A protégé of Steven "Freakonomics" Levitt gets under the skin of Chicago's underground economy. It's a pity he didn't have a better editorby Diane Coyle / February 25, 2007 / Leave a comment
Off the Books: The Underground Economy of the Urban Poor by Sudhir Alladi Venkatesh
Harvard University Press $27.95
Chicago has an irresistible allure for social scientists, and no wonder. Its university, one of the world’s great research institutions, has some of the grimmest of urban ghettoes right on its doorstep on the city’s South Side. Chicago’s most famous (or notorious) economists drew free market lessons from this daily drive-by brush with poverty. Nobel laureates such as Milton Friedman and Gary Becker made Chicago economics a byword for the proposition that the economy and society in general can be understood as the outcome of individual rational choice. Then Steven Levitt, in his bestseller Freakonomics, delved more deeply into the ghetto to debunk the Chicago school free-to-choose account of why so many young African-American men opt for drug dealing as a career (rather than, say, investment banking).
Or rather, Levitt delved by proxy, drawing on the research of a young Chicago sociologist, Sudhir Venkatesh. Venkatesh (now a professor at Columbia) spent years hanging about in the poorest parts of the city. He observed Southsiders at work, at the shops, at home, at play. He conducted surveys among the small businesses. He interviewed pastors and politicians. Off the Books is his account of this detailed web of daily life.
We get our ghetto tour from the perspective of a few key individuals, with whom Venkatesh clearly spent a lot of time. One is a mother and de facto community leader, just about scraping by in a legal job. Another runs an “off the books” auto repair shop. They in turn introduce us to their neighbours, friends and enemies through the recounting of specific incidents, such as the local gang leader’s decision to move his selling operations into a park used by local kids after school. Venkatesh goes on to analyse the implications of each incident through local surveys and further interviews.
The central point of this series of narratives is that economic and physical survival in the inner city is made possible only by operating outside the structures and institutions of the formal economy—and that that necessity in turn traps the community in informal or illegal economic activity. It is not just that many people make their living from drug dealing and extortion. Paying tax, offering vacations and health insurance to workers, satisfying safety regulations—any of these burdens imposed by undertaking otherwise legal activities formally would make them economically unviable. Almost nobody in the area can lead a life that’s legitimate by the standards of middle America, because nobody else in the community does so. The only way even to buy a meal or get a haircut is to do so off the books—or to move out altogether. This trap is only reinforced by the inadequacy of the area’s infrastructure, policing and public services, which further increase the hurdles in the way of in formal and legitimate economic activity.
At the same time, the book paints a detailed picture of the informal but highly effective regulation of the off-the-books economy that emerges from social relations in the community. Just as in the overground economy, reputation, personal contacts and social power structures determine people’s economic success or failure. “Social capital,” as this network of social relationships is usually described, is both a vital source of economic opportunity and a barrier to alternative and better ways of making a living.
Venkatesh’s detailed account illuminates the efforts of some economists (including Levitt) to explain the persistence of deprivation and poverty as a vicious circle in which individuals are trapped by particular institutions. Conventional policies, especially those which assume poor people are making free choices, do not address the multiple adverse incentives which discourage individual effort.
Despite Venkatesh’s heroic research and information-gathering, however, Off the Books has two flaws. The minor one is that it could have done more to set his observations about the Chicago community in a broader analytical context. For example, once we observe that a strong sense of community both helps people survive and traps them in dangerous and unrewarding means of survival, how should the South Side experience inform our views of the role of institutions and social capital in determining economic wellbeing? To the extent that Venkatesh comments at all on the role of government, he clearly regards the absence of state intervention as the South Side’s problem. Policing, street cleaning, schools, safe public spaces—all the government-provided amenities of middle-class communities are absent or inadequate here.
Yet Venkatesh’s examples show that the presence of government intervention is a problem too: small businesses in poor communities cannot afford to meet the many regulations imposed on them; the tax take from a low pay packet is so great that people prefer to work for cash; local politicians will help only those who can pay. What’s more, the underground economy is in fact far smaller in the US than in most European economies, presumably because the overall tax take is lower and the burden of regulation lighter, although the pockets of informal economic activity are highly concentrated in the US. If we want to explain the map of poverty and devise effective policies to tackle disadvantage, they will have to be informed by detailed sociological research of the kind reported in this book.
Venkatesh is clearly more interested in the storytelling. But the book’s major flaw is that he turns this golden material into an absolutely leaden read. There are some obviously wonderful narratives, all derailed by the lumpen prose of the academic sociologist. A good editor could have made this a much better book, perhaps a classic, but the publisher hasn’t even bothered to correct spelling mistakes and minor typos, never mind help out with the organisation of material or clarity of the prose.
This is still a must read for anyone interested in shaping policies which can reduce urban poverty and alienation. But it pales by comparison with another classic of Chicago ghetto sociology, Eric Klinenberg’s “Heatwave” (University of Chicago Press, 2002). Heatwave takes the bird’s-eye view, using statistics and secondary sources to tell the tale of political neglect and entrapment in poverty, but it’s a compelling account even without the first-hand experiences like those Venkatesh reports. Which is a real shame, because Off the Books is the first book I’ve read since Heatwave which has been so thought-provoking about what exactly determines the individual decisions which, added together, make economies succeed or fail.