Economics, System D, and the Blockchain

I spend a fair amount of time thinking about stuff like the role of emerging technologies in societal development. This post contains a bit of such thinking as pertains to economics. Although you might know way more than I do about these matters, I hope that my insights nonetheless add something interesting to your day. 

To start with, the term 'global economic system' is misleading, because there are at least four overlapping, yet identifiable, economic systems 

 

~The Shadow Banking System. This is where the financial industry imagines value into existence, and transforms this imaginary value into market influence, which is indistinguishable from economic wealth. Another way to describe this economic segment is as a device used by the power elite to monetize the synergistic value produced by schemes of cost and risk sharing that are solely regulated by, and only accessible to, the power elite. The total size of this economy is absurdly large. Its notional value is at least a quadrillion dollars, but I am not clever enough to work out how many trillions of dollars worth of exchange this might actually represent in a given year. 

~The Formal Economy, which is what most considerations of economic exchange are limited to. 

~The Informal Economy, also called "System D", which consists of economic activities that are legal, but unregulated. This segment represents an estimated $10 trillion of exchange activity globally. This estimate of value is statistically dissociated from economic activities associated with illicit, criminal activities. 

~The Illicit Economy, involving unsavory financial activity of two varieties. The first consists of organized crime networks' financial activities. The second consists of nation states' clandestine financial activity related to defense and security. The total size of this economy is unknown. 

While there are many ways to segment the overall economy, most of these do not translate very well into everyday understandings. By considering the total system in terms of these four segments, however, the way that our economy actually operates becomes easier to make sense of. 

The shadow banking system was set up by the managerial class to operate beyond the monetary and regulatory limits of the formal economy. As an opaque system for cost and risk sharing amongst the financial elite, it solves the problem of how to handle the increasing complexity of successfully manipulating formal economic and governmental structures while limiting exposure to the deterioration of these structures inevitably produced by such manipulation. The term 'shadow banking system' is technically defined narrowly as a network of highly specialized firms, each of which is optimized to efficiently complete a single, discrete portion of a complex formulaic financial procedure [1]. Here, I use the term far more broadly, considering any business that has the power to create new money from imagination, operates outside the regulatory parameter, and employs a completely insane and extremely boring array of legal and financial mechanisms to cause and then benefit from a wide variety of crisis situations to be part of this system. 

The informal economy is very small compared to the shadow banking system in financial terms, but far more people rely on this for their livelihoods, and it is accessible to everyone. In global terms, here is where the fastest rate of economic growth is visibly occurring. Half of the world's workers rely on this informal economy for sustenance today. By 2020, this portion will have increased to two-thirds. Many - if not most - of these people would prefer to be afforded the benefits of formal employment, yet are unable to access these benefits for a variety of reasons. Traditional regulatory efforts, economic development schemes, and philanthropic ventures are typically unable to resolve the issues associated with this, are often instrumentalized by the financial elite, and continue to add complexity and financial barriers to the economic climes that emerging businesses must navigate. 

When the formal becomes inaccessible or excessively inhospitable, it loses legitimacy, and people arrange to meet their needs by other means [2]. Author Robert Neuwirth spent several years investigating this phenomenon, and published what he found as a book titled “Stealth of Nations: The Global Rise of the Informal Economy.” Here, Neuwirth names the total global informal economy 'System D', and, relying heavily on OECD data, finds that this represents $10 trillion of annual problem solving economic exchange globally. He discusses this in a Foreign Policy article:

 “They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of "l'economie de la débrouillardise. " Or, sweetened for street use, "Systeme D. " This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy ... Kids selling lemonade from the sidewalk in front of their houses are part of System D. So are many of the vendors at stoop sales, flea markets, and swap meets. So are the workers who look for employment in the parking lots of Home Depot and Lowe's throughout the United States. And it's not only cash-in-hand labor ... System D is multinational, moving all sorts of products -- machinery, mobile phones, computers, and more -- around the globe and creating international industries that help billions ofpeople find jobs and services. “ 

Robert Neuwirth, The shadow superpower, Foreign Policy, OCTOBER 28, 2011  

System d is conceptually distinct from comparably complex organized criminal networks. An easy way frame this distinction is as follows: The formal economy relies on a system of norms, rules, and laws that treat a small portion of the population preferentially, and organizes the remainder of the population into a system of control for rendering service to the desires of this structurally supported group. Criminal networks, on the other hand, employ the same strategy of forced compliance to a preferred leadership group's desires, but in an inverted fashion, offering people an escape from the 'legitimate' leadership group's rules in exchange for service to desires of this inverted power structure's rulers. 

