The Most Interesting Article I’ve Read This Week

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Jason Kuznicki

Jason Kuznicki is a research fellow at the Cato Institute and contributor of Cato Unbound. He's on twitter as JasonKuznicki. His interests include political theory and history.

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19 Responses

  1. Avatar Tod Kelly says:

    System D isn’t a utopia, which I say only because I’m sure I’ll be accused of thinking otherwise.

    Actually, I’m pretty sure people what people are going to accuse of is saying it’s OK if America operates like a 3rd world country.Report

    • Avatar Jason Kuznicki in reply to Tod Kelly says:

      What if it gave us the growth rates of some of these 3rd world countries?

      Eh, probably not even then. It’s only pure if it’s been blessed by the government.

       Report

      • Taking growth rates into account?  You give your trolls much credit.Report

      • Avatar James K in reply to Jason Kuznicki says:

        Honestly, I doubt you’d get the same results in a first world country.  Strange as it may seem, it’s actually easier for poor countries to grow fast than rich ones because they can grow by accumulating capital – a trick first-world countries can’t pull because we are already maxed-out on capital.

        For the same reason, the Soviet Union’s high grwoth rate in the early-mid 20th Century wans’t an indication of communism’s superiority (no matter what the apologists of the day might have said), they were just playing catch-up.

        Same story for China today.Report

  2. Avatar North says:

    How does “system D” manifest itself when it crosses into the first world economies? I’d take this more as an indictment of how manifestly corrupt, inefficient and badly run third world countries are specifically than a general indictment of all forms of government regulation everywhere.Report

    • Avatar Dan Miller in reply to North says:

      At a first guess, I’d say the answer you’re looking for is “Greece”.Report

    • Avatar Kimmi in reply to North says:

      Second greece, and refer you to the economic research on illegal watermelon peddling in the midwest. (god, some researchers are bored, amiright? Well, they can’t all be Krugman…)Report

    • Avatar Jason Kuznicki in reply to North says:

      Yes, Greece.  But also babysitting, Freecycle, Craigslist, the barter economy, and all the illegal immigrants who pick vegetables and work in the building trades.   Also, all the money you won at the casino but didn’t report to the IRS.Report

      • Avatar E.D. Kain in reply to Jason Kuznicki says:

        I think part of the point is that these DIY-economies are a reaction to necessity. There is so much corruption and so many violent barriers to peaceful commerce that these things are inevitable.

        In the developed world you have less of a need, so you see these things manifest around the edges (i.e. Craigslist, the barter economy, etc.) rather than as a more fundamental piece of the economy.

        I think there’s a pretty strong case to make against the sort of government regulations that clamp down on start-ups and the DIY and barter economy – licensing schemes, etc. But this is still not a general indictment of regulations themselves, which can provide important safety guidelines for workers, or important environmental regulations that prevent one company from infringing upon the rest our liberty to live in a relatively clean environment.Report

        • <i>I think part of the point is that these DIY-economies are a reaction to necessity. There is so much corruption and so many violent barriers to peaceful commerce that these things are inevitable.</i>

          This.  That’s certainly the lesson from Hernando de Soto’s <i>The Other Path</i> (he uses the term “informal” economy).  A highly recommended book.Report

  3. Specifically, central governments must be doing something really, really wrong for businesses to want to hide so badly.

    Three observations. First, aren’t the central governments concerned weak states to start with? Nigeria for instance ranks 14 in Foreign Policy’s 2011 Failed States Index. The government may not be doing something bad so much as being ineffectual, corrupt, or nonexistent in important ways.

    Second, it is easier to make larger profits when setting aside “labor laws, copyright protections, product safety regulations, antipollution legislation, and a host of other political, social, and environmental policies”, as the article describes System D. There’s a substantial individual benefit and a huge social cost. The Trafigura case for instance – in a nutshell a shipload of toxic waste transported from the Netherlands (high disposal cost) to the Ivory Coast (low disposal cost), the improper disposal injured more than 30,000.

    Third, the issue of counting criminality in relation to System D remains murky in the article,

    Finding a firm dividing line is not easy […]: “It’s very difficult to separate the nice African ladies selling oranges on the street and jiggling their babies on their backs from the Indian gangsters who control the fruit trade and who they have to pay rent to.”

