Murphy\’s Bye-Laws

Law #4: Any fool can make a rule, and any fool will mind it. –H.D. Thoreau

The Black and Blue of Black and Gray Markets

Posted by PintofStout on April 21, 2007

Revisiting the book that inspired my post on Agorism and the underground economy, Off the Books: The Underground Economy of the Urban Poor, by Sudhir Alladi Venkatesh via a review in reason‘s May issue (this review now available online) a realization came to me. The players in underground markets are predominantly poor with little to lose from risking transactions in the black or even gray markets. Their lack of wealth is predominantly caused by their lack of access to government sanctioned markets, which is what ultimately drives them underground and keeps them there. So the apparent lack of such economies in more affluent areas can easily be attributed to the risk involved for the wealthier residents and less restrictions on them in the open market. One doesn’t have to have taken the worst of 12 rounds in the ring of life to go underground, but going underground certainly increases the chances of taking more blows than anyone could hope for.

Sam Konkin’s theory of revolution sees these small underground economies getting larger and ultimately undermining the authority of the state. But if the urban poor only go underground because they have to and therefore have little to risk, what is going to drive larger numbers of people who have some wealth, a house, and some financial security to risk going underground? The answer to that is easy: The incentive to keep what they’ve earned. Many people participate in economies similar to the ones in Venkatesh’s book but on a smaller and much grayer scale. Working for cash under the table, trading services with a neighbor, selling things via a flea market or yard sale, pretty much anything done without reporting the income to the government is the gray market (if it is illegal beyond just not reporting, then it becomes a black market). If the government is going to try and take a cut every time money changes hands, the people have to work more and harder to get what they need, so they are simply trying to keep the prying hands of government out of their transactions whenever possibly.

Unfortunately, at such small scales and while keeping so much of our economic activity within reach of the government, the underground or counter-economy will be like throwing stones at tanks. The catch is to get people to participate on larger and larger scales, thus putting more of their current wealth at risk from outright theft from the state, which in turn makes it less likely they will participate further. As I had mentioned elsewhere, it seems like the more you have to lose, the less free you are. Unless there is an explosion of revolutionary monks, it seems a revolution is unlikely to grow much while the recruits are still somewhat prosperous (if not as free as they’d like). This is where the turning point of Konkin’s theory takes place: when mechanisms or organizations are sprouted that provide some protection from that risk or even just consultation on how to lower the risk, these organizations or people will remove the monopoly on protection from the state and allow the counter-economy to further expand to the detriment of the state.  Eventually, freedom may mean more than just “nothing left to lose.”

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10 Responses to “The Black and Blue of Black and Gray Markets”

  1. […] PintofStout has a thoughtful post on the relevancy of wealth to varying degrees of risk aversion in the context of counter-economics. Read: The Black and Blue of Black and Gray Markets […]

  2. Jeremy said

    Man, it seems like a lot of us are thinking along parallel tracks lately. It almost makes me believe I’m making too obvious a point in my post I’m writing on how the rich benefit disproportionately from State guarantees of security and order (because they have more wealth at stake). But well said!

  3. Luis Martinez said

    I feel that grey markets and arbitrage is a dynamic force that leads to economic and social aquedation. Even in cases where they do not lead to revolutions, they serve as an ever-present ballast against the strong and long arm of tyrany.

    Great post!

  4. Carl said

    While I agree with the main thrust of the argument (and maybe I just need to read the book) but how can the turning point described by Konkin ever be achieved? Trade in quite literally everything that’s legal to posses has regulation, taxation and general intrusion upon a free transaction at every single level. It would require a vertical and “gray” structure from procurement of raw materials, to production to sale and the end user where everything was under the table or out of the system entirely.

    Payments would have to be done from a gray market system as well. Things are currently set up too neatly in a regulatory environment. Otherwise gray markets are just selling grandmothers crafts, produce and the odd finished good.

