The “Shadow Economy” under Liberal Capitalism

In all of my discussions on economics and finance, I always refer to the official economic and financial activities of any nation as the “national economy.” That term should be familiar to anyone who has been reading this Blog or The Work-Standard. What deserves mention here in relation to the national economy is the existence of another economy which operates outside of the official one. I am of course referring to the “Shadow Economy,” the unofficial economy of organized crime, corruption, waste, and fraud. Beyond the multiplicity of different organized crime groups, not to mention the international black markets of assorted contraband, the largest driver of economic activity comes from evasions of national taxation and regulatory bodies. A Shadow Economy is a national phenomenon exclusive to the jurisdiction of an affected nation, although there are possibilities where movements of Kapital is facilitated by Free Trade Agreements (FTAs) thanks to Globalization.  

The types of economic activities that occur within the Shadow Economy vary and they do not necessarily have to involve the production, transportation, distribution, and sale of contraband. It can take on activities like unlicensed taxis, untaxed tobacco, undeclared income, and so forth. Due to the fact that a lot of what goes on is informal and unofficial, it is difficult to obtain accurate statistics on the actual extent of the Shadow Economy of any country. What I can assert is that the Shadow Economy has grown exponentially since the Death of Bretton Woods and following the dissolution of the Soviet Union and Eastern Bloc countries. Given the timeframe in which the Shadow Economies have grown, I am willing to argue that Globalization and the increased movements of Kapital across international borders has helped immensely in their overall proliferation.             

Despite the informalities and hidden activities, the effects that a Shadow Economy has on the actual national economy will always be registered, albeit through empirical evidence and close observations of statistical data. How the effects are registered by a national economy depends on whether it happens to be a Market/Mixed Economy or a Planned/Command Economy. I have already cited examples of Shadow Economies in Planned/Command Economies across several Entries in The Work-Standard, so I will be dedicating this discussion to Market/Mixed Economies.

In a Liberal Capitalist Market/Mixed Economy, there would be less Kapital Accumulation from the collections of tax revenue and reduced participation in the labor market, increased fiscal deficits, and growing unreliable of government statistics. It is possible for Kapital to be laundered out of the country in offshore banks, in addition to the prospect of increasing Demand for certain foreign currencies. Unlike a Planned/Command Economy, where the concern is with undeclared revenues from economic planners deliberately forging financial records, in a Market/Mixed Economy, it often occurs among individuals reporting less Kapital than they actually have.

Mainstream neoclassical economics states that the size and scope of a Shadow Economy is correlated to that of taxation rates and regulations. Lower taxes and fewer regulations, the argument goes, tends to result in a smaller Shadow Economy. The influence of Welfare Capitalism, the amount of Kapital that goes into maintaining the social safety net (to deter serious interest in developing Socialism), also plays an important role. Based on official statistical data, it would seem that the US has a much smaller Shadow Economy compared to other OECD member-states. I mean, consider the following graph that depicts the size of different OECD Shadow Economies based on GDP percentages:

Note that Greece was at the top of the list, which it can be inferred as being the direct consequence of the country’s poor recovery from the Great Recession. Is it possible that because the Greek economy has not made a full recovery from the Eurozone Crisis, its Shadow Economy was able to proliferate as a result?

There really is no definite solution to Shadow Economy and trying to find one will yield a multitude of different answers. Depending on who someone asks, the solution ranges from lowering taxes and rolling back regulations to promoting greater transparency and more democratic governance of the national economy. For Market/Mixed Economies, I am not going to offer any actual suggestions, apart from strengthening governmental institutions because the proliferation of a Shadow Economy tends to undermine the responsiveness of governmental institutions. That also includes whether a national government is beholden to the interests of the Totality that it ultimately governs.  

Categories: Politics

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