America’s Growing Black Market: Freedom in Action
By Anthony Gregory • Monday November 23, 2009 10:35 AM PDT • 18 Comments
The Christian Science Monitor has a neat little piece on America’s burgeoning shadow economy:
Perhaps the biggest surprise about America’s shadow economy is its size. Long associated with colorful street hawkers in the developing world, the shadow economy makes up a larger portion of the economies of countries like Greece (25 percent) or Mozambique (more than 40 percent) than it does in the US. But because America’s economy is so much bigger, its shadow economy amounts to nearly 8 percent of its gross domestic product (GDP)—in the ballpark of $1 trillion, estimates Friedrich Schneider, an economics professor at Johannes Kepler University in Linz, Austria. That’s bigger than the GDP of Turkey or Australia.
Many nations wouldn’t survive if not for their gray and black markets. Some of Europe is more heavily regulated than America, but with large segments of the economy operating outside the radar of the regulatory and tax police. Of course, many of the Soviet Union’s subjects only survived thanks to illegal economic activity.
This expanding black market in America demonstrates something important: The capacity of the market to exist without the state. Indeed, we libertarians who believe that a free society could thrive without a monopoly on violence (i.e., a state), should look upon the growing black market as overall a positive thing, and a model, for the most part, of civilized behavior.
In a free market society, there would be no black market as such, at least not in anything that would be legitimate (there might still be small amounts of exchange in the realm of properly illegal activity, such as the hiring of hitmen). In a free society, contracts could be upheld for a large range of activity where there is no government protection, such as the street drug trade.
But consider: Most of the illegal drug trade works and thrives. People get what they want out of it. Most illegal drug transactions are upheld and carried out honestly, with most economic actors walking away from the transactions satisfied. This all happens not just in the absence of government protection of contracts, but in the face of outright government hostility, prohibitions, policing, and threats of jail time.
If a market can operate without the government protecting it, and indeed while the state is attempting at great cost to obstruct it, then we can safely argue that it would probably operate fine, and even better, without the state being involved at all. Not only would taking the state out of the picture allow for the now-illegal market to flourish without the cost of avoiding state sanction; getting rid of the state would allow for the advent of more market mechanisms, such as arbitration, openly publicized customer reviews leading to sophisticated public calculation of a business’s reputation, and contract enforcement.
That one trillion dollars is moving around in the economy in direct confrontation with state intervention shows that the market is self-organizing. We do not need the state to oversee all this business— in fact, despite the state’s obstructive presence, the underground market thrives. Are there problems? Of course. There is fraud, which would be harder to get away with if this market were all out in the open, and not forced into the shadows by the state. There is misrepresentation and dishonesty. But these are the exceptions.
And can we really believe there is less of this in the legal, regulated economy? It seems to me, the more involved the state is in overseeing the economic sector—banking, military spending, education, health care—the more we see corruption, waste and fraud. This is because the state itself represents the legitimization of violent and predatory behavior, and the more it expands its role in overseeing and attempting to direct the economy, the more illegitimate and dishonest behavior gets the state’s official seal of approval and protection through the force of law. The state allows corrupt business practices to operate under the facade of legitimacy. The black market, on the other hand, must exist with efficiency and mostly with honesty, so as to overcome the cost of avoiding government obstacles and detection. Indeed, I would guess we are less likely to see speculative bubbles and systemic fraud in the illegal market than in huge swaths of the more highly regulated and politicized sector. But the remaining problems with the black market, such as with the turf wars and adulterated products in the drug market, would mostly disappear if the state just withered away, as almost all these problems could be traced to the effect of police intervention and the need of illicit entrepreneurs and customers to circumvent the state’s watchful eye. But most of the black market is much more peaceful than the drug market, since it is just taxes and regulations, rather than iron clad punitive drug laws, that are being avoided. Competition, reputation and arbitration would allow for a more honest market than we see today either below ground or above the board.
Tags: Business, Civil Society, Criminal Justice, Drugs, Economics, Free Market, Law, Morality, Property Rights, Socialism, Taxation, The State 
Oh, come on. Please don’t pretend everything is fine in the illicit drug trade. Violence is rife between rival gangs, both in the US, and on a grander scale in Mexico. Can you blame it all on the state? Maybe, but you would have to build a case for that.
lukas | Nov 23, 2009 | Reply
Well, of course it’s all because of the state. Legal drug markets — alcohol, tobacco, pharmaceuticals — are not nearly as violent. Drug gangs would not exist in a free market in drugs, just as gangs don’t exist in these other areas.
Anthony Gregory | Nov 23, 2009 | Reply
Yes, but alcohol, tobacco and pharmaceuticals aren’t usually sold on the black market either.
lukas | Nov 23, 2009 | Reply
There was a raging black market and rampant gang violence during prohibition of alcohol. It is the same situation with today’s illegal drugs.
