underground economy

DEFINITION: The “underground economy,” also known as the “black market,” is a clandestine market in which exchanges or transactions are illegal for one (or both) of two basic reasons.

The first reason is that the goods or services offered for sale are illicit (prohibited by law) in themselves. Common examples are the sale of illegal drugs and prostitution.

The second reason is that the goods offered for sale, while not illicit in themselves, are exchanged under illicit conditions. A common example is the sale of alcohol or cigarettes on which the appropriate taxes have not been paid.

USAGE: The concept of the underground economy is complementary to—and partially overlaps with—the notion of the “illegal economy.”

The illegal economy embraces more than just illicit market transactions. It also encompasses the production or other provision of inherently illegal goods or services.

Thus, for example, middle- and higher-level individuals engaged in the primary manufacture or importation of illegal drugs are deemed a part of the illegal economy. As individuals, they could not be properly counted as a part of the underground economy in the sense of the black market, since they are not directly involved in any market transaction.

On the other hand, the local drug dealer who sells directly to consumers might be deemed a part of either the underground economy or the illegal economy, or both, depending upon the nature of the accounting being made.

Other common examples of typical underground economy transactions and activities include human trafficking (transportation of individuals under illegal conditions), loan-sharking and illegal currency transactions (loaning money or exchanging currency at other than legally approved rates), and tax evasion (fraudulent reporting of taxable income).

What all these transactions have in common is the illicit way in which legally sanctioned transactions or activities are conducted.

Other common examples of illegal economy activities include the production and sale of certain kinds of illegal weapons, the extraction and sale of biological organs for transplantation, counterfeit currency, and the piracy of medicines, books, music, films, and other forms of intellectual property. In all these cases, the goods offered for sale are inherently illegal.

Perhaps the clearest example of the difference between the underground economy and the illegal economy is the difference between illicit currency exchange—which involves the exchange of the legal tender of two countries at an unapproved rate—and the sale of counterfeit currency.

Yet another set of terms of related interest is the following:

  • White market—the legal exchange of legal goods
  • Black market—the illegal exchange of legal or illegal goods
  • Gray market—the ambiguously legal exchange of legal goods that are sold under unforeseen, unauthorized, or unofficial—though not strictly illegal—conditions

Money earned from black markets is often referred to as “black money.” Black money often takes the form of cash.

The existence of black money has spawned an entire industry, known as “money laundering,” whose aim is to make black money disappear into a larger pool of legally acquired money.

The connection between black money, money laundering, and cash has led to a political movement for the elimination of cash from the economy, in favor of some such system as Centralized Bank Digital Currency.