I am teaching my Law, Economics, and Organization class this semester. The class is for upper-level undergraduates and graduate students, so there is a good variety of backgrounds and interests among the students who enroll in it.
Since the class is a seminar, I spend about half the time teaching, with the other half spent discussing specific papers.
Last Friday, in the context of the module on relational contracts, we discussed two classic papers. The first is Greif’s (1993) paper, in which he discusses the various mechanisms used by 11th-century Jewish merchants around the Mediterranean to sustain long-distance trade. The second is Bernstein’s (1992) investigation of how diamond traders choose to “opt out” of the legal system by developing their own extra-legal institutions.
Hustle and Flow
In the spirit of both articles, I wanted to link to a somewhat dated article in Wired, a Q&A with Robert Neuwirth, who published a book titled Stealth of Nations: The Global Rise of the Informal Economy last fall. Here is an excerpt:
Neuwirth points out that small, illegal, off-the-books businesses collectively account for trillions of dollars in commerce and employ fully half the world’s workers. Further, he says, these enterprises are critical sources of entrepreneurialism, innovation, and self-reliance. And the globe’s gray and black markets have grown during the international recession, adding jobs, increasing sales, and improving the lives of hundreds of millions. It’s time, Neuwirth says, for the developed world to wake up to what those who are working in the shadows of globalization have to offer.
Neuwirth labels the informal economy “System D,” from the French word débrouillard, i.e., one who makes do. Here is some more:
Wired: The sheer scale of System D is mind-blowing.
Neuwirth: Yeah. If you think of System D as having a collective GDP, it would be on the order of $10 trillion a year. That’s a very rough calculation, which is almost certainly on the low side. If System D were a country, it would have the second-largest economy on earth, after the United States.
Wired: And it’s growing?
Neuwirth: Absolutely. In most developing countries, it’s the only part of the economy that is growing. It has been growing every year for the past two decades while the legal economy has kind of stagnated.
Neuwirth: Because it’s based purely on unfettered entrepreneurialism. Law-abiding companies in the developing world often have to work through all sorts of red tape and corruption. The System D enterprises avoid all that. It’s also an economy based on providing things that the mass of people can afford—not on high prices and large profit margins. It grows simply because people have to keep consuming—they have to keep eating, they have to keep clothing themselves. And that’s unaffected by global downturns and upturns.
Neuwirth’s emphasis on “illegal street vendors and unlicensed roadside hawkers” brings to mind a few conversations I’ve had recently with a friend who has (literally) been around the world (twice, if I’m not mistaken), and who was observing how, relative to Asia and Africa, few people actually knew how to hustle nowadays in America.
I will continue this discussion tomorrow with a discussion of why we no longer hustle and flow, and how fewer transactions are taking place in the context of the market as time goes by in America relative to less developed economies.
(HT: Vignesh Nathan.)