In the last few weeks, the shadow economy has become a hot topic. As recently as two days before tax day it was possible to note that the one authority on the shadow economy (also known as “the underground economy” or “the black market”) in the United States, Edgar Feige had surfaced in the Sacramento Bee. Since then, Google coughs up over two thousand references to the shadow economy in the news. Prominent in the list are references in speeches by President Obama, Senate Majority Leader Reid and Senator Dodd in connection with proposed regulatory reform of the financial system. Big banks and speculators trading in the shadows are the new denizens of the shadow economy. But, that’s not whom Feige and a few European researchers were focused on. From their perspective, which I share, the shadow economy being undocumented and unregulated provides evidence that most economic analysis is flawed because of what it leaves out.

The recent inclusion of large secretive financial players in a category that used to be reserved for the trade in contraband and cash transactions (behaviors that might well be considered remnants of what prevailed before nation states got into the habit of organizing and formalizing and monetizing the exchanges by which humans have traditionally sustained themselves) brings to our attention the importance of secrecy and stealth in perverting our reciprocating instincts.

I think that’s the point David Frum is trying to make when he quotes at length from Hernando de Soto, prescribing these antidotes:

“All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.

– The law has to take into account the “externalities” or side effects of all financial transactions according to the legal principle of erga omnes (“toward all”), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.”

Some people might consider this another version of the now all-purpose solvent — transparency. But that word keeps reminding me of “through a glass darkly,” which, like a veil, might well hide more than it reveals. And I have a similar reaction to describing the supervision and inspection of financial enterprises as a matter of “consumer protection,” even as I recognize that finding a better word than “consumer” is problematic. “Public” as an adjective raises enough hackles and probably accounts in large part for the strenuous opposition to the “public option” as a health insurance alternative to the private corporate monopoly. As a noun, “public” is anathema to all who disdain the interests of “the great unwashed.” Moreover, “consumer protection” enjoys a certain level of acceptance by people who prefer to see themselves as rescuing the dullards in the consuming class from their more rapacious associates. Which probably accounts for why a reference to

secret deals carried out by aristocracies accountable to no one but themselves

tickles my fancy. Also, it points up the difference between people who are in the shadows because they are being ignored and people who hide themselves and sequester their assets in the shadows, out of the eye of the public, for their own nefarious ends. On the other hand, perhaps it’s better that focus less on who’s to be protected and how and concentrate, instead, on the malefactors.

Another one of the pundits who seems to have recently discovered the shadow economy, Max Fraad Wolff goes to some effort to develop the hypothesis that no small group of people can/should be held responsible for crashing the economy:

Financial firms grew large and powerful by inserting themselves front and center in a US economy running on debt and speculation. This was a Main Street phenomena every bit as much as a Wall Street phenomena.

What a wonderful sentence! It posits inanimate entities (financial firms) as not only autonomous agents (inserting themselves), but as organisms that grow and do so entirely on their own. No people in the picture or even required to be present. Never mind deus ex machina. Deus in machina is the free market and, if mistakes are made, everybody (and therefore nobody) is to blame. Adam and Eve are still guilty and Satan gets off scot free.

Another wonderful sentence explains it:

This is not to say that there was not massive and massively dangerous exploitation of the debt and speculative desires of American households by many in the financial sector.

It wasn’t a few wicked people. If there had been no “debt and speculative desires” to exploit, there would have been no opportunity for sin. That’s such an old story. That a self-identified economist spouts it merely tells us that economics has a strong moralistic bent which, to our misfortune, keeps the practitioners of the “science” from seeing what is. For example, if trade and exchange are the essential behaviors by which humans, unlike predators who extract what they need, sustain themselves, and if some of those trades cannot be completed on the spot, is debt not an inevitable result? And, if so, why should it be considered a negative? Debt is a natural consequence of the passage of time. Which is why “time is of the essence,” however much economists would prefer to remain focused on a point in time. Which is also why the “speculative desires of American households (I appreciate Wolff’s resurrection of that word — see can be considered blame-worthy when, in fact, looking ahead and planning for the future are also integral components of exchange and trade. It wasn’t looking ahead that led to economic collapse; it was exploitation, pure and simple. And, in case it’s not clear, exploitation is akin to extraction; the behavior of the predatory organism which takes what it wants, often by stealth, without giving anything in return.

Probably because most humans rely primarily on their sense of sight to alert them to opportunity and danger, evil lurks in the shadows and relies on stealth. Shadow and stealth go together like that proverbial horse and carriage. Which is why, to end this little meditation on shadows, I want to refer back to my take on the stealth bomber, whose development in the nineteen eighties, about the same time that the deceptive practices which eventually caused our economy to crash were put in place, was probably more than a coincidence. Power by stealth. And deception. Those are the core issues.
That was the conclusion I had reached when I wrote in November of 2007, under the title, Autocrats of Wealth by Stealth:

Whether the introduction of the B-2 Spirit stealth bomber was harbinger of things to come, may be uncertain, but its development as a black project in the nineteen eighties at great expense makes it a good symbol of the transfer of public assets into private pockets with little or no public benefit.

That I chose to illustrate that post with an image of the B-2 Spirit and the St. Louis arch in the background strikes me as eerie. I suppose some Pentagon propagandist thought the allusion to the Spirit of St. Louis clever. But, to me, the development of the B-2 is perverse. In 2007 I asked,

So what, exactly, is it that the secrecy protects and whom is it that the stealthiness actually deceives? At $2.2 billion for each specimen, I think it’s fair to conclude that it’s the American public that’s being protected from knowing that there’s yet another failure on the books, even though the profit margins of the contractors [Northrop Grumman Integrated Systems Sector. Boeing Integrated Defense Systems, Hughes Aircraft (now Raytheon), General Electric Aircraft Engines and Vought Aircraft Industries] continue to look good.

Now I would not argue that the money could have been spent on something better. No, I can conclude that the money was spent on something bad. That’s the benefit of hind-sight. Experience can make us certain of evil, if we have eyes to see it and the shadows are not themselves deceiving.


Monica Smith

Monica Smith writes Hannah's Blog. Born in Germany, she came to the United States as a child, living first in California, then after an interval in Chile, in New York. Married to a retired professor at the University of Florida, where she lived for 17 years, she moved to St. Simons Island, Georgia, in 1993 and now divides her time between Georgia and New Hampshire. (New Hampshire, she says, is always interesting during a presidential election.) She and her husband have three children and five grandchildren. Ms. Smith says she "learned long ago that I am not a good team player when I got hired at the Library of Congress, fresh out of college with a degree in political science and proficiency in four foreign languages, to 'edit' library cards and informed my supervisor that if she was going to insist I punch the clock exactly on time, my productivity was going to fall from being the highest to being the same as everyone else's. The supervisor opted to assign me to another building where there was no time-clock. After I had the first of our three children, I decided a paycheck wasn't worth the hassle."