The Radical Center
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The Radical Center

Black Markets: Second Best Solutions

A while back I had a conversation with Gary Chartier regarding business ethics and I thought of a fascinating course, or text book for some one out there to put together: “Business Ethics and the Black Market.”

Black markets are sometimes good and sometimes very bad. That black markets exist is a sign, most of the time, of failure — the legal structure of the market is distorted due to bad policy making.

For instance, gay customers at the Stonewall Inn were ripped off by the bar, which was owned by the mob. But, for the longest time the mob was the only outfit that could afford to pay off the police so it was one of the few safe places gay customers could congregate. At the time it was a crime to serve alcohol to gay people in New York. Really, I’m not making it up! Yes, Stonewall watered down the drinks, and engaged in routine blackmail of customers they determined were well-off — the blackmail also was possible due to gay sexuality existing in an illegal market, so to speak, since it was a crime to be gay as well.

So, there are multiple angles to this sort of study. One is about how individuals operating in black markets can act ethically and the other is about how the structure of black markets encourages unethical behavior. Black markets are not pristine wonderful things as many libertarians erroneously seem to believe. They are often dark, ugly, violent places. When the wrong institutional structure exists you have black markets, when it is in place you don’t.

Another black market is the kind discussed by Hernando de Soto in his books, The Mystery of Capital and The Other Path. These are not evil black markets but attempts by the poor in developing nations to protect their legal rights to property they can’t register as their own thanks to bureaucratic roadblocks. They are pushed outside the legal system and as such don’t have access to legal protection for their property rights. They operate less efficiently as a result.

I saw the same thing with hawkers in South Africa, who had no legal claims. They operated at the lowest level possible in fear of police confiscating all their goods. So, they made no investment in proper stands and mini-shops. They can’t. It was a piece of cardboard on the ground with their products on paper plates. If they minimize the investment and they minimize the cost when police came through destroying everything. This is similar to the property issues de Soto discussed — they are pushed outside the legal system and operate far less efficiently because of it. (Yes, they had some alternatives, but they weren’t as good or as efficient.) One reason I am not an anarchists is the need for a sound institutional foundation for markets to operate at maximin efficiency.

Others forced to operate in black markets are sex workers and drug merchants. Both faced increased violence and risk because they are not allowed in the open market. “Illegal” immigrants are another category of people who are criminalized by their very status. That opens them to exploitation by “coyotes” who can rob them, to sub-standard work conditions because they have no legal rights, to being ripped-off entirely for their wages. They are open to blackmail, extortion and other forms of exploitation entirely because their status is illegal.

By creating illegal markets government creates opportunities for exploitation. Consider the classic film Victim, with Dirk Bogarde from 1961. The film showed a blackmail ring destroying the lives of gay men for its own enrichment. The film, the first to actually say the word “homosexual” was about a successful barrister in London who is approached by a young man he was once involved with. The barrister, now married, avoids the young man not knowing he was seeking help because he was the victim of blackmail. He stole money to pay the blackmailers and is arrested. While in police custody he hangs himself and the barrister decides to break the blackmail ring. Laws on sodomy were known as the “blackmail’s charter,” in that they gave opportunities to exploit and harm people who otherwise, in a free and legal system, could not be so harmed.

Black markets, of all kinds, are not wonderful things. They are signs something is wrong, they are symptoms that the wider market has is sick, in some way, usually by virtue of legal regulations and restrictions.

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