The Christian Science Monitor has a neat little piece on America’s burgeoning shadow economy:

Perhaps the biggest surprise about America’s shadow economy is its size. Long associated with colorful street hawkers in the developing world, the shadow economy makes up a larger portion of the economies of countries like Greece (25 percent) or Mozambique (more than 40 percent) than it does in the US. But because America’s economy is so much bigger, its shadow economy amounts to nearly 8 percent of its gross domestic product (GDP)—in the ballpark of $1 trillion, estimates Friedrich Schneider, an economics professor at Johannes Kepler University in Linz, Austria. That’s bigger than the GDP of Turkey or Australia.

Many nations wouldn’t survive if not for their gray and black markets. Some of Europe is more heavily regulated than America, but with large segments of the economy operating outside the radar of the regulatory and tax police. Of course, many of the Soviet Union’s subjects only survived thanks to illegal economic activity.

This expanding black market in America demonstrates something important: The capacity of the market to exist without the state. Indeed, we libertarians who believe that a free society could thrive without a monopoly on violence (i.e., a state), should look upon the growing black market as overall a positive thing, and a model, for the most part, of civilized behavior.

In a free market society, there would be no black market as such, at least not in anything that would be legitimate (there might still be small amounts of exchange in the realm of properly illegal activity, such as the hiring of hitmen). In a free society, contracts could be upheld for a large range of activity where there is no government protection, such as the street drug trade.

But consider: Most of the illegal drug trade works and thrives. People get what they want out of it. Most illegal drug transactions are upheld and carried out honestly, with most economic actors walking away from the transactions satisfied. This all happens not just in the absence of government protection of contracts, but in the face of outright government hostility, prohibitions, policing, and threats of jail time.

If a market can operate without the government protecting it, and indeed while the state is attempting at great cost to obstruct it, then we can safely argue that it would probably operate fine, and even better, without the state being involved at all. Not only would taking the state out of the picture allow for the now-illegal market to flourish without the cost of avoiding state sanction; getting rid of the state would allow for the advent of more market mechanisms, such as arbitration, openly publicized customer reviews leading to sophisticated public calculation of a business’s reputation, and contract enforcement.

That one trillion dollars is moving around in the economy in direct confrontation with state intervention shows that the market is self-organizing. We do not need the state to oversee all this business— in fact, despite the state’s obstructive presence, the underground market thrives. Are there problems? Of course. There is fraud, which would be harder to get away with if this market were all out in the open, and not forced into the shadows by the state. There is misrepresentation and dishonesty. But these are the exceptions.

And can we really believe there is less of this in the legal, regulated economy? It seems to me, the more involved the state is in overseeing the economic sector—banking, military spending, education, health care—the more we see corruption, waste and fraud. This is because the state itself represents the legitimization of violent and predatory behavior, and the more it expands its role in overseeing and attempting to direct the economy, the more illegitimate and dishonest behavior gets the state’s official seal of approval and protection through the force of law. The state allows corrupt business practices to operate under the facade of legitimacy. The black market, on the other hand, must exist with efficiency and mostly with honesty, so as to overcome the cost of avoiding government obstacles and detection. Indeed, I would guess we are less likely to see speculative bubbles and systemic fraud in the illegal market than in huge swaths of the more highly regulated and politicized sector. But the remaining problems with the black market, such as with the turf wars and adulterated products in the drug market, would mostly disappear if the state just withered away, as almost all these problems could be traced to the effect of police intervention and the need of illicit entrepreneurs and customers to circumvent the state’s watchful eye. But most of the black market is much more peaceful than the drug market, since it is just taxes and regulations, rather than iron clad punitive drug laws, that are being avoided. Competition, reputation and arbitration would allow for a more honest market than we see today either below ground or above the board.