Mises Daily Articles
The Education of Robert Neuwirth
You have to give Robert Neuwirth credit — and I'm not being sardonic here; I mean it: you have to give him a lot of credit. He's a highly intelligent young man, a young man who is willing and able to think outside the box, and he is making definite progress. I recommend that we encourage him, let him know that we understand and appreciate his efforts, help him to learn more and to do it faster. But I get ahead of myself. After all, I haven't yet explained who Robert Neuwirth is or what he's done that merits our attention. So let me begin at the beginning.
Robert Neuwirth is a journalist who is preoccupied with this question: What do people do when the state has made satisfaction of their wants, their natural desire to improve their lives, almost impossible?
Neuwirth would almost certainly not pose the question in quite these terms. On the one hand, he understands quite clearly that this is precisely what is going on — that it is the state that has put people in the position he describes so well. In his first book, Shadow Cities: A Billion Squatters, a New Urban World, published in 2005, he wrote about "people who came to the city, needed a place to live that they and their families could afford, and, not being able to find it on the private market, built it for themselves on land that wasn't theirs." In almost all cases the land in question belonged to the local state. Back in the 1980s, when squatters first arrived on the then-empty piece of hillside land in Rio de Janeiro now known as Rocinha, for example, they "assumed that building a stone or brick home would be so brazen that it might encourage the government to come out and demolish the homes." So they built "rickety mud and wood houses," where they "survived with no water, no electricity, no gas, no toilets, nothing."
Things have changed there in the past couple of decades. "Today," Neuwirth wrote in 2005,
there are thirty thousand homes in Rocinha.… Most are two, three, or four stories tall, made from reinforced concrete and brick. Many boast shiny tile facades or fantastic Moorish balustrades or spacious balconies, which look out over the endless waves crashing on the beach at São Conrado, far down the hill. Electricity and water have come to this illegal city, and with them a degree of consumerism. Most families have a refrigerator, a color television … and a stereo.
these squatters mix more concrete than any developer. They lay more brick than any government. They have created a huge, hidden economy — an unofficial system of squatter landlords and squatter tenants, squatter merchants and squatter consumers, squatter builders and squatter laborers, squatter brokers and squatter investors, squatter teachers and squatter schoolkids, squatter beggars and squatter millionaires. Squatters are the largest builders of housing in the world — and they are creating the cities of tomorrow.
In these cities of tomorrow, everything is provided by that hidden economy. The state won't provide water or electricity or gas, so illegal businesses provide them. The state won't deliver mail, so illegal businesses deliver it. The state won't provide mass transit, so illegal businesses provide it. The state won't arbitrate or adjudicate disputes among illegal businesses and their customers. So illegal businesses do that, too. And in his new book, Stealth of Nations: The Global Rise of the Informal Economy, Neuwirth turns his attention to those illegal businesses and to the men and women who run them, people who "do business without licenses, without being registered or incorporated, and without paying taxes."
This "informal economy," he writes, "produces, cumulatively, a huge amount of wealth.… It is how much of the world survives, and how many people thrive." And he has a name for it: System D.
"System D," he quickly explains,
is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man (or woman) is a débrouillard(e) is to tell people how resourceful and ingenious he or she is. The former French colonies have sculpted this word to their own social and economic reality. 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.
In both books, Neuwirth follows essentially the same procedure. He travels around the world, visiting various cities, living in each of them for anywhere from a few weeks to a few months, talking to people who have homesteaded "public" land or who work in System D. In both books, he focuses his primary attention on Third World cities (Rio de Janeiro, Nairobi, Mumbai, and Istanbul in Shadow Cities; Lagos, Ciudad del Este, and Guangzhou in Stealth of Nations). But he is well aware that neither squatters nor System D is peculiar to the Third World. As he wrote six years ago in Shadow Cities, there was a time, not all that long ago, when the leading metropolitan centers of today's First World didn't look all that different from the leading metropolitan centers of today's Third World.
