Posted on 10/31/2013 1:09:48 PM PDT by RKBA Democrat
Sometimes being a publicly traded company may not seem like it’s worth the hassle. Quarterly earnings reports, disclosure of stock sales by insiders, a raft of government regulations, it’s all a lot of rules dictating how one does business. And, whether public or not, there’s any number of government regulations to follow at the local, state, and federal level. Not to mention local, state, and federal taxes.
It’s enough to make one seriously consider taking it all underground. What would it be like? To operate a company without any concerns other than profit and your employees? To keep all of your profits without any consideration of taxes? Must be nice. Or not. With that freedom comes a whole range of new issues, not the least of which being “people with guns may come take our stuff and we can’t call the police” or “I could go to prison.” Those two alone tend to keep most businesses operating in the daylight.
However, for a great many people, the high risks and tremendous freedom of a black market economy remain appealing. For as long as there have been governments and laws, there have been people trying to skirt them, buying and selling goods and services on their own terms. And that tradition continues with fervor even today. Estimates by some economists place the size of shadow economies at over 20 percent of global GDP. Those are, of course, just estimates as no cartel is releasing an earnings report (that would be a touch bold, even for the most powerful figures of organized crime). But they do speak to a simple fact: no matter what the legal economies do, there’s always a large market out there for goods that exist outside the law.
Different Types of Shadow Markets
Economies that function outside of the law can take on a variety of different forms, but they tend to divide into two distinct camps based on pricing: goods and services that are available at a discount because they are illegal, and goods and services that charge a premium because they are illegal. Unlicensed moonshine or cigarettes in the United States, for instance, are sold illegally because, by operating outside of legal authority, vendors can avoid paying taxes and fees and offer the same goods at a discount. On the flip side of that coin is the sale of illicit drugs. Cocaine, for instance, is illegal and can only be obtained outside of legal authority. This allows the people distributing it to charge a considerable premium over what one would normally expect to pay in a legal economy based on its production costs.
Risk Premiums Drive Massive Margins
Illegal goods and services tend to survive, and even thrive, based on these unusually high margins. A brick of cocaine that sells for $2,000 in Peru, where’s it’s grown and processed, is worth $10,000 by the time it gets to Mexico. It’s then another $30,000 wholesale, and $100,000 by the time it’s sold by the gram at the street level. At a base level, this is a basic example of a risk premium. Each time the product crosses a border, there’s a chance it gets stopped by customs or government officials. Any person involved in moving it is taking a legal risk, and the compensation they receive has to be enough to make it worthwhile for them. And at the street level, dealers take major risks to sell products, resulting in the price jumping even further. On the whole, the profit margin for a complete end-to-end lifespan is 5,000 percent, but this sort of mark-up is necessary to make it appeal enough for people to accept the risk of incarceration of violent death associated with the industry.
For legal products being sold outside the normal market, the margins clearly remain higher than they would be working inside the law. Otherwise, the risks associated with operating an illegal business wouldn’t be worth taking. However, the legal availability of the same goods drastically reduces these margins. There needs to be a significant enough price advantage that your potential consumers will accept their own risk premium when they select your product over the legal alternative. In the case of entirely illegal substances, no such price controls exist.
No Anti-Trust Laws
Another benefit (and liability) for moving illegal goods is the absence of any sort of anti-trust laws or government regulations. Is your product unsafe? That could injure customers, potentially hurt your business by damaging your reputation. But you won’t have to worry about facing fines or legal ramifications. What’s more, monopolies, which allowed some of the richest men in history to accumulate vast fortunes when they were still legal, are fair play. And anyone’s who watched an episode of The Wire can tell you that said monopolies can be violently enforced, at times, allowing one to completely control a market place. What if, in the late 1990s, Bill Gates and Microsoft (MSFT) didn't have to limit their business because of anti-trust laws? What if Bill Gates could have just gotten a gun and FORCED everyone to use windows? And what if those people couldn't call on the police to protect them? Kind of makes it a whole new ballgame.
On the whole, illegal goods enjoy a number of advantages purchased by their considerable risk premium, including elastic demand, an absence of traditional marketplace competition, and no regulatory body limiting the way one does business.
A Massive Economy by Any Measure
So what does this all mean? It means that the size of the underground economy is considerable. Estimates of just how much money is trading hands for prostitutes, illicit drugs, and/or stolen artwork are inherently shoddy. Given that these economies need to stay hidden from any official measure as a matter of survival, attempts to measure them defy traditional efforts to collect data.
