GDP and the Underground Economy

In the 1800s, most economic activity was not recorded in GDP. Most people were self-sufficient farmers or wives engaged in home production, or producing outside of written records. As markets expanded and the government increased its tracking abilities (much through income tax records), the underground economy shrank as a percent of GDP. Now the reverse is happening again.

Matthew Yglesias » Home Page: "

One noteworthy trend we’re experiencing of late is the rising prominence of social production—the creation of valuable information goods on a non-commercial basis. Probably the clearest example is Wikipedia, a hugely useful service that doesn’t produce any economic “value” in GDP terms. Of course valuable activity that doesn’t register in GDP is nothing new—just ask moms spending time taking care of their kids. But the transition to the digital economy is changing things in important ways. In particular, it’s simultaneously making it cheaper than ever to produce and distribute information goods, but harder than ever to capture revenues from information goods. ...we’re almost certainly shifting from a world in which a large and important set of activities aren’t captured in the national economic statistics to a world in which a large, important, and growing set of such activities isn’t captured in the conventional statistics."

Also this:

...the true essence of the “new economy” of the digital era is that there will be lots of activity going on that people enjoy and find useful, but that has very little in the way of economic value that’s captured by profit-making firms. The quintessential enterprises of this era are things like Wikipedia, which may no money, or CraigsList which makes a very modest sum of money, even while they both revolutionize certain spheres of endeavor. Certainly the revenues associated with CraigsList are tiny compared with the revenues that used to exist in the rapidly-dying newspaper classified ad market.

Twitter seems like something that could become extremely widespread, and that lots of people could receive a small-but-real amount of daily enjoyment from, all without ever generating much money. And I think that will be pretty typical of the digital realm. The fact that Google itself is a very successful company sometimes serves to obscure the fact that the total amount of money being made off the internet is pretty small considering how ubiquitous internet use has become. Ultimately, I think understanding this growing de-linkage between value and monetizability, or perhaps between “use value” and “exchange value” as Marx would say, is important to understanding the world we’re increasingly living in.

Also this

And yet in the name of halting “piracy” there are those who would so tighten intellectual property rules as to make it impossible for these kinds of creative works to be made. That would boost the financial incentives for for-profit corporations to produce high levels of cultural content, but it would also raise substantial barriers to the creation of amateur, hobbyist, or not-for-profit content creation. That’s worth keeping in mind whenever you hear debates about intellectual property issues. Strong IP is usually branded as “good” for “creators” but the main impact of the digital revolution has been to advantage non-commercial producers relative to commercial producers, and the main impact of strong IP law is to shift the balance of power back to the commercial world. We’re accustomed to thinking of capitalism in opposition to socialism, state-direction production, but in the information realm the main opposition is between capitalism and activity that is simply non-commercial in nature.

Other reasons for an underground economy is to sell things that are banned like drugs or to avoid taxation (like offshore banking).