many investors as possible, irrespective of where they lived. Creating stocks tradable on national secondary markets offered greater demand for the stock, greater liquidity (that is, the ability to have ready cash to buy and sell the stock), and greater opportunities for profit from the secondary trading of the securities. But the possibilityof local stocks and local exchanges has been, and remains, firmly embedded in U.S. law. It’s a sleeping giant.

Every now and then a story comes along that reminds us of the existence of the state systems. For example, when Ben & Jerry’s first issued public stock, it was basically a statewide offering. You had to be a Vermont resident to buy or sell the securities. Subsequent stock issues by Ben & Jerry’s, however, were conventional national offerings. Gradually the company lost its tether to Vermont and ultimately was purchased by Unilever in a hostile takeover.

The prevailing view is that it’s difficult and expensive to do any of the five essential pieces of successful state stock exchanges—to create local stock, to sell it initially, to evaluate it, to trade it, and to assemble it into diversified portfolios. It’s worth mentioning that historically these same tasks confronted investors interested in larger companies. But throughout the nineteenth and twentieth centuries new financial intermediaries emerged, making it possible to restructure companies so that they had tradable stock shares, to evaluate the worth of shares, and to exchange shares on various public stock markets. My point here is that we already know how to do these tasks pretty well. Now we need to apply our know-how to the local companies.
~Michael H. Shuman, from Local Stock Exchanges: The Next Wave of Community Economy Building

I like this idea, although I would prefer local bond exchanges, rather than stock exchanges, since I think stocks are ultimately a rent extracting device. A system like this could be used to create a funding mechanism for worker-owned co-ops, which is one of my pet causes, and it could also conceivably be combined with an alternative, local currency to create a truly local economic system! Exciting...

Alternative Theology, Lesson One

Diptherian Ontology: The Orthodoxymoronic Position

First Assumption: nothing comes from nothing.

This is a denial of the concept of creation ex nihlo. The natural extension of this concept is that anything currently existing has necessarily existed in a previous time period. Things change form, change state, rearrange themselves in multiple ways, but in some sense the same “things” exist now as existed at the beginning of the universe. Anything that exists or comes into existence has necessarily been created from some thing or things that already exist, and so even the Big Bang, the supposed beginning of our universe, must have originated in some thing which had existence prior to it. That infinitesimal point-particle that exploded into what we now know as our universe did not come from nothing; it was not created ex nihlo. Nothing comes from nothing*.

Physicists cannot look back further in time than the Big Bang, they cannot see what may have come before it, since the very fabric of time itself is wrapped up in that tiny particle. But just because the mathematics that physicists use to look back in time breaks down at the moment of explosion, it does not follow that there is nothing beyond that moment to see, nor that other methods of looking might not yield more satisfying results.

First Conclusion: we have always existed and will always exist.

Nothing comes from nothing, and we did not come from nothing either.

It happens every so often that water falls, of its own accord, from the sky. Of course, the water doesn't just come from nowhere, it comes from clouds which are composed of water vapor. And that water vapor just didn't happen either, it came from evaporation off of lakes and oceans. And those lakes and oceans didn't come from nothing, they are created and maintained by rivers and streams which, of course, get their water from the rain, which every so often falls from the sky.

In all of this, the water molecules themselves remain ever the same and always exactly what they are. In certain states they are perceptible to our senses and useful for our purposes, while in other states they are imperceptible and therefore useless to us. Nonetheless, they remain forever themselves, unchanging.

In the same way we ourselves change state and move from imperceptibility to perceptibility and back again, perhaps more than once, but we ourselves never change. Being and non-being are themselves two different states through which we, and everything else, moves. Any thing, any entity, may exist in the state of potential (non-being) or the state of actuality (being). The entity itself remains unchanged regardless of it present state. The unenlightened on these matters view birth as a beginning and death as an end, but this view, as we have seen, violates the First Assumption. Nothing comes from nothing.

*It may be objected that the discovery of “quantum foam,” i.e. of particles popping into and out of existence on the quantum level, proves the reality of creation ex nihlo. The Orthodoxymoronic view, however, holds that these particles are, in fact, not popping into and out of existence but rather moving back and forth between our dimension and one abutting or overlapping it. Regardless, even if the particles are popping into and out of existence, existence itself is merely one form of being, as is explained below.

DOJ Declares HSBC Too Big To Prosecute

2012 may well be remembered in times to come as the year of the financial scandals. Not that scandals in the finance industry are anything new, but this year seems to have seen a greater number of scandals, and of larger scope, than anything that has come before. It is now clear that fraud and manipulation are widespread in the finance industry, even more so than many cynics, myself included, had previously believed.