Now liquor sales are conducted entirely peacefully, as drug sales would be if not illegal.
dee | Nov 23, 2009 | Reply
The increased violence in Mexico in the last couple of years appears to be the direct result of more money being poured into drug law enforcement in that country from guess where... The good ol’ US of A. Can you blame it all on the state? Well yes, of course and many have very eloquently for very many years. Mises Institute Mark Thornton, I believe, has written a book about the economics of prohibition that many explain it for you. Milton Friedman spoke out against drug prohibition. This is not a new argument.
This is an excellent article, btw, and seems to me a great thesis for a book.
Cathy | Nov 24, 2009 | Reply
The one thing missing in this article (from my perceived minarchism) is an explanation of how a society like this (free) would operate when violence does occur in that free market. Would we, as could be inferred from the article, merely hire hit men to wipe out those who do commit fraud, or steal? Or would we have a minimal government with “a monopoly on violence” to punish the transgressor? I prefer the latter.
A far better example of a market separate from government intervention/interference is yardwork. My sons raked two lawns for a neighbor (his mother’s and his rental property) last week and were paid $55 each. It was a free and voluntary exchange. Had he not paid them, being able to take him to court and the ENFORCE the court’s decision would have been necessary, but it wasn’t. My sons now understand a free, voluntary market, and are ready to do much more of it. Entrepreneurs. They do a daddy proud.
Ed Burley | Nov 24, 2009 | Reply
dee, I agree with every word you say. But Mr. Anthony asserts that the illicit drug market works well, despite its lack of recognition by the state. If you want to prove that markets work well even without governments enforcing contracts, the drug trade is not a very convincing (or pertinent) example. It would be much more judicious to pick, say, undocumented labor.
lukas | Nov 24, 2009 | Reply
Not many underprivileged, urban young school leavers (or school absconders) have got neighbours with lawns to be raked. What they do have is a substantial peer group busily engaged in the drug trade and making a living (albeit not a very lucrative one for most of them). I sometimes wish that the entrepreneurial skills learnt there could be used in a more socially positive market, and parhaps sometimes they are. But this won’t happen for the majority until it is recognised that the ‘drugs war’ is unwinnable and drugs are legalised. The hapless taxpayer could then hope to be able to fund rehabilitation from a sales tax on drugs and be relieved of having to fund the ‘war’ and the high cost of insurance against the low level crimes that drug users commit to fund their habit. The income from tobacco taxes in the UK is far greater than the cost of treating tobacco related illnesses in the National Health Service.
John Harrison | Nov 24, 2009 | Reply
lukas, the fact that the drug trade works at all, with the vast majority of the product getting to the consumers, with most people involved not subjected to the violence that plagues this admittedly violent market, demonstrates the power of markets to organize. It’s true that most other black markets aren’t as violent, because the state isn’t cracking down on them quite as much.
Anthony Gregory | Nov 24, 2009 | Reply
“Most illegal drug transactions are upheld and carried out honestly, with most economic actors walking away from the transactions satisfied.”
Based on what evidence can you make such a statement? Are you citing return statistics for drug dealers? Or are you citing consumer satisfaction studies? Perhaps complaint statistics or “Office of the President” calls. My personal sample size with such transactions is zero, so I can’t offer anecdotal data. However, I have a hard time imaging that I could confidently saunter down to my local drug dealer carrying a wad of cash with complete confidence that I would have a safe and secure transaction, kind of like going to my local BofA branch’s ATM. Would I feel confident that I’d received a fair deal, gotten the right weight and quality? Would I feel confident that the baking soda content of my cocaine was what I was expecting, or that my heroine was properly “cut?” I think it’s preposterous to suggest that “most illegal drug transactions are… carried out honestly.”
As several people have alluded to, I think a much better example would have been lawn care, maid services or babysitting. Almost all of those activities are done via the black market, with no taxes paid, withholdings collected or 1099’s filed. I would be much more willing to accept that “most lawn service transactions are upheld and carried out honestly,” and I think your article would make a lot more sense.
I would argue that the nature of the product/service makes a big difference here. Regulation helps provide confidence to consumers that hard-to-evaluate products (like drugs) are what they are represented to be (labeling helps provide confidence), and information (and confidence in it) lubricates markets and makes them more efficient. Lawn service is easy to evaluate, and the risks if it is performed poorly are low. Drugs are hard to evaluate, and the risks if they are of variable quality are much higher. As a result, I see much more of a valuable role in the regulation of illegal drugs, and I think the argument that completely unregulated black markets work just fine for drugs and lawn care alike is weak.
