The Invisible Hand’s Shadow

The shadow economy as an issue for public policy and public administration is something I have been banging on about for several years (see A False Economy, Public Finance, 2004). I recently tried to raise the issue at both the Treasury and Public Administration select committees.

So I was pleased to see a fascinating paper by Sean Mallin of the University of Notre Dame, USA, in the latest edition of ‘Real-World Economics‘. Mullin’s opening paragraph ought to tempt you to read further….

“Non-formal economic exchange is not a relic of the distant past nor is it a practice limited to the most underdeveloped and economically “backward” of modern times. It is ubiquitous, yet frequently overlooked; under various guises, non-formal economies exist today alongside and intermixed with formal markets, even in the most advanced capitalist countries. From the trading of snacks in an elementary school playground to the trafficking of people all around the world, the workings of non-formal economies are embedded in our daily lives, actively shaping everything from bank policies to foreign policies. The world we know floats atop a tumultuous ocean of non-formal economics. It’s about time economists—and the ordinary person on the street—take a look.” 

As I have argued consistently the shadow economy is much bigger than most policy-makers are willing to admit, and its impacts far more wide ranging. Everything from official statistics to public services to tax collection is undermined by this growing problem. As Mallin says “We need to see the non-formal before we can even set out to understand it” and he might have added that there are none so blind as those politicians and public administrators who don’t want to see. The current recession will see the shadow economy grow, as it always does in hard times. Mallin goes further:

“War, poverty, death, and deceit are all upheld through the continued ignorance of the non-formal dimensions of political economy. The stakes in the battle for a real-world economics are too high to ignore.” 


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