How the informal economy took over the world

The idea of an informal economy was born at the moment when the post-war era of developmental states was drawing to a close. The 1970s were a watershed between three decades of state management of the economy and the free market decades of one-world capitalism that ended with the financial crisis of 2008. It seems now that the economy has escaped from all attempts to make it publicly accountable. What are the forms of state that can regulate a world of money that is now essentially lawless? The informal economy started off forty years ago as a way of talking about the Third World urban poor living in the cracks of a rule system that could not reach down to their level. Now the rule system itself is in question. Everyone ignores the rules, especially the people at the top – the politicians and bureaucrats, the corporations, the banks – and they routinely escape being held responsible for their illegal actions. Privatization of public interests is probably universal, but what is new about neoliberalism is that, whereas the alliance between money and power used to be hidden, now it is celebrated as a virtue, wrapped up in liberal ideology.

The informal economy seems to have taken over the world, while cloaking itself in the rhetoric of free markets. We are witnessing the world-historic collapse of the twentieth-century attempt to impose national controls on the economy. Inevitably, when witnessing this collapse, we dream of restoring the era of social democracy, of Stalinism and of developmental states. The rules operated then with some degree of success. This nostalgia for the heyday of what I call “national capitalism” will not serve us well today. We need to analyse the contemporary world economic crisis at a number of levels. Above all, we should acknowledge that the core problem is not narrowly economic, but one of political failure, both national and international. Money and markets have escaped from public control and cannot be put back in that straitjacket. The question then concerns what democratically accountable structures might be capable of regulating the world economy and under what social conditions? I will try to answer that question by reflecting initially on the history of a concept with which I have been closely associated.

Before the First World War no-one believed that the state, a hangover from pre-industrial society, could manage the turbulence of urban commerce. Industrial capitalists and the military landlord class formed an alliance in the 1860s and afterwards to keep in check the proliferating working class spawned by the machine revolution. Germany and Japan took cooperation between these classes within new state structures to an unprecedented level. But the Great War revealed hitherto unimagined government powers: to raise and kill off huge armies, organize industrial production, control market prices and monopolize propaganda. After the war, the issue was which kind of state – welfare democracy, fascist, communist – would win the race to organize world society. The whole period, 1914-1945, was a nightmare: two world wars, the Great Depression, a succession of ugly conflicts such as the Spanish civil war, the Japanese invasion of Manchuria, the Italian attack on Abyssinia. Writing just before the end of all this, Karl Polanyi blamed it all on the nineteenth-century experiment to make society conform to market principles.

No wonder then that, in the late 1940s, the world turned to post-war governments of various kinds to build an alternative system. Their mission, for the first and only time in world history, was to reduce the gap between rich and poor, to increase the purchasing power of working people and to expand public services. The European empires were dismantled, beginning in Asia; a new world order was inaugurated under US hegemony, implementing the accords of Bretton Woods; the United Nations was formed and “development” – a post-colonial compact between rich and poor nations — was the order of the day. All of this took large amounts of state intervention. The post-war boom began to come unstuck around 1970. By the end of that decade, neoliberal conservatives were installed in power throughout the West. Their slogan was the free market and in the 1980s, with the active support of the IMF and World Bank, they set about dismantling state restrictions on the international flow of money in the name of “structural adjustment”, at first in the developing countries. This was the context in which the “informal economy” emerged, not only as a description of the Third World urban poor, but as a universal feature of modern economies.

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Comment by Keith Hart on October 19, 2012 at 9:20am

Well, John, if this is your version of my story, I told it badly or you weren't listening. I was referring to the end of the postwar period of state-managed market economies which took the form in the West of Keynesian social democracy, but had parallels in postcolonial developmental states and the communist bloc (which many commentators at the time thought were more similar to the US than was supposed). I identified the events of 1971-73 that underpinned an unraveling of that synthesis which took the rest of the decade to be completed. It happens that a discourse of formal and informal economy emerged at the same time, but it was not apparent then that the presumption of state control of the economy was almost over. I didn't spell out in the paper how and why market fundamentalism took root in the West and elsewhere; but I do see it as a counter-revolution organized by the rich against the class compromise of the postwar social revolution that put redistributive states in the driving seat everywhere. This, I claim, is how the informal economy became general, as a result of the drive for deregulation. I then enrol my own concept of national capitalism whose collapse underpins the current economic crisis and I provide a brief account of the euro crisis as an episode in the history of money. The conclusion is that national politics and law cannot organize the global money circuit and as a result the informal economy has taken over the world -- with dire consequences for us all which are not usually reflected in media discussions of the crisis. Now this may be unnecessarily complicated, but your summary leaves out most of the relevant history for abbreviation's sake. If I could reduce my argument to this level, I would. But I learn by writing and this story isn't finished yet.

