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Ghetto CapitalismSudhir Venkatesh's new book unravels the mystery of the underground economy.

By Patrick Radden Keefe
Posted Friday, Dec. 8, 2006, at 6:07 AM ET
Illustration by Robert Neubecker. Click image to expand.

America's underground economy stubbornly resists reliable study or measurement. Its overall size may be anywhere from 5 percent to 10 percent of America's GDP. Estimates of annual unpaid taxes range from $200 billion to $500 billion. Even the low ballparks are high. So, why do the dynamics remain so mysterious?

One answer is that under-the-table deals are by their nature surreptitious, and whether you're paying an undocumented immigrant to rake your lawn, underreporting the money your restaurant made on a Saturday night, or dealing crack in a schoolyard, you're not likely to expound on those activities to an academic (much less an IRS investigator). It doesn't help that social scientists tend to employ the bluntest of tools. In their best-seller Freakonomics, Steven Levitt and Stephen Dubner tell the story of a grad student, Sudhir Venkatesh, who entered poor black Chicago neighborhoods armed with a wonky questionnaire while studying urban poverty in the late 1980s. The typical response to questions like, "How do you feel about being poor and black?" was so contemptuous that Venkatesh wondered whether, in addition to the multiple choice answers ranging from a) Very Bad to e) Very Good, he should perhaps have appended f) for Fuck You.

Eventually, Venkatesh jettisoned the survey and adopted a less orthodox methodology. He calls it "hanging out." He spent years in a 10-square-block neighborhood on Chicago's South Side observing the clandestine work of gangbangers and mechanics, prostitutes and pastors. The result, Off the Books: The Underground Economy of the Urban Poor, suggests that in some American neighborhoods, the underground economy is a source not just of sustenance but of order, and that while shady transactions may be illegal, they adhere to a distinctive and sophisticated set of laws.

Off the Books differs from most studies of underground economies in both scope and perspective. Venkatesh goes micro. His statistics are based on tiny areas: Only two of the 21 families on one residential block are traditional nuclear families; only 10 percent of the shop owners along one commercial strip have good credit. Eschewing the objective distance often prized in the social sciences, he gains the trust of the people he is hanging out with, sometimes by mediating their disputes. (He's a little sheepish about this, saying he remains "not entirely comfortable" with his involvement.)

On that one residential block, Venkatesh focuses on three women: Bird, a prostitute; Eunice, an office cleaner who sells home-cooked meals on the side; and Marlene, a nanny who is president of the block's neighborhood association. (All the names in the book are pseudonyms.) The women share tart observations about their respective livelihoods: Bird thinks gangsters should "let the pimps show them how to run a business." Through them, we come to meet a diverse cast of locals, "nearly all linked together," Venkatesh writes, "in a vast, often invisible web that girded their neighborhood. This web was the underground economy."

Licit and illicit economies tend to be entwined, and in a closely knit urban neighborhood, this mutual dependence means that public-minded civilians and hardened criminals are regularly forced to negotiate. In the spring of 2000, an entrepreneurial gang leader, Big Cat, was elevating the criminal activity in a local park. Marlene and a preacher, Pastor Wilkins, arranged a tense summit with the kingpin in a church basement. Venkatesh talked his way into the room and watched as Big Cat agreed to stop peddling drugs in the park during after-school hours. For this concession, Pastor Wilkins promised to persuade a nearby store owner to allow Big Cat's gang to deal in his parking lot, and Marlene agreed to ask the cops to leave the dealers unmolested in their new location.

"I can't figure out who's crazier," Big Cat chuckles, once the deal is struck. "Me, or you niggers."

The people in Off the Books are struggling, and their many informal transactions represent a kind of adaptive strategy —and often an indigenous social safety net. Private property is a luxury in the neighborhood, so for $300 a pop, a restaurant doubles as a gambling hall on the weekends; prostitutes use the back room of the dollar store; the currency exchange sells fake Social Security cards obtained by a local pastor. All of this gives new meaning to the urban planning notion of "mixed use."

Similarly, neighborhood residents get around bad credit by borrowing what money they need within the community. Debts aren't always repaid with money. Venkatesh charts the degree to which promises and payments in kind substitute for cash. Small businesses give homeless people a place to sleep in exchange for food because it's cheaper than paying a night watchman; a prostitute and a grocer transact business without ever opening their wallets. Leroy, a mechanic, eventually gets rid of his cash register, because "his customers seemed unable to pay with our nation's legal tender."

In his efforts to demonstrate that this shadow economy is anything but the desperate Hobbesian scramble an outsider might assume, Venkatesh can at times sound like Jane Jacobs extolling the civic merits of Manhattan's West Village. "Beneath the closed storefronts, burned-out buildings, potholed boulevards, and empty lots, there is an intricate, fertile web of exchange, tied together by people with tremendous human capital and craftsmanship," he writes. In this view, even Big Cat is a "stakeholder" in the neighborhood, with an interest in seeing norms adhered to and order preserved. "It's not a crack house," as an old Onion headline had it. "It's a crack home."

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Patrick Radden Keefe, a fellow at the Century Foundation, is the author of Chatter, which is out in paperback.
Illustration by Robert Neubecker.
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