System D in Action


IT ought to be considered a natural law: “People will buy whatever they want, and other people will sell it to them.”

system-d-postGovernments have worked for centuries to profit from this fact by taxing, regulating or outright banning transactions. By inserting themselves between buyers and sellers, governments have created thousands of exciting new categories of crime. A major purpose—in fact, maybe the whole point—of the so-called “black market” is simply to get around the parasitic costs of government.

Let’s get one thing straight from the get-go: the “black market” doesn’t necessarily have anything to do with dangerous or immoral goods—in fact, it usually doesn’t. Sure, we all know about foreign drug cartels and their War on the War on Drugs. But illegal drugs are a small part of the worldwide black market.

Take cigarettes, for example. For adults, cigarettes are as legal as can be. Yet people smuggle them and sell them under the table. Why? Well, take a look at what’s happening in Arizona. In 2006, that state increased its excise tax on cigarettes by 82 cents a pack. In the next 12 months, tax-paid cigarette sales fell by 32 percent. No, people hadn’t given up smoking. The brilliant state leaders didn’t seem to have considered that Arizona shares a long border with Mexico, a place with a time-honored tradition of smuggling people and things into America and access to lots and lots of cheap cigarettes. By 2011, an estimated 50% of all cigarettes smoked in Arizona were untaxed. That’s the “black market” at work.

It’s not always a bad thing. Ban candy and other tasty treats from school lunch rooms, as school districts in Los Angeles and other places have done and voila!, kids smuggle them in anyway. Some make a fat profit by selling the now-illicit goodies to their friends. Extra street cred for getting caught and suspended. They’re not really doing themselves any harm, and they’re learning the valuable lesson that Mr. Administrator is not your friend.

Sometimes, on the other hand, black markets and the smuggling that goes with them are an absolutely dreadful thing. Ask the thousands of people who have been killed by ruthless gangs in Central and South America, Asia and elsewhere. Oh, you can’t ask them; they’re dead.

The all-time classic example of how government bans lead to enormous profits for smugglers, leading in turn to violent competition for market share, is alcohol prohibition in the 1920s. Passage of the Volstead Act in 1919 banned what some people saw as a harmful drug, and initiated the indubitably harmful rise of organized crime gangs dedicated to smuggling in or manufacturing as much of that drug as they could sell. Sound familiar? At least back then they had sense enough to repeal the ban.

People will buy whatever they want, and other people will sell it to them. Make it illegal, and you only raise the price—and the profit margin—and the possibility of violence. There’s a reason beer distributors don’t shoot at one another these days.

Sometimes the black markets created by governments are just dumb. In several states, for example, it’s illegal to braid hair professionally without having obtained a cosmetology license, which is given after taking a course that often costs thousands of dollars and may not even teach one single thing about hair braiding. Naturally, plenty of disadvantaged but entrepreneurial young ladies braid hair without licenses. Customers come to them because 1) they don’t give a damn if their hair braider is approved by government and 2) the braiders who didn’t go to cosmetology school can charge less.

And yes, there have been armed raids.

Another example: Several state governments have banned the sale of “raw” milk. But some people prefer their milk unpasteurized, so there’s a market for it, and somebody’s willing to fill that niche. Now we’re entertained by the spectacle of armed enforcers going after villains whose nefarious crime is … selling milk. The most commonly mentioned criminal cartel? The Amish. Not exactly the sort of vile cabal that comes most readily to mind, but there it is.

And yes, there have been SWAT raids.

I understand the ban on Scottish haggis has been lifted, though. Any haggis-smuggling rings there might have been (yuck!) got hit in the pocketbook by that repeal, for sure.  I don’t know if there’s an underground market in flower arrangements in Louisiana, but arranging flowers without a license is a crime there and you’d better have one if the Louisiana Department of Agriculture comes to call.

At least I couldn’t find any evidence of armed raids for that one.

The U.S. Supreme Court recently refused to hear a case challenging a Florida requirement for all interior designers to have a state license, letting the requirement stand. Do you really imagine that the décor in Florida homes and businesses is any less dreadful because bureaucrats approve? And do you imagine that unlicensed artistes will stop their decorating?