"Some sections of London were squatter zones until the mid-1800s," he wrote, noting also that
even New York, the definition of the modern real estate city, was a squatter metropolis until the early years of the twentieth century. In fact, the word squatter is an American term, originating in New England around the time of the revolutionary war as a popular term for people who built their homes on land they didn't own. The first use of the word in writing came in 1788, by the man who would become the fourth president of the United States — James Madison.
Altogether, Neuwirth wrote in 2005,
there are about a billion squatters in the world today — one of every six humans on the planet. And the density is on the rise. Every day, close to two hundred thousand people leave their ancestral homes in the rural regions and move to the cities. Almost a million and a half people a week, seventy million a year. Within 25 years, the number of squatters is expected to double. The best guess is that by 2030, there will be two billion squatters, one in four people on earth.
The process Neuwirth describes in this passage is, of course, most clearly observable in the Third World, hence his emphasis on cities like Nairobi and Mumbai.
As for System D, Neuwirth certainly finds plentiful evidence of it in the Third World cities he visits. He writes of an illegal Sao Paulo street market that
draws four hundred thousand people on the average weekday — and many more on Saturdays. On important holidays, the market attracts a million shoppers a day … the eight thousand merchants in the market (according to a recent census, sixty-five hundred of them — or 80 percent — are either unlicensed or evading registration requirements in some way) do more than R$17 billion of business a year — or almost $10 billion. Brazil is a massive country with a population of perhaps 190 million and a strong industrial base, but, if it were incorporated as a single business, this one street market in one city would qualify as one of the five largest Brazilian-owned firms operating in the nation.
Neuwirth notes that "in the Philippines … three-quarters of the nation's workforce — 24.6 million people — work in System D," while "in Bolivia … more than two-thirds of all jobholders work in System D."
On the other hand, as I have noted, Neuwirth is acutely aware that System D is not limited to the Third World. He quotes a Reuters article that claims, "the value of Spain's off-the-books economy [in 2010] was two hundred billion euros (approximately $280 billion)."
He quotes an article from the Irish Independent that claims "illicit economic activity [in Ireland] adds up to €6.1 billion — or about $8.5 billion … annually."
He quotes a 2007 article published by the Swiss national news service that claimed, "the activity of people working off the books" there accounted for $35 billion a year.
He also observes that "in Southern Italy and Sicily, at least 25 percent of all economic activity is unreported to the government."
And then there's the United States, with "the largest unregistered economy in the world, worth more than $1 trillion." Altogether, worldwide, the informal economy is huge. "It used to be," Neuwirth writes,
that System D was small — a handful of market women selling a handful of shriveled carrots to earn a handful of pennies. It was the economy of desperation. But as trade has expanded and globalized, System D has scaled up too. Today, System D is the economy of aspiration. It is where the jobs are. In 2009, the Organisation for Economic Co-operation and Development (OECD), a think tank sponsored by the governments of 30 of the most powerful capitalist countries and dedicated to promoting free-market institutions, concluded that half the workers of the world — close to 1.8 billion people — were working in System D: off the books, in jobs that were neither registered nor regulated, getting paid in cash, and, most often, avoiding income taxes.
In many countries — particularly in the developing world — System D is growing faster than any other part of the economy, and it is an increasing force in world trade. What's more, after the financial crisis of 2008/2009, System D was revealed to be an important financial coping mechanism. A 2009 study by Deutsche Bank, the huge German commercial lender, suggested that people in the European countries with the largest portions of their economies that were unlicensed and unregulated — in other words, citizens of the countries with the most robust System D — fared better in the economic meltdown of 2008 than folks living in centrally planned and tightly regulated nations. Studies of countries throughout Latin America have shown that desperate people turned to System D to survive during the most recent financial crisis.
The world over, System D is synonymous with entrepreneurialism and employment. The global economy may be contracting, but System D is providing jobs. The digital divide may be a concern, but System D is spreading technology around the world at prices even poor people can afford. Squatter communities may be growing, but System D is bringing commerce and opportunity to these neighborhoods that are off the governmental grid. System D is distributing products more equitably and cheaply than any big company can.
