Shadow Economy

Yes, labor force participation is back to what it was when the contributions of most women to the economy weren’t counted. That people aren’t getting paid doesn’t mean they aren’t contributing. Sometimes it’s just a counting problem — an accounting problem.

Actually, there are many accounting problems. One has been discovered and and is now being addressed and will result in a revision to the GDP. That is, the Gross Domestic Product is going to take into account what dollars people invest in creative endeavors that don’t manifest in material products — i.e. the value incorporated in a CD over and above the cost of the disk itself. Put another way, creativity has been left out of our national accounts. Of course, that’s also true of basic reproduction. People making other people is not considered labor worth counting.

What we have is various economies, only one of which economists track and that badly. In addition to the formal economy mediated by dollars that enter official records, there’s the shadow economy or underground economy, which is also mediated by dollars, but they don’t get counted in the official records. Then there’s the economy that’s based on surreptitious theft and exploitation, using currency sporadically. Then there’s pure finance, in which currency is traded and exchanged regardless of any real goods and services. Perhaps we could call most of what happens on Wall Street the esoteric economy. In addition, there’s the economy of the household and the neighborhood where trade and exchange occur independent of formal accounts or even money changing hands.

money shadowSome economists are aware of the shadow economy to the extent of trying to calculate its size in terms of the currency it does or does not use. Edgar Feige’s latest estimate is that 19% of reportable income (not including legally exempted corporate revenues) is not being collected, accounting for a short-fall in IRS receipts of some $500 billion a year. While this estimate is derived from an analysis of things like the use of cash (growing) and retail sales (characteristic of an economy with a 5% unemployment rate), it seems logical to argue that the velocity of the dollar is higher in the underground economy and capturing the dollars would be counter-productive. If free enterprise is valued, then the shadow economy of freelancers would seem to be the only one doing things right, in terms of how they use money.

In that sense, the term “labor force” is telling. The only labor that counts is that which is forced or coerced. While this judgement is entirely consistent with the basic assumption that:

“man prefers leisure and must be bribed to work.”

This negative prejudice, although it accounts for economics being called the “dismal science,” is a distortion of reality. It makes no more sense to argue that humans are naturally unproductive, given their manual dexterity, than to argue that they are essentially sedentary, despite their essential mobility. So, that humans have to be told what to do and where to go is just so much wishful thinking by humans looking for an excuse to exercise control over their fellow man.

There is a logical fallacy known as “false attribution of agency.” It usually involves assigning action to inanimate substances. The plunging bus is a good example. But, what I wonder is if there is also a category which recognizes the false attribution of inaction or a claim of no agency. Is the omission of agency recognized as a logical flaw? Or is not doing considered such a virtue that it’s not even subject to analysis? Of course, the dead don’t do. That goes without saying. But what about the living that don’t do anything but talk?

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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."