The Problem with Black Market Economics

The term ‘black market’ has a negative connotation to it. It’s often associated with transactions relating to illicit drug use, firearms sales, and prostitution. However, the negative implication of the black market isn’t due to its being “unregulated’ by the government. It exists outside the law and therefore it must be the law that has the black market unsafe safe, right? Not quite. While it’s true that government regulation of the market influences the operation of the black market, it’s not true that the government keeps us safe through regulation.

Black Market Economics

Investopedia defines the term black market economics as transactions “taking place outside of government-sanctioned channels.” It then goes on to list some examples of ‘usual transactions’. It also asserts that these transactions “take a toll on an economy, since they are shadow markets where economic activity is not recorded and taxes are not paid.”

Ask yourself: how do you know that the government sanctions your transaction? Why are unrecorded transactions and taxes not being paid a burden on the economy? What fuels the economy; consumer transactions or government taxation? Does it make sense that a transaction taking place outside of government sanctions, where transactions aren’t recorded, and taxes aren’t collected really a burden on the economy?

Black Markets vs Open Markets

It’s interesting to read Investopedia’s definitions on black and open markets. A black market economics is one that avoids government controls, taxes, and is not government-sanctioned. An open market is one that is free from government controls, taxes, and government sanctions. Then what exactly makes a black market, black? What is the difference between avoiding the government and being free from the government?

It’s quite easy for us to imagine the black market: prostitution rings, drug cartels, firearms dealers, mercenary services. It’s violent, right? What makes a black market black is the violence.

So why are black markets violent?

A market, generally defined, is a place where goods and services are exchanged. Violence, which is simply a form of aggression, isn’t something that only happens in certain markets, like black markets. Aggression happens in every market and civil governance exists to execute justice when this happens. However, because the black market is not sanctioned by the government, it withholds justice when aggression occurs. On the white market, you can go through channels sanctioned by the government to seek recompense for injustice. However, on the black market, this can’t happen, and so violence is resorted to.

Civil justice cannot exist on the black market, not because it’s a market that avoids the government, but because the government, which has monopolized civil governance, avoids the black market economics. In fact, it can and does become the aggressor itself by participating in something called the red market.

Samuel Edward Konkin, III is said to be the one who coined the term black market. He also coined the terms gray, white, and red markets as well. If white markets are legal, then the red market is the white market with violence used as a means of enforcement. We can see the red market manifested in the war on drugs; both illicit and prescription. Gray markets are legal products and services that have been obtained illegally or are sold outside of government regulatory channels. Looking at these various types of markets, we can begin to see how violent government intervention changes market dynamics.

Mere Liberty

A market freed from government

I should point out that Investopedia does not use the term white market; it uses black, gray, and open. The implication here is that an open market must entail the red and white market activities that Konkin describes. It means the editors of Investopedia believe there is only one way to have an economy free from government, truly open. That is if the government benevolently and voluntarily steps out of the way by way of tweaking the laws and regulatory agencies.

But is this the case? The gray market gives the closest description of how a market freed from government would work. But the aggression occurs when the monopolized forces of the white and red markets either interfere or ignore the market. In other words, it’s not regulation that keeps the white market apparently peaceful. Instead, the primary source of violence in the market is the state monopolization of civil governance.

The states uses aggression as a means of enforcement, as in the case of the white and red markets, or by ignoring justice altogether, as in the case of the black market by punishing the wrong people or turning a blind eye to actual injustice. Is there really something wrong with an otherwise peaceful person growing cannabis on their balcony and selling it in order to pay rent? How is this different from the corn farmer who uses his profit to pay his mortgage?

What is the best solution to the black market?

The violence of the black market economics is a direct consequence of monopolizing civil governance and the use of force, and then withholding those services when aggression occurs. That means the black market is entirely a creation the state. The solution is not to make regulations stronger, or enforcement more violent. That will only make the problem worse. No, the best way to rid ourselves of the black market is to deregulate the white market, decriminalize black market transactions, or, even better, dissolve the monopoly on civil governance, so that the positive effects of the gray market can occur.

Resources & Further Reading:

  1. Black Markets and Green Market Anarchy
  2. The Black Market Correction
  5. What is Praxeology?

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B.A. Philosophy, Arizona State University. My writing focuses on libertarian philosophy and reformed theology and aimed at the educated layperson. I am a confessionally Reformed Christian orthodox Presbyterian in the tradition of J. Gresham Machen (1881 – 1937)
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