    Schneider suggests, however, that, in making his estimates, he has this covered. He screens out all money made through “illegal actions that fit the characteristics of classical crimes like burglary, robbery, drug dealing, etc.” This means that the big-time criminals are likely out of his statistics, though those gangsters who control the fruit market are likely in, as long as they’re not involved in anything more nefarious than running a price-fixing cartel.

    Is there a background of private (illegal) violence? Is the “rent” really extortion or is it an exchange made without the threat of force? Unclear.

    And thanks for pointing out this article, it was an interesting read. Though I’m more inclined to see the dystopian features of entrepreneurship unencumbered by the gaze of the state.Report

  4. Avatar DensityDuck says:

    “System D” sounds like a tarted-up restatement of “it’s easier to get forgiveness than permission”.

    Maybe the lesson here is not that government is stupid, but that we don’t actually need must-obey and third-party-verified compliance to every regulation that someone can imagine.Report

  5. Avatar Stillwater says:

    they don’t give anything to, or get anything from, the regionally dominant protection agencies, except insofar as they benefit from a general climate of non-lawlessness, which helps even lawless businesses succeed.

    If half the people in the world are working in System D, then I’d say the general climate isn’t quite what you’re describing.

    central governments must be doing something really, really wrong for businesses to want to hide so badly.

    For businesses to want to hide so badly? Isn’t that a question which contains it’s own answer? Doesn’t it also derive neatly from the first principles of a theory which says that unfettered markets and profit motive are the best way to maximize etc etc.?Report

  6. Avatar Kolohe says:

    I didn’t care much for Neuwirth’s article, to me he’s overselling his thesis* to sell books.

    And I’m quite sympathetic to off the books, grey market, informal economies. But like reason’s paens to the northern parts of Cote D’Ivoire a couple of years ago, it’s ignoring some key parts of the picture.

    My first reaction when I came across this piece earlier in the week was “So, he’s discovered the 18th century?”

    (*To wit – calling it a ‘system’.  By definition, it’s not.  And it’s certainly not a ‘superpower’ in any sense of the term)Report

  7. Avatar George T says:

    The US operates almost entirely under “System D”.  We legalized all its informal transactions and gave them legal protections, and got incredibly rich off it, continuing a trend started in Britain.  The reason the US has no large black market (unlike the third world), is that we grandfathered it in.

    The economist Hernando De Soto not only did the best research into the rules of the system (In his book “The Other Path”), but in his book on capitalism traced the incredible wealth of the US to a series of laws passed in Frankfort Kentucky, declaring that the state would recognize as the legal owner of land the person who had made improvements upon it, regardless of any other land grants.  The Supreme Court struck it down repeatedly and Frankfort kept passing it again (every politician Kentucky was elected by people whose farms were carved out regardless of Revolutionary War land grants, deeds from the Spanish Crown, and land speculators back east).  Other states followed Kentucky’s example, and vast tracks of land entered the legal economy, as did the bulk of the otherwise disposessed subsistence farmers.

    In most third world countries the average person doesn’t own a legal title to his land, and thus can’t legally own a house or run a business.    We solved that problem by making it trivially easy to own property legally.  The contrast isn’t lost on people who spend 20 years fighting a vast web of bureaucratic ministries, bribing everyone in sight to try and get a legal title to the home they built with their own hands on the land their family has farmed since the 1600’s, but who can hop on a plane to Miami and become a legal homeowner and business owner the same day.

    The other reason to recommend De Soto is that he’s the first person to figure out what capital actually is.  Adam Smith and Karl Marx made stabs at the question  but couldn’t figure it out, and no economists since then could figure it out either.  That’s but one of the reasons that many people consider De Soto to be the greatest economic thinker since Smith, if not the greatest of all time.

    And the most interesting thing about De Soto is that he didn’t spin a theory (like Karl Marx sitting in his basement wondering what it must be like to have a job), he just took lots and lots of detailed observations (tasking a great many students to help collect data) and described what he saw and how it worked, like a scientist looking through a microscope at newly discovered little animacules.  It reminded me of Adam Smith observing meetings between businessmen, as they conspired to collude and then always got stabbed in the back by a member who undercut the rest of them.

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