What Is the Black Economy?
The black economy is a segment of a country's economic activity that is
derived from sources that fall outside of the country's rules and regulations
regarding commerce. The activities can be either legal or illegal depending
on what goods and/or services are involved. The black economy is related
to the concept of the black market. In the same way that an economy is
made up of many related markets considered as an integrated whole, the
black economy is made up of the collection of various black markets in an
economy.
KEY TAKEAWAYS
The black economy is all economic activity in a given economy that
occurs outside or in violation of the prevailing laws and regulations of
society.
People will break or ignore the rules imposed when governments
intervene, tax, or regulate markets. This can produce net economic
benefits or costs to society.
Activity in the black economy is often illegal, usually untaxed, and
rarely recorded by official economic statistics. In fact, the activity may
not consist of formal market transactions at all, making it very difficult
to estimate.
Understanding Black Economy
People operate in black economies in order to trade contraband, avoid
taxes and regulations, or skirt price controls or rationing. Black economies
typically arise when a government restricts economic activity for particular
goods and services, either by making the transaction illegal or by taxing the
item so much that it becomes cost-prohibitive. A black market may arise to
make illegal goods and services available or to make expensive items
available for less money (such as pirated music or software).
As an example of a black economy, a construction worker who is paid
under the table will neither have taxes withheld, nor will the employer pay
taxes on his earnings. The construction work is legal; it is the nonpayment
of taxes that classifies the event as part of the black economy. Other purely
illegal transactions—something that varies widely by jurisdiction—are part
of the black economy by default. These include obvious things like selling
illegal substances and weapons, as well as activities that are highly
dependent on local laws, such as doing a renovation without a permit or
receiving payment for a sexual act.
How the Black Economy Stays Hidden
Because tax evasion or participation in a black market activity is illegal,
those who engage in such behavior will often attempt to conceal their
activities from governments or regulatory authorities. Black economy
participants traditionally choose to transact their illegal transactions in cash,
since cash usage does not leave a footprint. More
recently, cryptocurrencies have opened up new possibilities for payment,
particularly over the dark web. Different types of underground activities are
distinguished according to the institutional rules that they violate. Typically,
such activities are referred to with the definite article as a complement to
the official economies (e.g., "the black market in bush meat").
The black economy consists of many decentralized clandestine markets—
the black markets. These underground economies exist everywhere—free
market and communist countries alike, both developed or developing.
Those engaged in underground economic activities circumvent, escape, or
are excluded from the institutional system of rules, rights, regulations, and
enforcement penalties that govern above-board parties engaged in
production and exchange.
Costs and Benefits of the Black Economy
The net economic costs and benefits of activity in the black economy varies
depending on the type of activity and the context. Often black market
activities may benefit the direct participants in ways that are harmful to
others, such as the buying and selling of stolen property. Black market
activities of certain types can create clear and unambiguous harm to
society, such as murder-for-hire services. Other activities in the black
market may not cause direct economic harm to anyone but can reduce the
effectiveness of social institutions that benefit all of society, such the
poaching of wildlife, illegal dumping of toxic waste, or the evasion of taxes
used to pay for legitimate public goods.
Other times, the black economy can represent a clear net economic gain to
society that circumvents or compensates for economic problems created by
government policy. Smugglers and black marketeers can be the only
source of food and medicine to starving people in war-torn regions. Illegal
radio stations and newsletters can circumvent repressive regimes. Buyers
and sellers who violate regulations such as price controls and quotas can
undo some of the deadweight losses that can otherwise be tied to these
types of policies.
Moreover, banned private entrepreneurial and commercial activity in
centrally planned or socialist economies can provide invaluable consumer
goods and services that would be very scarce or nonexistent otherwise.
Similarly, personal services such as home-cooked meals and child rearing
that occur within a household are typically beneficial to all involved and
society at large, but they are part of the black economy because they occur
entirely outside of any formal contract, regulation, or recorded market
transaction.
Four Types of Black Economies
There are four major classifications of black economies: the illegal
economy, the unreported economy, the unrecorded economy, and the
informal economy.
The Illegal Economy
The illegal economy consists of the income produced by those economic
activities pursued in violation of legal statutes defining the scope of
legitimate forms of commerce. Extortion and drug dealing are part of the
illegal economy.