James Kee | Nov 24, 2009 | Reply
James, the drug market is more violent because there’s too much regulation. The drugs are regulated out of legality altogether. The black market in lawn care is less affected by regulation, since lawn care is not outright illegal. And we know most drug transactions occur honestly, since so many millions of Americans have successfully flouted the law for so long. If more than 50% of drug transactions ended without both sides satisfied, it’d be hard to imagine a drug market nearly as vibrant as the one that exists. Billions trade hands in California yearly in the illegal marijuana market. You think it’s unfair to assume that most of these transactions are honest? Cocaine and heroin are indeed more violent and corrupt markets, because, I believe, they are more illegal. The fact that some marijuana is legal — for medical uses, just as some lawn care is legal — has helped make the marijuana market even less violent here in CA.
Anthony Gregory | Nov 25, 2009 | Reply
James Kee, you forgot about the ‘reputation’ aspect. True, it may be hard to believe that if you go to a previously unknown person with a large wad of cash and buy some drugs, it will naturally end well. But if there is a reputation of honesty, long history of good quality of the product and perhaps personal acquaintance with the dealer it can be expected to be an honest transaction, just avoid bringing suitcases of money because you can’t expect drug dealers to be more honest than many politicians.
Oliver Jinks | Nov 27, 2009 | Reply
Enjoyable Read. I would like to know how much violence and unsatisfied consumer relations occurs in illegal drug transactions. I’ll wager that the current method of regulation (prohibition) has played a tremendous role in price elevation and quality declination. Effectively, government task forces attempt to break the supply lines. In theory, a business must recoup that loss by diminishing the quality and raising prices in order to mediate that loss.
In a free market, would prices decline as supply reached demand capacity? Would there also be increased competition to deliver a quality product? In effect, the application of free market mechanisms to a deregulated drug trade would decrease profit margins without the need for heavily armed uniformed government operations. In a less lucrative business that is decentralized and abundant(lawn care, maid services, babysitting), there is less incentive to dominate the market.
The desire to dominate the over-regulated market likely leads to violence and the need to increase yield production by incorporating impurities and poison in their business model.
I do not condone the use of drugs, however, I do wonder if there is a more effective way to make the industry safer and less lucrative for those whom participate in it. After all, the first act of industrial violence occurs at the barrel of loaded weapons sponsored by taxpaying citizens. Eliminate that kind of example to enforce regulation and perhaps one will witness the reduction in violence and increase in positive customer relations. The over-regulation of particular illegal substances becomes a twisted way of subsidizing those whom are willing to take the risks, employ violence, and participate in dishonest and unsafe product sales
Jeremy | Nov 27, 2009 | Reply
Having some direct knowledge of the illicit drug market, I offer these observations: Most transactions at the individual level are ompleted with a reasonable level of honesty. There is the possibility that either (A)the customer is an informant, and or (B) the dealer himself is an informant or (C)the dealer is a crook (selling a heavily cut or placebo product, lower quantity than agreed or commits outright robbery). A and B are soley the result of government interference. C can occur in any business transaction or interpersonal relationship, but is exacerbated by the lack of competition and secrecy forced by prohibition.
Just like any business the local dealer must maintain his reputation and trustworthiness or he will go out of business. And even “legitimate” regulated pharmaceutical companies sometimes mislead about their “legal” products, so government involvement is not guarantee of safety or quality.
But the main problem with prohibition is it turns a business into a criminal act, which breaks down the normal legal boundaries. In other words, once someone grows and sells marijuana they are an outlaw. So manufacturing methamphetamine isn’t much worse and neither is cutting the product. Then outright theft may not seem so bad either, because you are already branded a criminal. With no legal recourse if a customer refuses to pay, violence may be the only means for the dealers to recover their capital. Hence more crime.
To combat the problems created by prohibition, the authorities seek ever more power to pry into our private lives and take our property. Whether it be acces to our bank accounts, roadblocks, prying into our email or monitoring our phone calls, erosion of our privacy is the result. When our “protectors” discover questionable activities (like carrying too much cash), confiscation and forfeiture of our property fills the legal plunderers’ coffers. Add to that, the felony convictions that strip the offenders of their rights to vote and bear arms, while supplying employees to the prison industry and you have a win-win situation for the ever growing state.
Boothe Gregory | Dec 15, 2009 | Reply
If you are really interested in our narco-history, and are driving on I-35 through Oklahoma City, go visit the Frontier Drugstore Museum in Guthrie (32 miles N of OKC).
You can look at the ledger and see where in the late 1800s, people could walk into the drugstore, sign for their dose of cocaine or opiates, and buy them without any further regulation. There was no cartel violence in Guthrie.
http://www.drugmuseum.org/index.html
Lance Turlington | Apr 9, 2011 | Reply