And at least one expert, "Friedrich Schneider, chair of the economics department at Johannes Kepler University in Linz, Austria, [who] has spent decades calculating the dollar value of what he calls the shadow economies of the world," has estimated that, as of 2003, "the approximate value of the billions of underground transactions around the world … [was] close to $10 trillion." Or, as Neuwirth rephrases and repackages Schneider's estimates,
if System D were an independent nation, united in a single political structure — call it the United Street Sellers Republic (USSR) or, perhaps, Bazaaristan — it would be an economic superpower, the second-largest economy in the world (the United States, with a GDP of $14 trillion, is numero uno). The gap is narrowing, though, and if the United States doesn't snap out of its current funk, the USSR/Bazaaristan could conceivably catch us sometime this century.
Why is System D so popular? Because governments worldwide have made the alternative — doing business legally, within the system — too expensive for too many of their citizen-victims. Neuwirth understands this. He's too smart not to. He frankly acknowledges that "there are active disincentives to doing business legally."
And then he starts getting into specifics. He quotes Reginaldo Gonçalves, the building manager of a "shiny" Sao Paulo mall, who acknowledges that not all his tenants may be entirely within the law in their operations. "I'm not saying they are all totally legal," Gonçalves tells Neuwirth. "They have certificates. They are filed with the government. But we have a saying here in Brazil: 'If you work one hundred percent legally, you cannot survive.'"
Neuwirth finds that one of the principle obstacles to economic development in the Third World is what he calls "huge import duties" that "sometimes cost more than the value of the goods that are being shipped." And other taxes can be just as bad, which calls for more specifics. "Brazil … has a value added tax called the ICMS," he writes. "The ICMS levy varies for different products, and it's hard to figure out what the actual tax rate is. This is exacerbated by the fact that different taxes are computed on top of one another." But "all told, the various levies in Brazil can make up 90 percent of the price of what you buy."
Taxes like this provide a powerful incentive to gravitate toward occupations in which nonpayment of taxes is the norm. Another powerful incentive to work outside the system, to have as little as possible to do with the state, is provided by the widespread distrust and hostility the state has engendered among the denizens of System D. Neuwirth notes that in Lagos, "you almost never find the cops patrolling the streets or inside the markets, unless they're looking to harass people and extort payoffs."
And he tells the following cautionary tale of recent events elsewhere in Africa:
In early 2010, the government of Luanda, Angola, razed and relocated Roque Santeiro, that country's largest System D market. The result was catastrophic for Sambizanga, the neighborhood where the market used to stand, and for the traders who moved. Most local residents couldn't afford to make the twenty-five-mile round trip to work at the new market, so unemployment skyrocketed and crime escalated dramatically. Customers also avoided making the lengthy trip to Panguila, the new location, and traders report a steep decline in business.… In fact, business is so bad at the new market that Angola's leading microcredit bank has determined that it will no longer make loans to the merchants there. And the final sad fact is that the city has announced nothing about how it intends to redevelop the central site where the market used to be.
On the other hand, Neuwirth's enthusiasm for state bashing in this connection is noticeably halfhearted. Contrast his comments in the passages just quoted with those of the Israeli journalist Dan Bawly, in his nearly 30-year-old book The Subterranean Economy. The subterranean economy, Bawly argued, had come into being only because government had made "legitimate" business too costly. "If there is a villain in the act," he wrote, "it is big government.… The members of the subterranean economy … [i]f asked what they are doing or why … might say they are fighting for survival." For "the cost of both the aggregate of all the various taxes payable and the time and money needed to do so is a major encouragement to opt out of the overt economy." Also, "government expenditures for both bureaucracy and for transfer payments have been growing in size, becoming more cumbersome and less popular over recent years. As criticism of the various elements of expenditure in the budget has increased, the attractions of joining the unmeasured economy have grown, combined with a disappearing fear of getting caught, which is supported by the general belief in government incompetence."