In what may be the biggest financial scandal of the year, the United States Department of Justice (DOJ) announced that it would not be indicting HSBC (one of the world's largest banks) on money laundering charges, despite having amassed mountains of evidence showing that HSBC has assisted Mexican drug cartels and others to launder over $60 trillion. Instead, HSBC announced last Tuesday that they had agreed to pay $1.92 billion to settle the allegations. The reason that the DOJ gave for not bringing criminal charges is that a successful prosecution might bring down the bank entirely and destabalize the global financial system.

You're already familiar with Too Big To Fail...now meet Too Big To Prosecute.

The fine is being portrayed by the mainstream press as a win for prosecutors, since $2 billion sounds like a lot of money to most people. But when one recalls that HSBC likely laundered something in excess of $60 trillion, and that 1 trillion is equal to 1,000 billion, the fine actually seems ridiculously small.

Let's knock off a few zeros and put this in terms we can all understand: 60 trillion is 60,000 billion, so HSBC laundered $60,000 and got fined $2. All of a sudden those 2 billion dollars don't seem like such a big deal. The question one is led to ask is, did HSBC make more than 2 billion dollars for laundering 60,000 billion? The obvious answer would be “yes,” since 2 billion is only .003% of 60 trillion. Even if HSBC was only charging the Mexican drug lords 1% to launder their loot, they still would have made $600 billion.

What this means is that the biggest banks no longer need fear prosecution, even for laundering gargantuan piles of cash on behalf of drug lords, terrorist-funders and embargoed states (HSBC was doing illegal business with both Iran and Cuba). The fines they are likely to pay if they get caught can be written off as merely a “cost of doing business,” and a vanishingly small cost at that. The “Too Big To Fail” banks and financial institutions are now, officially, above the law.

What is even more disturbing than the money laundering itself, is the DOJ's reasoning for its refusal to bring criminal charges. Their concern, in part, is that a guilty verdict or plea in such a case would disallow pension funds from investing in HSBC. You read that correctly, the Department of Justice is refusing to bring indictments for criminal acts committed because doing so would hinder the criminals from having access to your retirement savings. DOJ is now in the somewhat awkward position of fining HSBC for criminal money laundering, while at the same time trying to maintain that HSBC was not engaged in criminal money laundering, since if they were, your pension fund would have to take its business elsewhere, which the DOJ apparently thinks we need to avoid. Welcome to Wonderland, folks; we are definitely through the looking glass, here.

But what if the Department of Justice has a point? What if being too harsh on HSBC and its executives really would destabilize the global economy and lead to another 2008-type crisis? Shouldn't we avoid that at all costs?

There are a number of problems with this line of thinking. The first is the assumption that criminal prosecution of individuals within HSBC will necessarily lead to the total collapse of the bank. HSBC is a massive, highly profitable bank, with a value of $174.38 billion and a profit margin of 27%, according to the New York Times Dealbook. Even without pension fund investors HSBC might still be able to make money, if on a considerably smaller scale.

But even if the withdrawal of pension funds led to the bank's collapse, there is no reason to think that HSBC couldn't be wound down in a relatively orderly manner. Iceland did just this, when it let its biggest banks fail during the financial crisis of 2008, paid off depositors using the banks' assets and made investors take a haircut. As a result, Iceland has been quicker than other European countries to recover from the Global Financial Crisis and, unlike the U.S., now has a banking system cleansed of frauds and criminals. Iceland's example puts the lie to the “Too Big To Fail” meme, proving that letting big banks collapse when they engage in unsound, fraudulent behavior, is a real possibility.

The actual reason that banks in the U.S. and elsewhere get bailed out, and that they only pay a .003% fine when they get caught breaking the law, has more to do with their large contributions to political campaigns and parties, than it does with their importance to our economic system. In fact, and not at all surprisingly, allowing criminality at our largest financial institutions to go virtually unpunished is an extremely bad thing for our economy.

The economy as a whole, and the financial industry in particular, runs on trust. When frauds and criminals are given a free hand to do whatever they like with little-to-no chance of meaningful prosecution, trust becomes a non-existant commodity in the market place and the system grinds to a halt. This is what happened in 2008 during the credit-crisis. Banks refused to lend to each other, none trusting that the others were reporting their financial positions correctly, no one being sure who was actually solvent and who was one step away from bankruptcy. Everyone knew that fraud was widespread, since everyone was engaging in it on a systematic basis, and therefore no one trusted anyone else. As it turns out, individual greed is not enough to make a market function: trust is also required.

And where does that trust come from? It comes from knowing that those who would cheat and defraud are being hunted by authorities, that they are being punished and eliminated from the marketplace. But now the authorities in charge of prosecuting the bad guys have come out and stated openly that they do not intend to prosecute the crimes of the largest players, that they will be given free reign to do whatever they like, whether it's knowingly selling pension funds lemon MBS (mortgage-backed securities) or laundering money for the Sinaloa cartel. Even a cynic like me has to shake his head in disbelief.