How the Poor Are Prospering by Ignoring the State

This is one of the most interesting and startling articles I have read in a long time.  In the usual version of events, the poor are helpless victims of capitalist exploitation, and only the wise intervention of the state can improve their condition. The growth of what experts call System D, the unofficial economy that operates outside the state’s arena of taxation and regulation, suggests that the reality is quite different. It is by evading the state’s alleged help that the most vulnerable have managed to eke out tolerable livings for themselves.

Today, System D is the economy of aspiration. It is where the jobs are. In 2009, the Organisation for Economic Co-operation and Development (OECD), a think tank sponsored by the governments of 30 of the most powerful capitalist countries and dedicated to promoting free-market institutions, concluded that half the workers of the world — close to 1.8 billion people — were working in System D: off the books, in jobs that were neither registered nor regulated, getting paid in cash, and, most often, avoiding income taxes. . . .

In many countries — particularly in the developing world — System D is growing faster than any other part of the economy, and it is an increasing force in world trade. But even in developed countries, after the financial crisis of 2008-09, System D was revealed to be an important financial coping mechanism. A 2009 study by Deutsche Bank, the huge German commercial lender, suggested that people in the European countries with the largest portions of their economies that were unlicensed and unregulated — in other words, citizens of the countries with the most robust System D — fared better in the economic meltdown of 2008 than folks living in centrally planned and tightly regulated nations. Studies of countries throughout Latin America have shown that desperate people turned to System D to survive during the most recent financial crisis….

In Africa, many cities — Lagos, Nigeria, is a good example — have been propelled into the modern era through System D, because legal businesses don’t find enough profit in bringing cutting- edge products to the third world. China has, in part, become the world’s manufacturing and trading center because it has been willing to engage System D trade. Paraguay, small, landlocked, and long dominated by larger and more prosperous neighbors, has engineered a decent balance of trade through judicious smuggling. The digital divide may be a concern, but System D is spreading technology around the world at prices even poor people can afford. Squatter communities may be growing, but the informal economy is bringing commerce and opportunity to these neighborhoods that are off the governmental grid. It distributes products more equitably and cheaply than any big company can. And, even as governments around the world are looking to privatize agencies and get out of the business of providing for people, System D is running public services — trash pickup, recycling, transportation, and even utilities.

System D employs nearly two billion people today. More evidence that as the world’s public sectors implode from the pressure of all their impossible promises, the result will not be desperation and want, but an explosion in wealth, creativity, and civilization.

Read the whole thing, and thanks to Gary North.

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  • Audacityofpope

    It’s great to read some current economic events that give me a good feeling about the future. Sure, the state apparatus may be collapsing, but so what? It’s not like the people are going to give a damn.

  • Rob Roberts

    The OECD is “dedicated to promoting free-market institutions”?  C’mon Tom.

  • Tom Woods

    Rob, I’m quoting from an article. I think we can still take away the main point of the article.

  • Kenneth

    I had to share that article with my Facebook friends. Thanks for providing the link. Here’s my comment about the article that I posted to my FB wall:

    Thanks to Dr Tom Woods for linking this very surprising article. Imagine an underground economy that rivals economic superpowers… This shows the best capitalistic principles in action: where there is demand, an innovative entrepreneur will find a way to provide the supply — even if they have to operate under the government radar to do it. Definitely a must read.

    Again, thanks Dr Woods.

  • Jared

    An example of this that comes to mind for me are the numerous people I know who sell goods on ebay. Supply and demand. My sister-in-law helped my brother pay rent in law school by selling goods she bought at garage sales on ebay.

  • Paulmollon

    Imagine that, people engaging in voluntary transactions without licenses, regulations, taxes or any other form of “assistance” from the gov’t. Heaven help us.

  • Andrew

    This IS fascinating! Reminds me of someone I know who has taken to driving around town collecting people’s curbside metal junk, taking it home, dissembling it, and then selling the metals to the local businesses that melt and recycle it. Good for everyone, right? Less for the landfill, less cost to the municipality to dispose of it, a cleaner neighborhood, low material cost for the businesses, and a very moderate source of supplemental income to provide for the family. Sure enough, much to their surprise, it’s illegal without a permit, and once the permit is issued, there’s your paper trail for collecting those taxes. Now the moral question gets posed: to participate in “System D” under the radar of the local municipal code, or not? A dilemma that wouldn’t exist for people in a truly free market.

  • Ray Blackmore

    System D sounds a lot like what americas free market capitalistic economy is suppose to be.

  • Vake

    Yeah, that sentence almost made me choke on my apple. The OECD is fighting tax competition between nations, one of the most important forces restraining the looters.

  • Vake

    Yeah, that sentence almost made me choke on my apple. The OECD is fighting tax competition between nations, one of the most important forces restraining the looters.

  • Anonymous

    Thanks for posting this Tom. Has got to be one of the most thought-provoking articles I’ve read in a long, long time. And I agree with @ Paulmollon below. “Imagine that…” 
    Introspectively speaking, these unlikely entrepreneurs make me feel like a stick-in-the-mud.

  • Anonymous

    That would be D for “Defiance”..

    T-shirt idea: “Proud to be System D” (just don’t let the IRS see).

    Kind regs from Amsterdam,

  • NJDave

    Tom, don’t you realize this story runs counter to coventional dogma and is therefore not worth of interest? Silly Austrians.

  • WILL

    I knew a friend who drove around without car insurance for a couple of months and took jobs under the table. After a few months he’d actually saved an entire MONTH worth of income doing it that way then working for a paycheck and having insurance. Risky, but tempting if you don’t make a lot of money and you have to work hard to earn what little you get.

  • George Doughty

    I didn’t know there were 30 capitalist countries. Anyway, Italy has a huge bunch of folks who don’t pay taxes. Why should they, the gov can’t fulfill it’s contract. I can hear it now ” we would’nt have these problems if these SOB’S would pay their taxes”!  Live for freedom friends.

  • DCM

    I saw that on North’s site as well – your title is great – hopefully we can continue to get folks to see that gov’t is the problem.  Hey, that’ll be us in a few years, we should take notes…

  • Tony Escobar

    Definitely an eye opener! Thanks for posting this!

  • johndavey

    System D is so freaking punk rock. i love it.

  • Matthew Tanous

    They might, I don’t know, finish their basement without proper government authorizations and inspections!  Call in the police – no, the troops.  This horrible atrocity must be stopped.

  • Matthew Tanous

    30?  There isn’t even one!  That’s pretty much the source of most of the problems in the world – central planning infects every country on the face of the Earth in this age.

  • Don Childers

    I build on this a bit here:
    The Tireless Agorist: The Apolitical Economic Superpower – The World’s Second-Largest Economy is Underground