However, the estimates of its size are considerable, to say the least. If Elgin and Oztunali’s estimates, where one fifth of the global economy takes place outside of legal regulation, are accurate, it means that shadow industries are easily among the most active in the world. And author Robert Neuwirth asserts that it’s even higher, estimating the size at $10 trillion a year, which would be over one fourth of global GDP. What’s more, Neuwirth says the black market, if legally recognized "would be an economic superpower, the second-largest economy in the world…" He also estimates that it involves 1.8 billion people, nearly half the world’s workforce. Add to this recent estimates from the public safety secretary in Mexico put the cartel’s annual revenue from sales to American buyers at almost $65 billion and a dark picture of the global economy starts to emerge.
Today it cannot be done.
Too many people talk. Piss one off and it’s over.
People can’t go five minutes without their phones and commenting about SOMETHING.
Will never work.
Interesting graph.
I remember in the late 60s when I worked in an auto plant in Ohio, there were always guys in the parking lot selling cartons of low tax Kentucky cigarettes. And this was when cigs were a quarter a pack.
“Today it cannot be done. Too many people talk. Piss one off and it’s over.”
I’m NOT advocating this. Simply noting it. Frankly, it disgusts me that people feel that they have have to conduct their life on the fringes on the economy. I’m blessed to not have to.
Failure, thy name is owebama.
I know you weren’t advocating it, I’m just saying the way people are today, I seriously don’t think it could be done.
If the government is repressive enough sometimes the black market is the only thing stopping mass starvation.
I dunno.
Ever been to a flea market? How many of those people are paying business taxes?
My deceased father-in-law successfully did this from the 1970’s until his death in 2000. and I'm not sure to this day how he managed. He ran a rather large scrap metal business and in 25+ years never filed or paid a penny in tax (personal or business) or obtained one license or permit. In fact he often bragged that he wouldn't know how to file a tax return because he had never filed one in his entire life. I think he got away with it because he would deal ONLY in cash, when he passed he had over $60,000 in his dresser drawer (literally). All his employees were family (his sons and brothers who he paid only in cash) and he kept what large assets the company had (mostly large trucks and other equipment) registered in the names of his sons so nobody had very much in their name.
Still a good deal here in san diego area, go to the duty free stores along the border, get smokes, some times some never heard of brand, 2 cartons/12.00 and u and a friend bring them into mexcio and come walk back thu customs and viola at least 50.00 bucks.. I know ppl who do this every day...
“What if Bill Gates could have just gotten a gun and FORCED everyone to use windows?”
Well, that’s exactly what’s happening with ObammyCare.
This happens all the time. How many restaurants don’t ring up a sale here and there? Does Garcia’s landscaping report every dollar of income? Every waiter report every tip? Electrician working after hours report every dollar of income?
That’s the underground economy.
In the US it is highly likely that illegal immigrants are major players in the underground economy.
I disagree. If we're to survive, it's going to have to be done.
Barter for example, is becoming more commonplace. There are plenty of cops, but unless you're big-time, there's simply not jail space enough for low-level activity. Keeping a low profile and person to person exchanges will be untraceable.
Jelousy is just as prevalent in above ground business, but with the black market, as well as in legitimate business, mutual dependence provides a counter-balance.
There's also the fear of retribution, which can take many forms.
This is the new America; we're all unapprehended outlaws.
Socialism greatly magnifies black market activity. Avoidance of government intrusion into personal financial activity is a primary dynamic of all trade. Taxation and regulation are never motivational except as negative influences.
Entrepeneurship always begins as black market, unregulated and untaxed. Only when it becomes established in the public sector does it become necessary to accede to government intrusion.
Certainly the uncontrolled market for goods and services globally is at least as large as government controlled markets, perhaps larger. Every yard sale, every Craig’s listing, every kitchen poker game, every barter, most house cleaning, all are black market, outside the purvey of government. Fully half of all purchases, trades, arrangements and deals are unreported. The more government attempts to govern these activities the deeper it is driven underground. Private, after all, means private.
“In the US it is highly likely that illegal immigrants are major players in the underground economy.”
And now you know why amnesty will pass. It isn’t about being humane or anything else to the illegals. It’s about trying to bring these folks into the legitimate economy.
There’s a whole separate underground economy just with individuals bartering goods and services - basically “cash under the table”.
It doesn’t require organization nor a mob and the chances of getting caught are basically nil.
If you look for it, you can find it all over the place. Some of it is blatantly illegal, most is in the grey area between a business and helping your friends and neighbors.
Does anyone know of any websites, blogs or discussion groups that provide information on strategies and legal tactics for operating in this economy?
Let’s face the fact: the country is dead. The game has changed and we’d better look to adapting and surviving. Ruminating on how things should be is a waste of time and energy.
Have you been to E-Bay?
Do you really believe amnesty will bring these people in from the cold. Evading taxes and many other laws is so ingrained in their character they are unlikely to surface to the legal world.
On the other hand if you are selling new or high value items they will come down on you like a ton of bricks.
The line between "Hobby" (not taxed, mildly regulated) and "Business" (taxed and regulated up the wazoo) generally has to do with how often you sell and at what price.
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