  5. Carl, I think the important thing to consider is that the counter-economy doesn’t need to fully replace the regulated economy before displacing the regulators. The system is much more fragile than the establishment would have us believe. Really, they just have a dog leash on a bull and pretend to have control. If the counter economy undermines key areas, such as security, then the whole predatory – mostly illusory – system would be in grave danger of collapse without even touching other areas.

    The underground economy (which I use as a synonym for counter-economy) is hardly ever, in my estimation, wholly underground. The actors within it either have a some presence above ground or have a connection to someone who is , at least in part, above ground. There are examples of the vertical market you describe: cannabis for one. Although, its illegal status puts it firmly in the Black market arena, and depending who is involved and their business practices *cough* Fed Gov *cough* then the violence and force makes it a red market.

    I know the prognosis looks bleak, that’s built in to the system. If you haven’t read the New Libertarian Manifesto, I would recommend it. It doesn’t rest on the premise of “If only several hundred thousand people would accept my ideology…” and says many people do it anyway without ideology, as the book being review displays.

  6. Luis, I agree with you about the balance struck against tyranny by decentralized actors acting outside of a revolutionary ideology or goal. It goes even larger than markets, too; it’s the whole of culture that markets, economy, praxeology, or whatever you call it fit in, and push from the inside out the the great shifts in any society.

  7. Carl said

    Having worked for a manufacturer maybe I have a little more and perhaps I’m a bit biased but every single transaction requires significant records covering tax information from raw materials purchased to finished goods going out. We couldn’t buy steel without giving and getting tax id numbers just so everything is on the straight and narrow. And the same goes for our finished product. I just can’t see anyone doing business in a larger market and not get arrested for tax evasion. In light of this any amount of capital will remain in legal markets due to risk.

  8. Carl said:

    In light of this any amount of capital will remain in legal markets due to risk.

    Thus the point of my post…

    If the stuff was easy and risk free, it wouldn’t have to be underground. You also imply that the state is omnipotent and perfect, when in fact they’re hardly on top of things, as indicated by the proliferation of “off the books” deals (see the NPR links in the first post), and likely have a large contingent of their own apparatus participating themselves in official and unofficial capacities. The whole reality is far from easily definable into neat regulatory frameworks.

  9. Carl said

    I don’t think I implied that the state was omnipotent and perfect. While you may feel like you’re being subversive by participating in gray markets you’re not participating in anything that will affect government revenue. I read the review. What he’s talking about is a tiny drop in the economic bucket. If anything became more successful than a flea market or an underground economy in an urban area then the great power of your fellows would rise up and take their fair share of earnings.

    “when mechanisms or organizations are sprouted that provide some protection from that risk or even just consultation on how to lower the risk, these organizations or people will remove the monopoly on protection from the state and allow the counter-economy to further expand to the detriment of the state”

    It’s cool to say mechanisms and organizations but does he give specifics? If he does I’ll be happy to read.

    http://tax.ohio.gov/divisions/communications/news_releases/news_release_052004.stm

  10. Your previous comment suggested that the regulations all worked and were obeyed 100% of the time or else even the slightest divergence will feel the cold hand of authority to put them back in their place. I don’t believe that is the case; it’s mostly illusory. Maybe I inferred that from the general tone of the comments.

    In a way you’re right about the size and scope of gray markets…to a point. They are usually small, but they are also diverse, decentralized, and also prolific. I bet you would have a hard time finding someone who never participated in the counter-economy in small fashion. The importance of that is just to show that these little things can happen and go great lengths toward striking a balance between centralized authority and individual human nature and free will and all that like Luis said.

    In the end the goal isn’t to break the government of its revenue, per se; they’ll just materialize more money. What we are attacking is the dogma of state superiority and legitimacy that allows them to print the money, tell me what to ingest, and dictate the use of my property (including my own body). When that illusion bites the dust, there hopefully won’t be anything left to collect revenue.

    Sidebar: I’m quite pleased that there have been comments and discussion over the last few posts. It was what I hoped for when starting to blog. So thanks for sticking around and contributing.

    By the way, and way off topic, is it grey or gray? What the hell is the difference?

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