Economics of the Black Market

S. K. Ray

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9780367168506
• eBook ISBN: 9780429724367
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

In this first serious study of the economics of the black market, S. K. Ray looks in-depth at profiteering, black money, fraud, smuggling, government corruption, and the overall structure of the black market.

1
An Introduction to the Concept

Discussion on black marketing from the viewpoint of an economic analyst is rare. But for Plumtre's Theory of the Black Market¹, we can scarcely think of another important study on the subject. This is somewhat paradoxical, particularly for economic scholarship in a number of developing countries, where the forces of the black market now wield partial suzerainty not only over the procurement and distribution systems, but also on currency-circulation and the national liquidity-situation.

It is often said that the black market as a trend of business entrepreneurship does not as yet come within the purview of economic generalisations, and that it is only an abnormal and short-period exception to the general economic laws.

In most countries governed by free economy, and more than most in a mixed economy like the Indian, nothing could be farther from the truth. Black market during the last few decades has been a way of life. Its effect on the economic life of the people has become far-reaching and highly pestering. Black marketing in the economy is no more confined to a few clandestine trade deals, but has already become a well-defined form of business dealing and industrial entrepreneurship.

In conjunction with black money, as an ancillary but nevertheless a very potent force, the black market, in the Indian sub-continent for instance, has become a hydra-headed economic monster. The strategies that it deploys, the currency and produce that it controls, and the socio-economic repercussions that it fosters, today form a definite branch of economics.

The price spiral

The general price index of wholesale prices in India (base 1961-62 = 100) increased in the early 'seventies by 154 percent showing a compound rate of increase of a little over 8 percent a year. In the subsequent years, the increase has been even more phenomenal. Except for a brief pause in 1975, the inflationary pressure on prices has been relentless, continual and unabated.

Sugar prices went up by a colossal 126.8 percent in the past year while those of potatoes rose by as much as 69.9 percent, according to the latest official analysis. The analysis covered 21 items, including rice and wheat, that showed a significant rise in price during the latest twelve months and, ominously, most of these have been food items.²

The inflationary fever of the price level has been conditioned by a multiplicity of different factors; variations and failures in agricultural production, large-scale imports of foodgrains, consequences of wars and refugee rehabilitation and, finally, deficit financing had all their roles to play; but a major guiding factor that has all the while been influencing the price level has been the forces unleashed by black market and black money.

The position of the national economy was analysed in the Annual Report of the Reserve Bank of India for 1973-74. The Report brought out that the increase in aggregate output in 1973-74 was higher than in the previous year. Yet this did not result in a slowing down in the rise of prices. In fact, the Reserve Bank of India in this report had cautioned the government of the danger of a hyperinflation and a run-away price-spiral, if deterrent and comprehensive measures were not enforced. These counsels of caution have been reiterated in the Bank's Annual Report for 1979-80.³

The behaviour pattern of the price spiral has been widely governed by hoarding, money-jumping, speculation, stock-piling and underhand procurement and release of commodities under the economic forces of the black market, substantially governed by black money.

In this background, it has to be accepted unhesitatingly that black market today has become a force to reckon with and certainly deserves a complete socio-economic investigation.

The economic laws

And, reverting back to the assertion that the black market as yet does not come within the purview of economic laws, it is today debatable how far can we rely any longer on these time-honoured economic laws as to their perfection and accuracy under all circumstances.

Economic laws hold good for aggregates and not for individual instances. They set forth the average relationship between phenomena. They are approximations or tendencies.⁴ We would, therefore, believe that whenever business dealing and industrial entrepreneurship in any particular direction assume sufficient importance as to their nature and extent, there should be special examination of the same in applied economics.

In economics as a humanitarian science, changes in the socio-economic phenomena, or in relevant substantive or peripheral economic laws, have been duly reckoned with, and adjustments made in the ideation of the economic theory and the ramification of planning and development.

Contrary to the assumption in certain quarters, economics, in the humanitarian sense, from Marshall to Kuznets, has been based on a continuous process of exploration, and let us admit, has made room for necessary adjustments in the theory as also in the dynamics of development.

It would be fallacious to think that once an economic law was given, it was perfect and that it would determine all future developments based on it, or in pursuance of it. The law itself was subjected to continuous research and would often give way to new findings or explorations. It has not been, as it were sometimes presumed, that the law was supreme, once and for all.⁵ (Cf. annexure 1).

Pigovian simplification

To give an example of such a phenomenon, we may refer to Pigou. In his Theory of Unemployment, Pigou theorised that, with perfectly free competition amongst working people and labour perfectly mobile, the nature of relationship (between the real wage-rates for which people would stipulate and the demand function for labour) would be very simple; there would always be a strong tendency for wage rates to be so related to demand that everybody was employed. Hence, Pigou concluded, in stable conditions everyone would actually be employed.⁶

In terms of an exposition of a given economic law, there is no doubt that such a simplification of the realities as Pigou elected to adopt, in order to fit his premises to a theory, does not stand the test of today's economic behaviour. Pigou propounded this theory by taking recourse to mathematical presumptions, and preferred to ignore a large number of variables - not that he was not vaguely aware of some of the possible variables.⁷

That is what happens when an economic law, once formulated, is idealised as a conformist norm of economic behaviour. It becomes so rigid that it ceases to be applicable in actual fiscal, developmental, planning and monetary policies.

