How the informal economy took over the world by Keith Hart

A la recherche du temps perdu (In search of lost time)

The idea of an informal economy was born at the moment when the post-war era of developmental states was drawing to a close. The 1970s were a watershed between three decades of state management of the economy and the free market decades of one-world capitalism that culminated in the financial crisis of 2008. It seems now that the economy has escaped from all attempts to make it publicly accountable. What are the forms of state that can regulate a world of money that is now essentially lawless? The informal economy started off forty years ago as a way of talking about the Third World urban poor living in the cracks of a rule system that could not reach down to their level. Now the rule system itself is in question. Everyone ignores the rules, especially the people at the top – the politicians and bureaucrats, the corporations, the banks – and they routinely escape being held responsible for their illegal actions. Privatization of public interests is probably universal, but what is new about neoliberalism is that, whereas the alliance between money and power used to be covert, now it is celebrated as a virtue, wrapped up in liberal ideology. This is the context for what follows. The informal economy seems to have taken over the world, while cloaking itself in the rhetoric of free markets. We are witnessing the world-historic collapse of the twentieth-century attempt to impose national controls on the economy. Inevitably, when witnessing this collapse, we dream of restoring the era of social democracy, developmental states and even Stalinism. The rules operated then with some degree of success. This nostalgia for the heyday of what I call “national capitalism” (Hart 2009) will not serve us well today. We need to analyse the contemporary world economic crisis at a number of levels. Above all, we should acknowledge that the core problem is not narrowly economic, but one of political failure, both national and international. Money and markets have escaped from public control and cannot be put back in that straitjacket. The question then concerns what democratically accountable structures might be capable of regulating the world economy and under what social conditions? I will try to answer that question by reflecting initially on the history of a concept with which I have been closely associated.

Origins and critique of the informal economy

Before the First World War no-one believed that the state, a hangover from pre-industrial society, could manage the turbulence of urban commerce. Industrial capitalists and the military landlord class formed an alliance in the 1860s and afterwards to keep in check the proliferating working class spawned by the machine revolution (Hart 2009). Germany and Japan took cooperation between these classes within new state structures to an unprecedented level. But the Great War revealed hitherto unimagined government powers: to raise and kill off huge armies, organize industrial production, control market prices and monopolize propaganda. After the war, the issue was which kind of state – welfare democracy, fascist or communist – would win the race to organize world society. The whole period, 1914-1945, was a nightmare: two world wars, the Great Depression, a succession of ugly conflicts such as the Spanish civil war, the Japanese invasion of Manchuria, the Italian attack on Abyssinia. Writing just before the end of all this, Karl Polanyi (1944) blamed it all on the nineteenth-century experiment to make society conform to market principles.

No wonder then that, in the late 1940s, the world turned to post-war governments of various kinds to build an alternative system. Their mission, for the first and only time in world history, was to reduce the gap between rich and poor, to increase the purchasing power of working people and to expand public services. The European empires were dismantled, beginning in Asia; a new world order was inaugurated under US hegemony, implementing the accords of Bretton Woods; the United Nations was formed and “development” – a post-colonial compact between rich and poor nations — was the order of the day. All of this took large amounts of state intervention and it generated the longest boom in global economic history. This boom began to come unstuck around 1970. By the end of that decade, neoliberal conservatives were installed in power throughout the West. Their slogan was the free market and in the 1980s, with the active support of the IMF and World Bank, they set about dismantling state restrictions on the international flow of money in the name of “structural adjustment”, at first in the developing countries. This was the context in which the “informal economy” emerged, first as a description of the Third World urban poor, then as a universal feature of modern economies.

