Black Market Information and the Enterprise – Part 1

[I recently read a book called Shantaram, by Gregory David Roberts. It’s an astonishing autobiography of a man who’s been heroin addict, slum doctor, escaped prisoner, Australia’s most wanted man, Indian mafia member and Mujahadeen fighter. In it, he talked briefly about black markets – he was involved in the currency side of things. And much of what he said – creative locksteps, how these markets come to be and the like – sounded very similar to me to issues networked organisations have to deal with.

This is my (probably overlylong) effort to thrash out some of the analogy and see if there’s anything to learn from it. This post is my trying to nail down the characteristics of a black market that I think are helpful to look at. The next is an attempt to show how those characteristics apply to today’s networked organisations. Both may be stretching the point]

BLACK MARKETS: WHAT THEY ARE AND WHAT CAUSES THEM
Black or underground markets are so-called because they operate in the dark, out of sight of the law. Arms dealing, drugs trafficking, alcohol trade in America’s 1920’s and ‘30’s speakeasies, and selling butter to Doris next door during rationed years of World War II are all examples of these markets in operation. This notion of visibility comes up again and again.

The economist’s explanation for them is that they develop:

“when the state places restrictions on the production or provision of goods and services that come into conflict with market demands.”

– Wikipedia

There are, of course, forces beyond the state’s control that can restrict the provision of goods (hurricanes, droughts etc). In general, however, the reasoning is that the more laws there are, and the heavier the constraints, the stronger these black markets are likely to become. Any economy that has rules or regulations has the potential for black markets, so it’s no real surprise that they are present in every economy today.

TYPICAL CHARACTERISTICS
Various connected black markets characteristics stand out for me:

1. decentralistion,
2. risk,
3. trust,
4. spread,
5. cost, and
6. boundary effects.

While the Prohibition Era in 1920’s America may not be wholly typical of every black market, it does help to highlight these (I’ve made liberal use of this as a source).

Decentralisation
The outlawing of alcohol made many otherwise admirable US citizens overnight criminals. Although limited amounts of wine and hard cider were legal, a glass of your favourite tipple after work or with a meal was effectively impossible to get unless you bought some on the black market or made your own. Homebrew boomed.

Equally, for those who could afford to pay, finding the best booze became almost solely a word of mouth process. Speakeasies didn’t advertise, but they were found and developed reputations nonetheless.

Risk and Trust
Black market customers necessarily takes risks. The most obvious of these is getting caught, but beyond that there are issues of quality control. Alcohol varied widely in its quality, because the supplier was unscrupulous, an amateur, or both.

Cutting was prevalent. With liquor in short supply, drinks were often blended with other substances to increase profits. Wood-alcohol still makes you drunk, but had the wildly unpopular side-effects of blindness followed by death.

“During the Noble Experiment, more than 10,000 people died from wood-alcohol poisoning, 1,565 in 1928 alone … the only reason this figure wasn’t higher was because of a peculiar characteristic of wood alcohol: before you died from it, you would go blind—permanently, irreversibly, blind. While drinking, if one’s vision began to go, the drill was clear: stop drinking and upchuck as much as you could, as fast as you could.”

Black markets have very few complaints desks. Perhaps as a result, trust and reputations become all the more prized. In the bootleg runs to the US, one William McKoy fast became one of the better-known rum runners, in large part thanks to his fair prices and uncut alcohol. If a bottle was “the real McKoy”, then its value and quality were vouchsafed. The expression is still with us.

Spread
Much to the lawmakers disgust, despite having put in place a rule to quell amoral drinking, lack of respect for the law actually grew. By turning average people into criminals, lawmakers unwittingly brought into question the validity of other existing laws, especially those regarding alcohol.

“As speakeasies were unregulated, outlawed, underground, and co-educational, they tended to breed unregulated, outlawed, underground, and co-educational activities.”

– Source

Everything from cigarettes to gambling to prostitution went gangbusters, so to speak.

Cost
Law enforcement during the Prohibition was an expensive flop. As a yardstick, a Ford factory worker—among the highest paid unskilled labourers — made only $25 a week. First, there was the loss of tax revenue: $500 million, or thereabouts. Second, there was the loss of money from an entire workforce of Budweiser, Coors and other wannabees. And then there was the day to day enforcement, which given growth of “honest citizens turned bad”, was battling against the tide. Some estimates for the cost of policing top a billion dollars, but however much the exact figure, it seems fair to say it was too much, and it was not money well-spent.

Boundaries
The “Noble Experiment”, as it was called, was run inside the borders of the US. Unfortunately, outside those borders lay less noble countries such as Mexico, Cuba, and Canada, not to mention the expanses of Atlantic and Pacific oceans. This boundary effect, however artificial, meant big money was made by the importers and distributors. In one year, one Mr Al Capone made $60 million (the equivalent of about $2 billion today) – a killing or more. He effectively made this from showing that the border was permeable, and that there were too many possible distribution channels within the US to effectively police.

TIME OUT
It’s worth remembering that, while black markets tend to thrive in times of heavy regulation (such as the Prohibition), black markets exist in all economies large and small. The above characteristics are present, to a greater or lesser extent, I think, in all black markets.

Enterprises are small economies, and they have their own black markets, inside and outside. The restrictions that fuel these enterprise black markets come in three broad flavours: the firewall, the software, and the culture. The black market characteristics are there if you look for them, and following on the Prohibition example, you also see a familiar character roster in an organisation: the Untouchables, the Gangsters, the McKoys, the homebrewers, the punters and the puritans.