Black market

A black market is a market in which certain goods or services are routinely traded in a manner contrary to the laws or regulations of the government in power. Typical reasons why the market goes underground in this way include the desire by substantial numbers of buyers and sellers to evade restrictive government price controls or inconvenient rationing schemes, to avoid paying heavy taxes on the good or service in question, or simply to be able to obtain forbidden goods or services that the government does not want the people to have at all.

These activities may be also referred to as "grey market" or "informal economy", etc.

Government and the black market
Governments govern by creating and assigning property rights and by more or less continually modifying these rights. Some rights modifications made by government prevent the property, or certain uses of property, from being exchanged in legal private markets. Almost inevitably an illegal market arises since property rights assignments have an important impact on the distribution of income and wealth. Rights in one's possession can have considerable value because of the authority they create to control the use of property. In addition, modification of another's property rights can be beneficial since rights condition behavior. Thus, an individual (or group) will seek new rights whenever use of something becomes desirable, and he will demand modification of existing rights if the modification provides incentives for others to behave in ways that benefit him (given that the benefits offset any costs associated with obtaining the rights modification.

There are many instances where private sector black markets could be prevented or severely limited through relatively inexpensive enforcement efforts. In these cases the public officials designated to prevent them are provided with a valuable set of property rights to sell. They can allow specific black marketeers to operate while preventing other potentials black marketeers from entering the illegal market. In other words, these officials can sell (and then enforce) the rights to be a monopolist in a private sector black market. All entry is illegal, but corrupt officials sell the right to produce to selected illegal firms.

Limits to entry into legality
In the 2000 book The Mystery of Capital, Hernando de Soto mapped out some of the problems people in developing countries have with becoming "legal":
 * Registering a small legal workshop with one employee in Lima, Peru, took 289 days and required $1231 in expenses (thirty-times the minimum wage).
 * Applying for permission to build a house on state property in Peru: 207 administrative steps involving 52 government departments, taking six years and eleven months. Ownership of the land requires an additional 728 steps.
 * Legalizing an informal property development in the Philippines: 168 steps, 53 public agencies, 13-25 years.
 * Buying land in Haiti: 111 bureaucratic steps, taking 19 years.

Staying legal was discovered to be almost as difficult as becoming legal.

Magnitude of the black markets
In Venezuela, in 1976 were two-thirds of employees employed in legal businesses, by 2000 it was less than a half. In the 1970s more than two-thirds of the housing erected in Brazil was intended for rent. By 2000, only about 3 per cent of new construction was officially listed as rental housing. To where did that market vanish? To the extralegal areas of Brazilian cities called favelas, which operate outside the highly regulated formal economy and function according to supply and demand. There are no rent controls in the favelas; rents are paid in US dollars and renters who do not pay are rapidly evacuated.

In 1995, the Mexican Chamber of Commerce estimated the number of street-vendor stands in the Federal District of Mexico City at 150,000, with an additional 293,000 in forty-three other Mexican centers. Thousands upon thousands of people work in the extralegal sector—on the streets, from their homes, and in the city's unregistered shops, offices, and factories. An attempt by the Mexican National Statistics Institute in 1994 to measure the number of informal "microbusinesses" in the entire country came up with a total of 2.65 million.

In the former communist nations, you may see even more sophisticated activities off the books, from the production of computer hardware and software to the manufacture of jet fighters for sale abroad. Russia, of course, has quite a different history from Third World countries such as Haiti and the Philippines. Nevertheless, since the fall of communism, the former Soviet states have been slipping into the same patterns of informal ownership. In 1995, Business Week reported that four years after the end of communism, only "some 280,000 farmers out of 10 million own their land" in Russia. Estimates based on electricity consumption indicate that between 1989 and 1994, unofficial activity in former Soviet states increased from 12 percent to 37 percent of total production. Some put the proportion even higher.

In the 2005 book Shadow Cities: A Billion Squatters, a New Urban World, Robert Neuwirth writes about the "System D" (the illegal sector):
 * "There are about a billion squatters in the world today — one of every six humans on the planet. And the density is on the rise. Every day, close to two hundred thousand people leave their ancestral homes in the rural regions and move to the cities. Almost a million and a half people a week, seventy million a year. Within 25 years, the number of squatters is expected to double. The best guess is that by 2030, there will be two billion squatters, one in four people on earth."
 * "in the Philippines … three-quarters of the nation's workforce — 24.6 million people — work in System D," while "in Bolivia … more than two-thirds of all jobholders work in System D."
 * "the value of Spain's off-the-books economy [in 2010] was two hundred billion euros (approximately $280 billion)."
 * in Ireland, "illicit economic activity adds up to €6.1 billion — or about $8.5 billion … annually."
 * the activity of people working off the books" in Switzerland accounted for $35 billion a year.
 * "in Southern Italy and Sicily, at least 25 percent of all economic activity is unreported to the government."
 * And then there's the United States, with "the largest unregistered economy in the world, worth more than $1 trillion."

In 2009, a study of the Organisation for Economic Co-operation and Development (OECD) found that "On a worldwide average, more than half of all jobs in the non-agricultural sector can be consider informal. In some regions, including sub-Saharan Africa and South Asia, this rate reaches at least 80 percent."(Informal referred to jobs or activities in the production and sales of legal goods and services which are not regulated or protected by the state.) It concluded: "Informality is increasingly becoming normal, not least in middle and even high-income countries."

