The Mechanics Of Black Market

Background

In light of the current affairs of these days, I thought this article will be a useful piece for my readers. Do read that with the knowledge of current affairs of today in mind, and with what we have learnt from history as a reference.

The concept of the black market has been an interest among people who do not have to come into contact with it. In real life and in works of art, we have seen many of such examples.
In the movie Lord of War, Yuri Orlov got his riches from the sales of firearms in the black market.
In the anime Grave of the Fireflies, both siblings took the clothing of their mother and exchanged for a little food in the black market.
In real life, El Chapo had a large network to manufacture and distribute his drugs all over the world in the black market, amassing huge power and wealth in the process.

The opposite of the black market is the white market, one which we are familiar with in our everyday lives. The white market is the legal, official, authorised or intended market for goods and services. It is where you can buy your stuff with your head held high and without fear of the law. The black market of course, is the illegal market.

The black market can be categorised into 2 portions – the first being the sales of outright illegal goods such as drugs, firearms, slaves, human organs etc. The second portion of the black market deals with legal goods which may consist of everyday items like rice, sugar, milk powder, soap, clothing, medicine.

Any decent country which wishes to develop properly and maintain stability would strike and ban the first portion of the black market with heavy penalties as it threatens the very livelihood and even lives of the citizens. News of Americans shooting each other everyday is not what people want to see happening in their countries, and the history of the opium war serves as a grim reminder of the devastating effects of drugs on a country. But even if we say ban, such activities are still around us, simply because their huge profits are the main income source of the triads. As long as there is good money to be earned, there will always be people willing to risk their lives. That is why despite the death penalty of Singapore and of China, people are still peddling drugs.

The businesses of the triads usually involves one or more of the following 3: collecting protection money, monopolise the daily basic needs of the citizens, and controlling the illegal trades such as gambling, prostitutions, drugs, firearms, organ sales etc. Of the illegal trade portion, certain sectors like drugs and firearms are an outright ban in many countries as mentioned earlier, simply because they caused too much disrupton to a peaceful society. Certain sectors like prostitution and gambling are let go with the occasional raids by the police should the triads behind the scenes step out of line, because they are deemed as a necessary evil within society for people to release some stress. Collection of protection money varies between different countries and societies, but basically it is like collecting taxes or rental from the common people by the triads. As for monopolising the daily needs of the citizens, that is what we will talk about today.

Determinants Of Supply In The White Market

Today we will not talk about the illegal goods portion of the black market, but rather the legal goods part of it. From this point onwards, when we say black market, we refer only to the black market portion where the legal goods are sold. In any normal circumstances, such legal goods can be dealt with in the white market. I can easily go to the supermarket to buy my groceries, or to the shopping mall for my clothes, or going online for my electronic gadgets. Going to the black market for legal goods is usually due to 1 of the following 2 reasons: The goods in the white market are expensive but low in quality, or supply is insufficient in the white market.

For white market goods which are expensive but low in quality, it usually involves government officials behind the scenes monopolising the market. For example, in the past, salt is a precious commodity where only the privilege few had the rights to trade. The privileged few which either had the connections or the money had earned from salt trading like how the drug lords of today profited from the drugs. If you buy salt from the official sources, it is legal. But if you try to buy and sell salt on your own, it is a crime punishable by death.

However as the country progressed towards industrialisation, society’s production and output increased greatly, fulfilling the basic needs of the people. Furthermore, with capitalism, the most efficient and effective way of producing is developed. What we see here is therefore not a lack of supply, but rather oversupply. This is the case as with our modern era. In such a situation, it is not common nor logical to have a black market selling legal goods. Black market of this sector should have no opportunity to survive. Should that happens it means that an issue came up in 1 of the following 4 factors: production, allocation, exchange and spending, causing the supply of basic needs to be severely affected and insufficient.

Compared to the illegal products (gambling, prostutition, drugs etc) in the black market, the black market of the legal goods satisfying basic needs are where the obscene profits truly lies. You can stop gambling but you cannot stop eating. You cannot survive if you are sick and has no medication, but you definitely can go without heroin or cocaine. You will think about sex only if you are warm and well-fed. Hence, if the forces behind the black market cannot determine which is the priority, they will be cutting off their customers. Once a person dies, he has no more needs and therefore no more profits to be earned from him or her. Therefore, items which fulfil the basic needs of survival has a very high and very inelastic demand. Furthermore, the illegal products only target a certain sector of the human population, but basic necessities are required by all humans who want to survive. Anyone who manage to make use of this opportunity well could create an obscene amount of profits.