In light of our increasingly potent technological capabilities, both legal and illicit expressions of such control tactics appear increasingly problematic. The conflict between actors in the formal and illicit systems pulls resources out of activities that create value. It then then siphons these resources into the service of the technologically augmented aggressions of either side against the other. This process is becoming increasingly automated [3]. System d emerges in this context, providing an alternative to both the formal and illicit systems for the majority of the world's workers. It attempts to solve the problem of managing the increasing complexity of earning a living while avoiding corrupted or corrupting institutional power structures. At minimum, this alternative creates a space in which to solve the problem of basic needs going unmet for no good reason, and of value creation potential being fully undermined by inequitable conditions. 

If the shadow banking system is where the financial elite avoid the rules of the formal economy, and the illicit economy is where mobsters profit from the population's desire to break these rules, system d is where the basic necessities of living render formal rules irrelevant. 

The size and growth rate of the informal economy signals that our global economy's organizational architecture has deteriorated and lost legitimacy. It further suggests that the economic crisis is not a temporary glitch, but instead represents a reconfiguration of the total global system. As developing nations rapidly industrialize, and developed nations fail to maintain the viable service and knowledge economies required to continue growing the purchasing power on which the global system necessarily relies, the fundamental assumptions of any 'traditional' economics prove themselves laughably inadequate. The strategy of monetizing an increasing variety of human activities is technically impossible beyond an arguably nascent threshold and psychosocially undesirable for reasons that are, or should be, obvious. 

System d is where economic growth appears to be occurring, and where people are finding ways to make ends meet as satisfactory jobs in the formal sector continue to disappear. It is also where undocumented immigrants are leveraged into inescapable working poverty by exploitative businesses. It is also where large companies research and test new ideas and assumptions about the market. And where new enterprises begin when adequate capital is inaccessible. And where many traditionally informal activities – child care, domestic labor, simple barter arrangements, farmers markets, yard sales, profitable hobbies, and the like – resist corporate and bureaucratic pressure to further financialize, and regulate, basic aspects of everyday life in community. The list is not exhaustive. It barely scratches the surface. 

There is nothing like consensus on the informal economy. Some want to define it in terms of worker behavior, while others use employer behavior for this. Even its general size is in question. The most neutral and rigorous recent study of system d in the U.S. that I have been able to find estimates that between 3% and 40% of workers in the US are employed full or part time in the informal economy, and that this work represents between 10% and 20% of the total economic activity that takes place in the US. Neuwirth's research suggests that system d is something like a USD1T per year portion of the U.S. economy, whereas measuring in terms of the 'tax gap' resulting from the difference between earned income estimates and reported income calculations, as Cebula and Feige do in Measuring America's Underground Economy, results in a figure of approximately USD2T [4]. As the 2T figure is derived purely from all estimated tax evasion, including that done by formally employed persons believed to be intentionally violating tax regulations despite earning all income through standard, secure, formalized enterprises, I do not believe this is at all an appropriate way to capture System d in the US. The income tax issue, in particular, is little more than a device of politicized rhetoric used to criminalize poverty by comparing poor people with white collar criminals. Many, if not most, of the people who live and work in System d earn poverty-level incomes, and would very much like to earn enough money to be required to pay income taxes. 

Put another way: are you familiar with the story of Robin Hood? It is as if most of Nottingham Kingdom has grudgingly left the village - fleeing from tribal and institutional corruption - to eke out a living with the Merry Men of Sherwood forest. This is highlighted by the difference between the following two quotes. The first is from an OECD report, while the second is from the popular American counter-culture blog of Ran Prieur: 

The view from the village: “Informal workers in developing countries make up more than halfthe workforce. They receive low wages and no formal contracts or benefits, yet often represent the most dynamic part ofthe economy. The likely surge of informal jobs due to the economic crisis makes the management ofinformal employment even more challenging and topical. Responding to this emerging challenge is critical, not only for the well-being of millions of workers but also for sustainable development.” 

Quoted From: 'Is Informal Normal? Towards More and Better Jobs in Developing Countries', OECD, 2009 

The view from the forest: “November 1. Greg comments on yesterday's post: It makes me think ofall the auto repair, plumbing, contracting, etc. businesses that are hurting for work but still trying to charge $75/hour and up. Eventually their price will have to come down, but then can they afford to pay their inflated mortgages and cost of living? And a reader who works with a plumbing company comments that $75/hour is necessary to keep up with business expenses, especially to "comply with all the insane number of new laws. . . these huge plumbing companies lobby to pass laws that make it impossible to do business without a full time staff of abstract information shufflers. " So there are at least two ways out. One path is to greatly reduce your living costs, most likely by getting out of debt and finding or creating cheap housing. The other path is to work illegally, under the table. Ideally you do both at once. Then you can afford to sell goods and services for less money than ordinary businesses that obey the law and pass most oftheir income up the pyramid. As more people do this, less money gets passed up the pyramid, and the old dominant system weakens and shrinks. Of course the danger is that the new economy, being mostly invisible, becomes corrupt. Bob Dylan said it best: "To live outside the law you must be honest. " 

Quoted as posted 1 November, 2011 on ranprieur.com 

Neoclassical, structuralist, and legalist (aka neoliberal) approaches to economics have each - in turn - tried and failed to adequately untangle and address the issues surrounding the informal economy. Meanwhile, the formal sector becomes increasingly hostile to average workers and small businesses, business is booming in the criminal system, and the shadow banking system continues to insulate the financial elite from risk manufactured by their actions. 