To Bawly, the real significance of the subterranean economy as it existed back in the early 1980s was the implicit message its constituent members seemed to be sending about government — government as such. "The rise of this subterranean economy," he wrote, "is one of the more ominous expressions of lack of confidence in government," a sign of a growing "polarization between society and the state," which "no democracy can afford."
Bawly was blunt about what he saw ahead. The subterranean economy's "power," he wrote, "revealed by the fact that in all free countries it has, by now, the active cooperation of a significant part of the population, poses a much greater threat to government than the politicians realize. No democracy has long survived as such when a majority of its citizens regarded its institutions with mistrust." And "in many countries," the "members of the subterranean economy" were already "the new silent majority; in others, a large silent minority." Bawly concluded his book, a bit ruefully, by warning that "only with a much smaller government presence is there any chance of reducing the size of the subterranean economy."
It is probably unrealistic to expect Robert Neuwirth to accept Bawly's entire analysis with no qualifications, caveats, or calls for emendations. Still, there's at least one part of what Bawly had to say whose evident truth would seem unassailable: his comments on widespread mistrust and lack of confidence in government. Robert Johnson wrote in the October 13 issue of the New York Review of Books, for example, that "public trust of government is in tatters and many people believe that elected officials ignore them." Apparently, when Johnson leaves his office or study and ventures out into the world, he encounters citizens who "are so disheartened that they do not believe government has the capacity to be responsive to their needs."
The pollsters the Washington Post sent out into the streets this past summer found something similar. They found that 73 percent of Americans now doubt the federal government's ability to solve economic problems, which, as Reason magazine notes in its current issue (December 2011) is "dramatically up from 52 percent last year and 41 percent in 2002."
Yet, apparently, this is not what Robert Neuwirth found when he ventured out into the world to conduct the interviews on which his two books are based. Or did he just ignore any responses of this kind out of a desire to avoid cognitive dissonance? For it is unmistakably clear that Neuwirth likes the state and believes it has an important and positive role to play in the future of System D.
Neuwirth never questions the fundamental legitimacy of the state. He writes, for example, that one of his interviewees, a System D computer retailer in Paraguay, is guilty of "fraud" because "his business avoided all customs duties and taxes in Paraguay, often by bribing local officials," and because "two-thirds of [his] business … involves … selling computers to people who illegally carry them across the border into Brazil." As though one could "defraud" the gangster who runs the local protection racket! As though paying customs duties and taxes was fundamentally any different from paying a "bribe"!
Neuwirth thinks that what's going on in System D is very much the state's business. He thinks that "governments may have legitimate worries about the growth of unrecorded transactions." And he thinks further that "there's no question that child labor is heinous. It should be against the law everywhere and it should be prosecuted."
He believes also that "System D groups are going to … have to organize to maximize their power and figure out how to interact with the political system. And if the political leadership wants to harness the entrepreneurial spirit — the very thing that helps their country thrive — they're going to have to work with System D. What's needed is a kind of shotgun wedding." Neuwirth seems to feel he cannot say this often enough. "Governments need System D markets," he writes, "because they are creative and questing and are where the jobs are. And System D needs government because it needs the goodies — infrastructure, organized ports, currency with a relatively stable exchange rate — that only government can provide." Yet his own book provides ample evidence for the proposition that System D can provide infrastructure and organized ports all by itself, with no "help" at all from the state. And Neuwirth makes clear that the main thing he thinks System D needs from the state is "the freedom to trade." Still, he writes, "though [this] may sound libertarian, freedom to trade does not simply involve a Rothbard-style approach that would dismantle all rules that rein in business."
Yes, Neuwirth has been reading Rothbard — and not only Rothbard. In Shadow Cities he quoted Hayek (once) and listed The Road to Serfdom among his sources. In Stealth of Nations, he refers to Rothbard three times in the main text, quoting him twice, and lists both Man, Economy, and State and The Ethics of Liberty in his bibliography. As I said a few thousand words ago, Neuwirth's mind is open. And, like Jane Jacobs (whom he also quotes) he is a talented observer. He looks at what he sees in front of him and (mostly) sees it as it actually is.
