The Speak-Easy Economy

There’s a Mexican restaurant I like (I’m not saying where it is) that seems to thrive in good times and bad. It never has a shortage of servers, cooks and people to bus the tables, even when there are only a few customer cars out front. Actually, it is hard to tell the workers from the customers, and extended family seems to appear from nowhere, people of all ages, sometimes eating, sometimes just visiting and sometimes going back and forth to the kitchen.

How does this place handle the high costs of this labor? It’s the sort of question that is impolite to ask. A passing familiarity with the existing labor regulations, mandates, taxes and edicts on resident documentation permits anyone to figure this out. The place survives and thrives because all these niceties are ignored. The whole arrangement works through quid pro quos, barter, cash, underage labor and undocumented workers.

They know it. We know it. No one is hurt.

Consider another case lately in the news. A report from ABC did some sleuthing on educational institutions all over Australia, where government demands that everyone sign up for public school or officially register as home schooling. The report estimates that 50,000 families completely ignore these rules. Some families don’t believe they should have to register. Others have discerned that there is more risk by going legal than schooling underground.

We all know of such cases. We know a person who bakes cheesecakes in her kitchen and sells them to friends — all while ignoring licenses, health regulations, mandates on oven size, zoning laws and all the rest. Her kids help her in exchange for a weekly allowance — an arrangement that looks a lot like child labor. We know of people who have one normal job but also a job on the side making jewelry, designing websites or tutoring. They prefer cash.

All these small anecdotes — and we know many of them — come from every place in the world, especially with the recession’s intense economic pressures. Faced with the choice of complying with government or making a decent life for themselves, people tend to choose the latter. So it is with hundreds of street vendors in San Francisco. It’s this way for thousands of workers in Shanghai who make licit products in the day and “pirated” products at night.

This will be increasingly true in the digital economy now that the US government has shown its teeth and arrested and destroyed property in the name of enforcing copyright. The Web will not suddenly become the great land of compliance. Instead, those providing gray-area services will become more anonymous, less traceable, more private and obscure.

This is already happening, as ever more people are being forced to use IP-scrambling proxies to surf and put their content behind impenetrable walls. There is a tragic loss here, but it might prompt the final showdown in the great struggle between power and market.

Digital or not, the state can’t make trading, sharing and associating go away. It only inspires the traders and entrepreneurs to avoid risks in different ways.

During Prohibition, the speak-easies sensing a threat would change the passwords to get in the door. With the massive increase in government all over the world, vast swaths of the world economy have begun to operate just like these speak-easies of old. They were zones of freedom, but their operations were distorted because they didn’t have access to law and courts and because the people who ran them were from a class of citizens that was willing to take crazy risks.

We know all of this anecdotally, but what does it all amount to in the macroeconomic sense? I’m right now reading Stealth of Nations by Robert Neuwirth. It is a mind-blowing book because it is the first in our time to attempt a broad look at the meaning of all this unregulated, untaxed, unofficial economic activity. Neuwirth estimates that fully half the world’s workers are involved at some level in what he calls System D.

This is the sector that is variously called the “underground” and the “informal sector.” He prefers System D (the street term derived from the African French word for highly motivated people) because it is nonjudgmental. It refers simply to the sector of economic life that exists “outside the framework of trade agreements, labor laws, copyright protections, product safety regulations, anti-pollution legislation and a host of other political, social and environmental policies.”

He documents the amazing workings of System D and demonstrates that it is the world’s second-largest economy, amounting to economic productivity of $10 trillion, which is probably a low estimate. At the pace at which government is growing, System D is set to employ as many as two of three workers by 2020. My own sense is that Neuwirth actually underestimates the size since he overlooks sectors like health, education and finance — which are surely three of the fastest-growing components of System D.

Neuwirth himself is not a libertarian or a free market thinker in any sense. He is a reporter with a lefty bias — a genuine leftist who believes in exalting the contribution of the poor and the working classes to the social and economic order. His reporting led him to discover that a main driving force for the classes is the need for economic relationships, and then also to notice that the state itself is the main barrier to their advancement.

He remains ideologically conflicted throughout the book. For example, he rails against child labor on one page, but then notes that were it not for child labor, many kids around the world would not be able to buy clothes, food and education and would likely turn to prostitution or some form of subjugation. But ideology is not the main contribution here. It is framing up the reality in a way that we can become conscious of the whole.

Reflecting on the sheer vastness of this sector of life, one realizes the fiction, for example, embodied in official government statistics that record only the on-the-books sector of economic life. These agencies are pumping out half-truths and whole myths every day. One further realizes the immense damage that would be done to humanity in general should there come a time when government actually managed to enforce all its edicts. It would be catastrophic. We owe much of our prosperity to people’s willingness to enter the rebel class.


Jeffrey Tucker
for The Daily Reckoning

The Daily Reckoning