The solvency of the U.S. government has been circling ruin for the last several decades. Without reversing the current trend and drastically reducing taxes and capital controls, the dark market economy will flush this government directly down the drain.
Since the 1970s, each American economic recession has taken longer than the previous to recover from. Real income has steadily declined throughout the last forty years. Washington has attempted to hide this course through profligate money printing and make-work in government sector jobs, but to limited avail. Between 2000 and 2010, public sector jobs in the U.S. rose from 20.5 million workers to 22 million, while private sector jobs declined from 110 million to 108 million. By July of 2010, the average federal government worker was paid 60 percent more than the average private sector worker. Money continues to pour out of the government spigot, lining the pockets of politically connected corporate officials like those of Halliburton, Lockheed Martin, and Citigroup; yet average Americans’ standards of wealth continue to plummet. Between 2009 and 2014, the number of households on foodstamps rose from 15 million to 23 million — a record 20 percent of US households. One third of all households are now living from paycheck to paycheck, with 66 percent of those residing in the middle class. The government’s balance sheets scarcely look better, having accumulated 17 trillion dollars in debt and 127 trillion dollars in unfunded liabilities by the end of 2013.
The typical government kneejerk reaction to such losses is to grow: more taxes, more capital controls, more laws, and more three-letter agencies. However, economists have long studied this approach and documented its counterproductivity. Compounding the effects of government regulation with further restrictions on market activity drives more market actors into the safehaven of the underground economy. In a 1997 economic paper studying this phenomenon, “The Underground Economy: Global Evidence of its Size and Impact,” the Canadian Fraser Institute wrote that “personal taxes must figure prominently […] among the factors that have caused the growth of the underground economy.”
Those of us who do not participate in the underground economy are often unaware of its breadth: it grew to include one half of the world’s workers by 2009, and is projected to include two-thirds of workers by 2020. Europeans affectionately refer to it as Système D, short for the french word “débrouiller,” meaning “to manage, especially in an adverse situation.” Système D now globally represents a ten trillion dollar economy.
Participants in the underground economy have traditionally used cash to transact privately. This will rapidly change as more of them realize the incredible potential of crypto-currencies in general, and Bitcoin in particular. Whereas cash can only be transported slowly, with great risk, and in limited quantities, Bitcoin has demonstrated the capacity to send unlimited funds across the world within a few minutes without fees, and practically no risk of interception. This is what Satoshi and his successors have provided to the world: fast, cheap, censorship-resistant money.
Immediately after this incredible tool was invented, dark marketplaces using crypto-currencies and other cryptographic means of protection sprang up around the Internet. For years the Silk Road, the first and most famous of dark marketplaces, has allowed underground market actors to trade with confidence some of the most highly prohibited items in the world. The shutdown of the original Silk Road led darknets to generate several new marketplaces, with the total number of items available for sale and overall transaction volume significantly eclipsing the numbers observed just before the shutdown. Not content to simply splinter the Silk Road into many scion marketplaces, independent software developers continue to press the issue, evolving them to become ever more resistant to state intervention through peer-to-peer protocols like Dark Market and Open Bazaar. This next generation of dark marketplaces will serve not only as places for people to buy drugs and guns, but also to execute sophisticated cryptographically-enforced smart contracts and to exchange completely mundane items, when traditional markets fail them. A few years from now, we may be as likely to see a toaster oven purchased through Open Bazaar as Amazon.com. [pullquote]A few years from now, we may be as likely to see a toaster oven purchased through Open Bazaar as Amazon.com.[/pullquote]
By default, the market tends to eliminate middlemen and transcend coercive elements. These are sources of friction to a machine seeking to travel ever more quickly and efficiently, and must be removed in order for that machine to achieve its goal. In the past few decades, this has been accomplished by the pluck of Système D entrepreneurs and cash, but with the advent of Bitcoin and dark marketplaces, far greater distances are possible for the underground economic machine. Unless lawmakers tempt their citizens back into state-approved realms by reducing friction themselves, economists may have to adjust their projections upward for participation in 2020’s underground economy.