The Emergence Of The Black Market (Specifically The Sector On Legal Goods)

Yet if we said earlier that such items will not usually have a place in the black market, then under what circumstances will such a situation appear? The common answers are war and disasters (be it natural or man-made). For example, during war, the country’s machineries are geared towards producing tools of war and for the military needs. Production of citizens’ basic goods are lowered to a minimum, and rather than an open trade in the white market, such items are now allocated instead. Your toilet paper is nothing compared to the AK47 which could have killed one more enemy. Or, an earthquake, tsunami, pandemic or any other large scale natural disaster. In this case the transportation and logistical network of the area would be severely crippled, causing supplies to be unable to enter the targeted area, effectively causing a lockdown. Or, a man-made situation such as the indiscriminate printing and counterfeiting of money during World War 2 under areas controlled by the Japanese, causing hyperinflation and resulting in the production cycle to breakdown. Due to a lack of a reliable currency, the currency could not serve its functions of trade, exchange and storage, ending with a situation of production stopping, of opportunistic gains and of basic needs being grossly insufficient.

During such times, the government will generally centralise the purchase and sales of the basic goods, where allocation is based on your family size, thereby ensuring that the population are able to survive. While it looks good on paper, in reality, the allocation given is extremely pathetic, and the people generally still lacks in food and other basic goods. From there, the black market is born.

On the surface, the black market of such nature is an exchange of goods between people who have items they do not need. Tom is allocated 20 rolls of toilet paper and Jerry is allocated 1 sack of rice. Jerry’s family do not need to eat so much, and Tom has a bigger family to feed. Their needs complement each other, and they trade. Due to the different needs of the people, the black market of this level can never, and should never be stopped. Yet in reality, the portion of basic goods allocated to the people are little and usually of low quality. By the time they accumulated a large enough portion to do a trade, the goods they have on hand had further dropped in quality, reducing their ability to trade even more.

The Abudance Of The Black Market And The Lack Of The White Market

A familiar sight in such a situation is that while the white market is severely lacking in goods, the black market has a wide variety of high quality goods. This is despite the government’s central authority doing the procurement, allocation and distribution of basic necessities. Fresh vegetables, non-mouldy bread, canned sardines just out from the factory etc can be found in the black market. As long as you can pay for it, you can have all that you like. These are the goods which should have gone into the white market and/or allocated to the citizens, but did not make it to their final destination. The goods are usually collected elsewhere under the name of war efforts, disaster relief, suppressing inflation etc, and not from the poor citizens who slowly accumulate their allocated goods in order to trade for other things.

Black market and violence comes hand in hand. Where there are huge profits, there are also violence. Only those who hold the power to exercise violence are able to maintain the order of the black market. To protect the profits of the market, it must be supported by violence. The profits of the black market is able to attract the triads like how blood attract sharks, and these profits are sufficient to maintain the operations of the syndicates and make it worthwhile. One of the more common ways the items can appear in the black market is via colluding with the officials put in charge of the affairs. In this case, the triads often act for the government officials, and these government officials act as a protective umbrella for these syndicates. Without the support of those in authority, such black market activities cannot carry on for so long and so openly. That being said, throughout history we have seen that those with the power to exercise violence are not limited to triads, but may also include official government soldiers or separate militant forces, or even terrorists.

The emergence of black market signifies corruption. Without corruption, the black market cannot survive, and as mentioned above, it often has the implicit approval of those in authority. After obtaining profits from the black market, these officials get bolder and bolder, expanding their business continually and roping in more people. What should originally appear in the white market for allocation (Covid lockdown measures), or what should be assigned to the military (war time) or the hospitals (disaster relief) now somehow appear in the black market. If the military could not get what they need, they naturally turn to the people. If the people do not have the resources, they simply die. But in reality, it is not that there are not enough resources to maintain the basic operations or for basic survival, it is just that the powers behind the scenes have secretly siphoned off all these resources and stored them aside.

In countries where black market of legal goods have become visible, it generally also means that their economies are already seeped with serious issues. During such times, the governments are unable to take out sufficient resources to maintain the loyalty of its civil servants, such as providing even the basic salary. When these public servants are not compensated properly, they naturally turn to the black market to get what they need – money. And precisely because the government is unable to provide the resources needed, they also had no strength to enforce its laws and therefore no choice but to turn a blind eye to what these people are doing.