In large cities, local governments often collude with taxi companies to limit the number of licenses available, creating a huge barrier to any additional taxis entering the market. This allows the companies that have existing licenses to control the market and reap enormous profits. It also creates a big sucking hole in the market, which customers fill by hiring “gypsy” or “pirate” taxis—often as not unmarked private cars—that work just as well at a fraction of the price and at no profit to the taxi companies or the local government. Strangely, both those entities seem to consider this a very serious crime.

Smuggling and the black market have a long and storied history in our country from before the American Revolution, though history textbooks tend to skip daintily over that fact. The first actions leading up to the Revolution were tax protests, by which I mostly mean smuggling and a market preference for smuggled goods.

A number of the Founding Fathers, most prominently John Hancock, were well-known smugglers and don’t seem to have bothered denying it—except to customs inspectors. For the most part, the smuggled goods were by no means illicit. They consisted of things everybody used every day, but which were heavily taxed or prohibited by the English government. Despite the risks, smugglers did it because there were huge profits involved. On commodities the government didn’t tax or prohibit, no black market existed. What would have been the point?

Robert Neuwirth, in his book The Stealth of Nations: The Global Rise of the Informal Economy, estimates the current worldwide value of black markets at about $10 trillion per year (about 5/7th the size of the “legal” U.S. economy).

Even more impressive, he thinks it probably employs more than half the people everywhere. There’s even a name for this informal economy: System D. And it’s growing.

Keep in mind that those figures don’t include the really nasty black market items like kiddie porn or sex slaves. Not even drugs. Neuwirth is simply looking at ordinary street vending and other forms of voluntary but unregulated trade.

Sometimes, of course, there are good reasons for bans. Ask a Florida fisherman what he thinks of the (banned) Asian Walking Catfish sometime. Lots of exotic animals, fish, shellfish, and birds are banned in various places for the same reasons: fears that they’ll become invasive and push out native species, or that they’ll spread disease. Such bans may make sense, but they’re often pointless, because banning anything that people want to buy only creates an underground market.

If you still believe that the black market, or underground economy, or System D, or whatever you want to call it, is just for swarthy Latin drug kingpins and depraved ghetto-dwellers, ask yourself: Have you ever hired someone to do yard work for you and paid in cash? Congratulations!

You’re a player in the black market. If it’s not taxed, cash income is illegal in this country.

Ever buy a box of Girl Scout cookies?  You ought to be ashamed of yourself, you corrupter of youth, you. Selling cookies—or lemonade, for that matter—in the wrong-zoned area or without a permit is illegal in most American towns. It’s remarkably easy to be a criminal in the new America.

And yes, cops have forcibly stopped children from selling lemonade. But do you really think that’s going to stop people from drinking the stuff? Do you really believe that children are going to stop trying to make a little money? Do you really believe everybody should have to crawl to government before being “allowed” to earn a living?

The power to tax, they say, is the power to destroy. Sometimes that’s true, but people are pretty resilient. Usually the power to tax, regulate or ban turns out only to be the power to make people sneaky. It’s ironic that the one thing any black market absolutely needs in order to thrive is a government willing to interfere with goods that people are going to get anyway.

And as we noted in the case of Arizona and cigarettes, legislators and regulators are often shocked—simply shocked—when their impositions actually result in decreased flows into government coffers.

But don’t pity the poor governments. I mentioned at the top of this article that they ultimately benefit from bans—and black markets and smuggling and tossing freelance traders in prison. Because even though the act of seeking out and punishing those villainous milk sellers, hair braiders, taxi drivers and interior decorators costs money, it provides a grand excuse to build bureaucratic fiefdoms, complete with armed enforcers and ever-growing budgets.

So don’t pity Arizona for its lost cigarette revenues. No doubt the state will soon have a War on Cigarette Smuggling—and hundreds more government employees dedicated to futile attempts to win it. Then the cigarette smugglers will become cagier and perhaps violent. Meanwhile, anybody who wants untaxed cigarettes will still get them.

And the beat goes on.

About Author

Claire Wolfe

Claire Wolfe is a libertarian author and columnist. Some of Wolfe's favored topics are gulching or homesteading, firearms, homeschooling, open source technology, and opposition to national ID and the surveillance state or nanny state.

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