Both in terms of further explorations on the given economic laws, and as a definitive behaviour-pattern of economic forces, black marketing, or more appropriately, the black market, certainly deserves an analysis in depth regarding its nature, extent and socio-economic repercussions. Such an analysis, based on an

investigation of the Indian situation, if conducted on a pragmatic, didactic and realistic way, would prove to be highly utilitarian as an econo-sociological exploration.

A definition

What, after all, is the blacK marKet? when oy (artificial) manipulation of the economic forces of demand and supply, of both currency and produce (or either), the trade or the industry (or both) create an artificial situation of scarcity or glut, and in the process amass huge returns on their investments, by what in chapter 2 we shall discuss as profiteering, we have a black market situation.

A number of neo-classical economists wrote about social prerogative and individual prerogative among businessmen. It was observed that by moral pursuasion, businessmen should be made inclined to socialize their business endeavours. Clay, in his Economics for the General Reader, advised businessmen and entrepreneurs that it was to society's interest that they should reflect on and realise the social effects of their private actions. A reflection of these ideas is available in the latest trend of a section of the econo-political analysis of the Indian price spiral.

These are, as far as they go, no more than eulogies. And despite this eulogy of a social approach to business, industrial or business enterprise has manifested itself in no inconsequential measure in unsocial, individualistic and anti-people tendencies.

The Indian situation, for instance, is replete with illustrative instances of such phenomena. It has been experienced, particularly during the last two decades, how legitimate speculation has been reduced to illegitimate gambling, stock of merchandise (particularly inelastics) has been hoarded in order to create artificial scarcity, and prices have been hiked by sterilising the age-old economic laws. By artificial manipulation of consumption-propensity and thereby affecting the level of demand, the spiral-potential of prices has been tapped by entrepreneurs and businessmen to accumulate huge margins on their turnover.

The situation is no different and, if at all, the difference is only of degrees, in respect of a number of other countries selected at random, with developed as also developing economies, that the present author had occasion to survey.

A theory

A theory of the black market may take shape in the trail of the Joan Robinson-Chamberlin-Triffin'sequence of the theories of monopolistic competition. Before the depression of the 'thirties, it was generally believed by economists that available economic theory was able to analyse the prevalent patterns of industrial entrepreneurship which were either perfectly competitive or monopolistic.

As to the relative importance they attached to these two groups of industries, there has been wide divergence of both appraoch and opinion. Surprisingly enough, however, they adopted more or less an uniform tenor of economic analysis. From this, however, it should not be concluded that "the details of the analytical system were, or were thought to be, definitive. As a matter of fact, certain portions of the system, such as duopoly, admittedly were (and are) in wretched shape".

At this point came the works of a number of economists like Joan Robinson and Chamberlin, demanding a radical orientation of approach and outlook. A good part of such literature, fundamentally, was no real break-away from the tradition of neo-classical economics; indeed, as was said, it contained too uncritical an acceptance of the substantive context of orthodoxy.

But Chamberlin's magnum opus, The Theory of Monopolistic Competition, was, in spite of some contemporaneous criticism, revolutionary in character. Indeed, it was Chamberlin who brought home to us the point that "no simple dichotomy does justice to the rich variety of industrial organisation".

Chamberlin

Chamberlin felt that different types of industrial entrepreneurship including duopoly, monopsony, oligopsony and increasingly imperfect competition were too intricate to be analysed adequately by the available tenets of theory. Available theory was of the patent type and failed to ramify the intricacies of a growingly complex entrepreneural set-up.

Chamberlin investigated the position in depth. He accepted that there were (a very few) industries that closely resembled those studied by the economists of perfect competition and that there were (perhaps more) concerns that partook of the nature of monopoly as this concept was used in neo-classical economies. But vastly more often, Chamberlin added, the trade and the industrial firms displayed a mixture of insulation from competitors or consumers.

It has been our experience, more than mos...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of Tables
• List of Figures
• Preface
• Acknowledgments
• 1 AN INTRODUCTION TO THE CONCEPT
• 2 ECONOMICS OF PROFITEERING
• 3 THE PARALLEL ECONOMY
• 4 MANY FACES OF THE BLACK MARKET
• 5 THE LABYRINTH OF SMUGGLING
• 6 PRICE BEHAVIOUR SINCE INDEPENDENCE
• 7 PRICES, INFLATION, AND MONEY SUPPLY
• 8 FRAUD, MISFEASANCE, AND JURISPRUDENCE
• 9 CORRUPTION IN PUBLIC LIFE
• 10 STRATEGY FOR A COMBAT
• 11 A QUINTESSENCE
• ANNEXURES
• BIBLIOGRAPHY
• INDEX