Comment by John McCreery on October 19, 2012 at 4:12am

The argument of the paper is that the formal/informal pair emerged at the point when the modern synthesis of states and markets was beginning to unravel (negative dialectic).

Here I would like to ask, unravel for whom? The question is inspired by Stephanie Coontz's book about the ideal of the nuclear family, whose title states her central thesis, The Way We Never Were. Also by George Soros' remark that every successful investment begins with a good story; the trick is knowing when the story stops being a good one. 

If I am reading you correctly, what I see is a story of nation and empire-building in which the transfer of authority from local and idiosyncratic to bureaucratic and supposedly rational regimes hits a limit, which is then described as the boundary between the formal and informal. Defects in bureaucratic solutions to social problems stimulates a reaction against bureaucratic rules, which fuels what has become market fundamentalism, minus the rationality that markets are supposed to embody—resulting in a world in which bankers and cocaine dealers could, depending on ideological perspective, be described either as businessmen or criminal gangs. 

The question that engages me is whether this process is, in any way, more than superficially different from the creation of the "new class" of party cadres in formerly Communist countries or the dynastic cycle in imperial China—which is to say, the  ideologies articulated appear to be different but the underlying story of greed, exploitation and repeated rebellions, leading at last to a "revolution" that starts the cycle over again.


Comment by Keith Hart on October 18, 2012 at 9:31am

The argument of the paper is that the formal/informal pair emerged at the point when the modern synthesis of states and markets was beginning to unravel (negative dialectic). There is still a tendency to seek solutions through the original pair, by restoring rules for example, but the world has moved on to another level. A number of related dialectical pairs have also become blurred: public/private, work/home or work/leisure, production/consumption, male/female, nation/world. Neoliberal globalization, the end of the Cold War, the digital revolution, the rise of the BRICS and the current economic crisis have all played their part in this.

After the twentieth century experiment of building society according to impersonal norms, one important development is the restoration of human personality to social intercourse at distance, partly as a result of the cheapening of information transfers. This is reflected in the rise of social media and the growing importance of cultural commodities in the world economy (entertainment, media, education, information services). I agree that any search for a new positive dialectic would have to take these developments of the personal/impersonal pair into account.

I co-edited a book by CLR James, American Civilization, originally written in 1950, which argues forcefully that the struggle between totalitarianism and democracy is often carried out in the sphere of popular culture. What I was trying to set out in the present paper was the case for recognzing the impasse when political culture remains trapped in a past that has already been undermined by the global circuit of money, opening up possibilities of war and revolution far more terrible than is commonly realised. If that argument is accepted, we could then move on to identify the positive principles around which humanity might rebuild world society.

Comment by John McCreery on October 18, 2012 at 7:32am

Marvelous. Bloody marvelous. So much here to talk about. Let me add just one thought and ask Keith how, if at all, it would alter his analysis. 

The argument develops dialectically, in terms of binary oppositions, formal/informal, work/home, male/female, etc. But sociologically speaking, modernization not only separated formal and informal institutions, work and home, the daily lives of men and women. It also carved out the third space of recreation and popular culture, which appears to now consume a growing fraction of the lives of people, or at least those fortunate enough to live above the poverty line in OECD countries. It may once have seemed reasonable to regard this space as marginal to the serious sides of life, enacted in homes and workplaces, as a merely liminal "other" of only minor concern. That, however, no longer seems to be the case. Indeed, as the line between work and home becomes increasingly blurred (or, more properly in deep historical perspective, restored to the usual state of affairs when most livelihoods depend on family farms or cottage businesses) and the festivities that used to only periodically interrupt the labor of making a living expand to become an all-pervasive, 24/7 available source of solace, distraction or sheer entertainment, what happens to the world-historical scheme so lucidly outlined in the article to which this blog points us?


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