In the early 1990s, not long after the fall of the Berlin Wall, I wrote a critique of my own concept (Hart 1992). I made the obvious point that the formal/informal pair, representing bureaucracy and popular self-organization as they did, mirrored the poles of the Cold War, ‘state socialism’ vs. ‘the free market’. I had earlier argued, in a published lecture on money (Hart 1986), that the habit of contrasting market and state theories of money as alternatives — at that time Milton Friedman’s monetarism vs. Keynesian macroeconomics — was ruinous since currency was both a token of political authority (‘heads’) and a commodity (‘tails’). After three decades of welfare-state democracy, the neoliberal counter-revolution was well under way by the 1980s; and we may now be witnessing the start of another long swing back from over-reliance on the market to increased state intervention in some form or another. So the state/market pair has not faded away. In the immediate aftermath of the Cold War, however, I was optimistic that new paradigms could emerge; and I questioned the usefulness of the informal economy as a concept, given its origins in the ideological poles of twentieth-century society’s nuclear nightmare.

The formal/informal pair first saw light in the context of development debates during the world crisis of the early 70s – a sequence of events that included America’s losing war in Vietnam, the dollar being detached from gold in 1971, the invention of money market futures the next year and the dismantling of the Bretton Woods regime of fixed parity exchange rates. This was soon followed by a world depression induced by the energy crisis of 1973 and then by a glut of euro-dollar loans that ended up as the Third World debt crisis of the 80s. ‘Stagflation’ in the West (high unemployment and inflation) prepared the ground for Reagan, Thatcher and their imitators from 1979-80 onwards. After the ‘modernization’ boom of the 60s, the notion that poor countries could become rich by emulating ‘us’ gave way to gloomier scenarios around 1970, fed by zero-sum theories of ‘underdevelopment’, ‘dependency’ and ‘the world system’ advanced by the other side in the Cold War.

In development policy-making circles, this trend manifested itself as fear of ‘Third World urban unemployment’. It had been noted that cities there were growing rapidly, but without comparable growth in ‘jobs’, conceived of as regular employment by government and businesses. At this time, Keynesians and Marxists alike held that only the state could lead an economy towards development and growth. Richard Nixon reflected this consensus shortly before his fall when he said “We are all Keynesians now”. There were a few liberal economists around, but none of them influenced policy. The question was, how are ‘we’ (the bureaucracy and its academic advisors) going to provide the people with the jobs, health, education, housing and transport that they need? And what will happen if we don’t? The spectre of urban riots and even revolution raised its head. The word ‘unemployment’ evoked images of the Great Depression.

This whole story didn’t square with my fieldwork experience in the slums of Ghana’s capital, Accra. It took me some time to work out why, but the result was a paper for a 1971 conference on ‘Urban unemployment in Africa’. It eventually appeared (Hart 1973), after an International Labour Office report influenced by my paper had launched the idea of an ‘informal sector’ in Kenya (ILO 1972). I wanted to persuade development economists to abandon the ‘unemployment’ idea and to accept that there was more going on in the grassroots economy than their bureaucratic imagination allowed for. To that end, I had two sections: the first was a vivid ethnographic description (“I have been there and you haven’t”); the second tried to engage their interest in the consequences for development theory, using what I call ‘economese’ — how to sound like an economist without formal training in the discipline — something I had learned by moonlighting as a writer for The Economist.

I had no ambition to coin a concept, just to insert a vision of irregular economic activity into the debates of development professionals. This was a classic move in the genre of ‘realism’ (Williams 1961). The ILO Kenya report, on the other hand, did want to coin a concept and that is what it subsequently became, a keyword helping to organize a segment of the academic and policy-making bureaucracy. The idea of an ‘informal economy’ thus has a double provenance reflecting its two sides, suspended between bureaucracy (the ILO) and the people (my ethnography). Drawing attention to activities that had previously been invisible to the bureaucratic gaze had a clear value, but I was struck later by how static my analysis had been. My aim had been to show that no single idea (‘the state’) can ever capture the complexity of real life. But I conceived of informal income opportunities as at best a minor appendage to the state-made economy, perhaps a bit more than “taking in each other’s washing”, but essentially going nowhere.