Bribes
Bribes are payments or favors exchanged to influence the spending of wealth or the providing of a service, which are also somehow morally reprehensible and often secret. The important difference between the public and private sectors is that private-sector competition naturally minimizes what we consider immoral and illicit bribes, while the public sector offers no effective mechanism for doing so.

Bribes to Individuals
If an individual receives a payment or favor to influence the spending of his own money, it cannot generally be considered a bribe, but a coupon, discount or rebate. Similarly, if an individual receives payment or favors for providing a service, it would be very difficult to portray it as anything other than a salary, wage or commission.

The best argument for the existence of bribery in the realm of individually provided services can be made in cases of misrepresentation: an influential restaurant critic offering a dishonest review, or a famous athlete pretending to use health products which don't really help him.

These cases create no violation of property rights. The public may feel deceived, but they have no property rights over the newspaper that runs the column or the television station that airs the commercial. Furthermore, the restaurant critic's reputation and future marketability will rise or fall accordingly, as will the athlete's, limiting their dishonesty.

Of course, if the misrepresentation reaches the point of fraud, a case can be made for breach of contract between consumers and the restaurant or the sellers of health products, but fraud is a crime separate from bribery. Bribes in the case of individuals operating with their own resources, do not exist. The misrepresentations often associated with what we call bribes are constrained by free-market competition.

Bribes to Employees
A payment made to an employee to influence the spending of his employer's money, like a procurement officer receiving money in exchange for purchasing one type of machinery as opposed to the most favorable kind on behalf of his employer, can certainly be considered a bribe in the nefarious sense.

Such cases are generally rare, because business owners are very good at looking after their money, and those who aren't don't remain business owners very long. Furthermore, it is only the employer whose property rights are violated.

In cases of misrepresentation, like a teacher receiving bribes to inflate grades, it is very likely that the teacher has violated his contractual obligation to his employer. Bribes in the case of employees operating with their employer's resources are rare because every employer is naturally vigilant toward his private property. When bribes occur, it is the employer whose rights are violated.

Bribes to Businesses
When money or favors are given to influence the purchases made by business, they are coupons, discounts, rebates, or additional services, not bribes. Similar to the previous examples of misrepresentation, a case for bribery can be made where, for example, a private educational institution (not just a rogue teacher) receives bribes to give particular students higher grades.

In the unlikely case that a contract between academic institution and students (or their parents) specified an objective rating of students' abilities, then the contractual obligations of the university toward the students were violated, and the students can and should seek restitution. Once again, however, the crime is the fraudulent representation of services, not the actual bribe. Absent such contracts, no violation of property occurs. The consequence of such a practice will very appropriately be the rising and falling of the academic institution's reputation.

It is unlikely that the market would tolerate academic institutions whose grading arbitrarily reflects the students' abilities. The ultimate arbiter of the grades will be the future employers of these students. Employers already can and already do use many criteria completely apart from grades.

Among businesses operating with their own resources, criminal bribes do not exist. What people sometimes recognize as bribes, are dishonest or fraudulent representation of a service. The free market is perfectly capable of regulating the dishonesty.

Bribes in the Public Sector
In the public sector, bribes, in the most nefarious sense of the word, are rampant. Unlike accountability for individually owned money, the accountability for publicly owned money is very diffuse — another tragedy of the commons.

Public corruption is often unpunished, because the main lever available to the true owners of the money, the public, is the election of the politicians who preside over the bureaucracy.

Illicit bribes are also rampant in government-provided services. Unlike the private school, restaurant critic, or athlete whose reputations compete with other schools, restaurant critics, and athletes, a health inspector, customs official, or license issuer does not face competition.

These providers of public services operate as government monopolies. They do not rely on their reputations and voluntary patronage of their service. In pursuing their individual self-interest, providers of government-monopolized services are much more likely to encounter situations in which the reward of a bribe is high enough to cover the risk associated with accepting it.

In both the spending of public money and the providing of public services, bribes are relatively common. They are a predictable and inevitable consequence of individuals pursuing their self-interest in the public sector.

Links

 * The Underground Economy in One Page by Danny G. LeRoy, May 2010
 * The Economics of Prohibition (pdf) by Mark Thornton
 * Encyclopedia of white-collar & corporate crime: A - I and J-Z by Lawrence M. Salinger
 * The Right To Bribe by Llewellyn H. Rockwell, August 1991
 * In Defense of Bribery by Pierre Lemieux, August 2005
 * The Nonviolent Black Market in Information by Manuel Lora and Daniel Coleman, July 2010
 * The Ethics of Bribery by Murray N. Rothbard, June 2007
 * Dimensions of the Shadow Economy (pdf) by Friedrich Schneider, 2000
 * Shadow Economies all over the World: New Estimates for 162 Countries from 1999 to 2007 (pdf) by Friedrich Schneider, Andreas Buehn and Claudio E. Montenegro, June 2010
 * Can the Underground Economy Save Europe? by David Howden, November 2011
 * The Underground Economy (pdf) by Hans F. Sennholz, 1984
 * The Education of Robert Neuwirth by Jeff Riggenbach, November 2011
 * Black Market from the Encyclopedia of Russian History by Julie Hessler, 2004
 * Black market and Informal sector on Wikipedia
 * Black market and Informal sector on Wikipedia