At a glance: feedback-driven interaction between formal and informal economies 

 

As you can see, even in such a simplified model, the interaction between formal and informal socioeconomic ecologies is nuanced. 

It is possible that the interaction between these will become increasingly adversarial if businesses on either side of this divide begin directly competing for advanced technologies, raw materials, skill and knowledge resources, and market access. Such tensions follow predictable patterns that are evident already. Formal sector enterprises band together and employ the regulatory, media, and violence monopolies they control to attack the informal sector in general, which then responds by employing increasingly risky business strategies to meet the basic needs of the millions of people who are unable to meaningfully participate in the formal sector. Whether or not these strategies are ultimately successful, the popular legitimacy of the formal sector deteriorates, sending even greater numbers of people into system d. 

It is also possible that the interaction between formal and informal economies will become increasingly collaborative as the strengths and weaknesses of each in our postindustrial context become apparent, and if barriers to formal entrepreneurship are reduced. These barriers are psychosocial as well as formally regulatory. They are extremely diverse and are often highly localized; perceived in many different ways by varietal actors. Some countries, and localized geographies within countries, appear to be making great strides in fostering such collaboration. Though perhaps unlikely, it is not yet inconceivable that a re-legitimization of the formal economic system and the governing structures that this has divisively instrumentalized could be achieved, in part, through appropriately handled interaction with system d. 

Another possibility is that the interaction between formal and informal could be competitive, and disruptive to the formal system, but in a way that ultimately augments this and rebuilds its popular legitimacy. This would be characterized in the above model as both the supportive and disruptive feedback loops striking an overall balance, and operating in concert with one another. Although it may be challenging to imagine such a scenario, this actually appears quite plausible. Formal sector businesses are continually attempting to produce 'disruptive innovations', but their opportunities for doing so are invariably constrained by institutionalized ways of thinking and interacting that limit their options. The informal economy is subject to a different manner of constraints, and thus may produce a novel variety of innovations with the good kind of 'disruptive' potential. Thus, competition between formal and informal could be adversarial, but constrained to mostly creative domains, and produce significant overall value that benefits the total system. 

Blockchain tech, alt currency, and Steem's creative disruption potential 

 

With the emergence of blockchain technology, many of the scalable cost-and-risk-sharing strategies that have proven so profitable to the shadow banking system have become far more accessible throughout the total economic system. 

The cost of money is exceedingly high for those of limited means. Finding a loan with reasonable interest rates or obtaining a fair price for goods/services is often impossible for those at the bottom of the food chain in the current system. Due to increasing wealth distribution inequalities in the total system, this becomes more and more true with every passing day. 

While the rise of decentralized alt currency networks may address the artificial scarcity of national currencies in a general sense, it takes coupling such currencies with a fair and functional reputation tracking system to make such currencies at all practical for widespread use in the informal sector. From where I stand, STEEM is effectively pioneering this. 

It is a disruptive innovation, but its inherent dependence on the formal economic system suggests that this disruption would not threaten the stability of the total system even if it were to be adopted on a massive scale. 

In Jan. 2019, a new token designed to address many of the monetary issues outlined herein launched on the Waves and Bitshares blockchains, using the STEEM blockchain for text-based operations. It's called Rstory.  

[1] For a (possibly already outdated) overview of the shadow banking system, see: Shadow Banking., Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky Federal Reserve Bank of New York Staff Reports, no. 458, July 2010: revised February 2012 

[2] "The informal economy is defined as that component of the overall market in which enterprises, employers and selfemployed individuals engage in legal but unregulated activities. While they do not comply with standard business practices, taxation regulations and/or other business reporting requirements, they are otherwise not engaged in overtly criminal activity. It includes both employed and self-employed workers; cash is the most common medium of exchange; and inferior work conditions are commonplace for workers" 

Definition quoted from: ELAINE L. EDGCOMB, TAMRA THETFORD, FEBRUARY 2004, The Informal Economy, Making it in Rural America, FIELD ISBN: 0-89843-401 -7  

[3] John Robb's book 'Brave New War' discusses the implications of this in a networked world. 

[4] 'Is Informal Normal? Towards More and Better Jobs in Developing Countries', OECD, 2009