No-one could have anticipated what happened next: under a neoliberal imperative to reduce the state’s grip on ‘the free market’, manifested in Africa as ‘structural adjustment policies’ (SAPs), national economies and the world economy itself became radically informal. Not only did the management of money go offshore, but corporations outsourced, downsized and casualized their labour forces, public functions were privatized, often corruptly, the illicit drugs and arms trades took off, the global war over ‘intellectual property’ dominated capitalism’s contradictions and whole countries, such as Mobutu’s Zaire, abandoned any pretence of formality in their economic affairs. Here was no ‘hole-in-the-wall’ operation living between the cracks of the law. The market frenzy led to the ‘commanding heights’ of the informal economy taking over the state-made bureaucracy. Just as the Cold War ended in confusion between the poles that launched it, ‘negative dialectic’(Hegel 1817)  – ‘state capitalism’, ‘market socialism’, the Pentagon fighting for the free market as the largest non-market collective in world history – so too the formal/informal pair, inspired by the state/market opposition, leaked into each other to the point of becoming often indistinguishable. What is the difference between a Wall Street bank laundering gangsters’ money through the Cayman Islands and the mafias running opium out of Afghanistan with the support of several national governments (Hart 2005)?

I concluded then that the informal economy concept was insufficiently dynamic. I thought this might be partly a consequence of living under the threat of nuclear holocaust. We didn’t want the opposed sides and their symbols to move, since the result could be the annihilation of all life on the planet. In any case, they did move eventually – at several levels. Another criticism was that ‘informal’ says what these activities are not, but not what they are. We need to know more about what is going on under the rubric of ‘informal’ when it has expanded to include activities of bewildering variety. The urgent task is to expose the positive principles organizing the informal economy and to place these investigations within an adequately broad historical framework.

(…to be continued)

 

Hart, Keith. 1973. Informal income opportunities and urban employment in Ghana, Journal of Modern African Studies 11.3: 61-89; Hart, Keith. 1986. Heads or tails? Two sides of the coin, Man 21.4: 637-656; Hart, Keith. 1992. Market and state after the Cold War: the informal economy reconsidered. In Roy Dilley (ed) Contesting Markets. Edinburgh: Edinburgh University Press: 214-227; Hart, Keith. 2005. The Hit Man’s Dilemma: Or business, personal and impersonal, Chicago: Prickly Paradigm; Hart, Keith. 2009. Money in the making of world society. In Chris Hann and Keith Hart eds Market and Society. The Great Transformation today. Cambridge: Cambridge University Press; Hegel, G.W.F. 1998 [1817]. Science of Logic, New York: Prometheus; International Labour Office. 1972. Incomes, Employment and Equality in Kenya, Geneva: ILO; Johns, Adrian. 2009. Piracy: The intellectual property wars from Gutenberg to Gates, Chicago: University of Chicago Press; Lewis, Michael. 1989. Liar’s Poker. New York: Norton; Locke, John. 1960 [1690].Two Treatises on Government, Cambridge: Cambridge University Press; Marx, Karl. 1970 [1867]. Capital: The critique of political economy. London: Lawrence and Wishart; Partnoy, Frank. 1999. F.I.A.S.C.O.: The inside story of a Wall Street trader. New York: Penguin; Perkins, John. 2004. Confessions of an Economic Hit Man. New York: Plume; Polanyi, Karl. 1977 [1964]. Money objects and money uses, The Livelihood of Man. New York: Academic Press, 97-121; Polanyi, Karl. 2001 [1944]. The Great Transformation: The political and economic origins of our times. Boston: Beacon; Shaxson, Nicholas. 2011. Treasure Islands: Tax havens and the men who stole the world. London: Bodley Head; Simmel, Georg. 1978 [1900].The Philosophy of Money. London: Routledge; Williams, Raymond. 2011 [1961]. Realism and the contemporary novel, in The Long Revolution. Swansea: Parthian Books.