System D, the underground economy and competition

Just read an article on the web about the underground economy, also known as system D, which is probably more the case in the developing world than it is in Canada.  This follows reading a book chapter about London when Karl Marx lived there.

It sounds as if both of these are closer to the perfect competition model than anything I have experienced.  The difference is that Marx lived at the beginning of an age unprecedented prosperity and we are probably going into an era of decline.

The author of the article appears optimistic about the potential for System D and I find it attractive.  It appears to have a lot of vitality.

However I see at least two problems.  One is that if you work outside the law then there is potential for exploitation and dishonesty.

Another problem with System D is that when it is hit with a recession a lot of people will be out of work.  There is no potential for economic safety  mechanisms such as unemployment insurance.

It could well be that System D is a way to get around excessive government regulation of the economy most of which works to restrict competition.

Therefore we should aim for the best of both worlds.  Keep legislation which tries to prevent exploitation and provide a safety net and get rid of legislation which restricts competition.

(The book is Grand Pursuit, the Story of Economic Genius by Sylvia Nasar and was published this year.)

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