He sees spontaneous order, for example. He writes that
what happens … in all the unregistered markets and roadside kiosks of the world is not simply haphazard. It is a product of intelligence, resilience, self-organization, and group solidarity, and it follows a number of well-worn though unwritten rules. It is, in that sense, a system.
And he describes the most successful of the "informal" marketplaces in Ciudad del Este, Paraguay, as a place that
only seems like absolute anarchy. The street market here … has unwritten rules and an unofficial schedule, almost as if all its merchants were punching a clock. The chaos here is meticulously organized.
Also, when he sees it openly on display in System D, Neuwirth understands the importance of what George H. Smith would call "justice entrepreneurship." He approvingly notes the development of merchant-funded and merchant-organized courts to settle disputes arising among buyers and sellers in System D markets and writes that
in joining to create a court, the merchants in a System D market create something bigger than themselves. They don't need white-wigged barristers or learned jurists to tell them what to do. Informally, haphazardly, they build their own social contract, based on fairness, equity, and justice. Forming a market court means that they have taken an initial step toward collective organizing and cooperative action. Once a market creates a court that endures, it is possible to look toward other tasks: perhaps an infrastructure bank, or a local sanitation department (a few merchants wielding brooms can make a big difference), or a market security force. If System D merchants can consistently work together to solve problems in their markets, their power and prestige will be greatly extended, and … their businesses will grow, because more people will trust their dealings.
Neuwirth understands the ways in which System D has begun to interpenetrate the mainstream, official economy as well. "Economists hate System D," he writes.
Politicians yell about tax evasion and public disorder. Nonprofits protest its low wage structure and lack of employee protections like health insurance and retirement benefits (though to be fair, in much of the world, governments and formal businesses don't offer many of these labor protections either). Sociologists debate its impact on the structure of social relations. But big business does what it always does: it figures out how to use it to make money.
And not just big business. In one passage that particularly interested me, Neuwirth writes that
formal businesses [of every size] have long dabbled in System D, selling gray-market items … or the galleys and uncorrected publishers' proofs of new books (an editor at Kirkus Reviews … told me they "donate" the vast number of galleys they receive to "anyone who will pick them up," including … the Strand bookstore, which sells these uncorrected proofs — most of them marked "Not for Sale" or "Not for Resale" — for $1.99 each).
In the first draft of this review, I quoted this passage from an uncorrected proof of Neuwirth's book (clearly marked "Not for Sale"), which I purchased in August from the Strand, though for a good deal more than $1.99. (In the weeks since then, I've managed to obtain a copy of the finished book from the helpful people handling publicity for it, so that I could double-check the wording of that quotation — and others used in this review — to make sure I was quoting from the book in its finished form and not just as it had appeared in an uncorrected proof.)
At the same time, unfortunately, this passage illustrates one of the biggest problems libertarian readers will stumble over when they peruse Stealth of Nations. For why does Neuwirth believe that "economists hate System D"?
an economist would likely call it irrational and inefficient. After all, what rational businessperson would set up a recycling business in Guangzhou, a city of more than ten million people, if his entire operation depended on the brawn and the savvy negotiating skills of a bunch of illegal migrant laborers who hustled through the streets pulling homemade handcarts? It would be more efficient to organize trucks, which could haul more materials in a more sanitary manner. Since the trucks could haul far more in one trip than a single man can, it's likely that routes would be combined, and would perhaps be serviced only once a week.
