Do we need a black market? We do, for our own good.

I read with interest recently about the rise of the black market, a phenomenon taking place even in some of the more progressive economies like Canada and the USA. Some lesser developed nations have over half their GDP siphoning through the unregulated channel. Whole careers are sustained in the underground economy and entire industries function in this netherworld. And I am not talking about drugs trafficking, arms smuggling, software piracy and prostitution, “industries” that are not necessarily beneficial to society. I am talking about small businesses that prefer cash to credit cards for goods or services rendered: the corner store, the handyman, the plumber, the carpenter and an endless list of independent service providers. With small business becoming the fastest growing sector in most economies, is its very growth fuelled by that “extra cash” that did not go into a government coffer called “tax revenue?”

I wondered why this has come to pass. Is it because of the inefficiency in the regulated process, the bureaucracy, the backlog, the biased decision making – all factors that have sent people underground? Have we as buyers and sellers lost faith in the establishment? When governments and banks around the world start failing suddenly, as we have seen in alarming frequency since 2008, it’s no small wonder that people start looking after themselves first, on their own terms. And when governments keep saying that they want to be “less government,” then they are unconsciously signalling that they wish for less tax revenues.

Much of the regulated system is determined on the honour principle: the onus is on us as taxpayers and consumers to declare our incomes, our assets and how we obtained them, in order to be assessed fairly, and as faith in a regulated society wanes, and cheating the system becomes endemic and acceptable, and when governments renege on election promises, there is a strong compulsion to avoid declaring that hand. The black market becomes a sign of self•reliance without an interest in a public handout (or is that now called a bailout?)

Consider the flip side: would an economy – regulated and unregulated sectors combined – be as robust if everything was regulated? Would regulation kill creativity? Take the internet – the last bastion of unregulated enterprise it seems, or is it, with a battle raging today to muzzle and censor it? Would e•commerce have grown so rapidly had the internet been regulated from its inception? Would a regulated internet become just an information power grid and cease to be an incubator of new business models?

It seems to me that these two opposing market systems exist in a symbiotic relationship, each giving rise to the other’s existence, each taking pot shots at the other, each demanding the other to be creative. More regulation creates a black market and when these black markets get out of hand, that brings in more regulation. And the sum of the two is greater than the two halves.

Viewed from a historical context these two rivals have existed since trade began. Regulation was identified with those who were deemed to have legitimacy of government, however corrupt or immoral that government, from the time of ancient despotic kings to modern megalomaniacal dictators; both operate under the principles of “Might is Right.”

Makes one wonder whether the unregulated market is always wrong and the regulated one always right, or is it the other way around? Perhaps an economy split 50:50 between the two, scary though it sounds, may be best to keep these two sectors jostling each other and raising the wealth of nations as a result.

Therefore, do we need a black market? It seems so, if at least to keep the two halves of the economy honest. Ironic, isn’t it?

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