The monopoly of the basic goods in the black market forces the people to pay for the items with everything they have. When we say everything, it does not mean only their salary or savings. If need be, they can sell their houses, their lands, their furniture, their jewellery, and every single thing that has value. For the sake of surviving, the people have no choice but to deplete their entire net worth just to live another day. In the face of death, every single thing one has accumulated over the years during peacetime is of no value. For the sake of living another day, they would sell all that they have at a fraction of their price, just to get a little food. When people are forced to sell off everything they had for the basic needs or to pay high taxes to support the military, then die off one by one once they have been fleeced dry, the trust and support for the government will collapse.

The Collapse Of The Society

The economic foundation of a country will determine its superstructure. The black market causes destructive damages to the economic foundations and the superstructure of the society. When resources flow to the black market instead of the white market, the economic foundation and market forces which support the white market will also collapse and be replaced by the hoarding of items and opportunistic behaviour typical of the black market.

The emergence of the black market will strike at the loyalty of the government officials. Because of the black market, the salaries of these officials are unable to support their basic needs. To ensure their own survival, they only have a few choices: being corrupted, join the black market or take on a second job. Even with strict laws and heavy penalties to prevent corruption or taking on a second job, enforcement of such regulations are bound to fail. For those of a high moral standing, abiding by every rule of the organisation or the country, will find themselves unable to survive the way they are now, leaving them with no choice but to flip to the other side, or resign from their job. At this time, the method of sustaining their livelihood is no longer obeying the instructions or policies of their bosses, but by doing what they can to get every single cent of profit they can lay their hands on. With the huge profits from the black market, government officials quickly gain independence from the central authority in terms of their finance. They now have no need to obey those with the political power, and the government no longer has any hold over them.

After the black market reaches a certain size, the legal tender will suffer a great loss in value. When this happens, people will find that they have money, but they lack the basic necessities for survival. Now, be it in the white or black market, the legal tender is effectively useless. We will now see a full blown vicious cycle in which hyperinflation occurs.

The legal tender which is used to circulate in the economy will be gradually replaced and eliminated from the transaction system. USD, gold or items of value and easy storage such as food or even cigarettes will be used as a medium of exchange. At this time, the black market is still controlled by the officials from within the government, but these officials no longer choose to obey the instructions from the top but operate on the basis of maximising their own profits in accordance to the power given to them. With the main economy turning from white to black in a short span of time, so will more and more government officials, resulting in the losing of power in the upper echelons of the society.

With the sheer amount of profits in the black market, hoarding and opportunistic behaviours are prioritised over actual production and price stability. Rather than working honestly for a living, turning to support the black market will mean quick and huge profits, luring in even more people from both sides of the law to collude. The production cycle is further crippled, causing prices to rocket up even more. Those in control of the black market earns even more profits despite the continual collapse of the production cycle.

The only losers are the rest of the common people who have no network, no resources, no backing, no power and no means to defend themselves. The whole society will be fleeced dry blatantly to support that few in power. When that happens and the people could no longer take it anymore, with nothing more to lose, a revolution will start. A revolution is not like the Hong Kong protest we see in 2019-2020 or their Umbrella Revolution in 2014 where young punks just cause disturbance to the public order in the name of justice. A revolution is filled with blood and sacrifice, one which people willingly participate simply because they have nothing else to lose. But this is another article for another day.

Conclusion

The emergence of the black market is a signal of danger. It signifies that the economy is sinking into great difficulty, the foundations of the legal tender is shaken, that the common people will face bankruptcy quickly, that colluding between the officials and the criminals will expand and deepen. As the black market achieves a certain size, the people will be bankrupt, corruption is blatant, the syndicates walks about with violence, the legal tender becomes worthless paper and the production cycle is effectively crippled. Should those in power ignore the black market, or believe that this is only a short term phenomenon, then the situation will quickly spiral out of control.

The black market is the consequence of an ineffective economy, and also a cause which push the society towards collapse and towards a clash between the haves and the have-nots. When the authorities in control remain silent towards the black market, or worse still create the conditions for it to grow such as pushing a certain portion of basic items into the black market, then we know that the day everything collapse is not too far off.

Credits: A significant portion of the logic and theories are taken from: Wechat account 卢瑟经济学安生杂谈

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