Adapting this point of view to one of the favored economic issues of the day, Neuwirth writes that
outsourcing is okay [with economists] because it is a rational and efficient choice; multinational companies can realize massive savings on labor costs by moving jobs to low-wage countries. Similarly, promoting big-box stores and driving out small retailers is okay because larger scale cuts down on overhead and reduces the need for redundant labor, allowing products to be sold more cheaply.
the haphazard street market economy … has dozens of merchants selling essentially identical flat-screen TVs. Each of these entities has buyers, transporters, and a sales staff. Each probably employs touts, to drag potential customers to their kiosk. In economic terms, these multiple jobs are wasteful and redundant. If all the small firms were combined, they could jettison a good number of these employees. It would be tough to let them go, but that's what's demanded by a rational and efficient market.
Thus, as Neuwirth sees it,
System D questions the value of efficiency. Why is centralized planning (a highly organized and controlled shopping mall, for instance) better than a form of trade that employs more people, even as it may divide the pie into smaller slices (a seemingly disorganized and chaotic street market)? Why is a more sober form of business better than the more cacophonous? Why are locked in prices better than the fevered negotiation that goes on at a garage sale? Why is standardization of design better than the overflowing bins and crowded alleys of a swap meet? In System D, employment has more value than efficiency, and the illogic of small dealers trumps the rationality of the big retailer.
In sum, "System D is inefficient and irrational … in economic terms."
In the face of such abject confusion, it is difficult to know where to begin. Which economists, exactly, make such a case against System D? Certainly not Murray Rothbard or any other Austrian. Rothbard said that economists are useless at advising business, because the only meaningful test of a business's efficiency is whether it is satisfying the consumers' most urgent wants at the lowest possible cost. And there's only one way to find out whether it is: by looking at its performance in the marketplace. If all these "wasteful" and "redundant" merchants are making money, then they are efficient, irrespective of what some theorist may believe to the contrary.
And at times, when Neuwirth's basic, intuitive good sense reasserts itself and overpowers what he thinks he knows about economics, he at least seems to acknowledge this. He quotes the Ghanaian economist George B.N. Ayittey, for example, who says that "every social need is a business opportunity." He notes that "in his writings, Ayittey has cited an Igbo proverb: … only an organism knows best its own needs and can best serve them." And he admits that "when you look at them from within, System D businesses turn out to be extreme examples of efficiency in action: they are organisms that know their own needs."
When Neuwirth is in this frame of mind, he seems at times almost to forget about the state. He writes, for example, that
our current system has created lots of wealth but has made the world an alarmingly unequal and unfair place. We still have yet to confront the twin problems that have plagued the dismal science of economics since its outset — unemployment and inequality. Despite hundreds of years of theorizing and pontificating, these twin problems seem as far from being addressed as they were before the invention of the free market.… System D is coming up with its own solutions … not … in the privileged halls of governmental buildings, or in the august offices of multinational nonprofits, or anywhere where economists talk of rational and efficient markets … [but] in the street … wherever the merchants of System D are scheming, planning, meeting, trading, exchanging, and, in innumerable small ways, building a better world, one deal at a time.
Set aside Neuwirth's naiveté about the origins of unemployment (in the end, involuntary unemployment is always caused by the state) and about the importance of inequality. Whatever we may think of his diagnosis of the "problems," he does seem to be advocating that they be solved, not by the state, but by System D itself, through the market process.
Alas, however, Neuwirth is not always in this frame of mind. And more often than not he advocates something very different. He is convinced that System D must "make itself simultaneously more productive and more accountable," so that its "merchants feel a greater sense of social … responsibility." At least some of the steps that need to be taken "could," he believes, "be created by government fiat." And if they were, "if implemented, they could help ensure that System D works for the national and global good."
I'm guessing that Neuwirth would say, if you put it to him directly, that he's preoccupied, not with the question of what people do when the state makes it almost impossible for them to live, but rather with the question of what people do when "corruption" or "misguided policies" make government an obstacle in a lot of people's paths instead of their friend, as things were meant to be.
Nonetheless, mixed bag though he is, I think he has a lot of potential. And he has been making excellent progress. Read his books. He'll give you much to think about, and he'll provide much contemporary evidence while he's at it for something he really doesn't yet believe or even fully understand but is unmistakably moving toward.