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The Characteristics of Illegal Markets

Summary and Keywords

The phenomenon of illegal markets is pervasive. The circulation of illegal goods and services reaches all social segments, crosses national boundaries, and produces enormous revenues. Scholarship has typically addressed issues of illegal exchanges by focusing on criminal organizations, their members’ activities, internal structures, and businesses while leaving the very notion of illegal markets conceptually underdeveloped. Different from organized crime, the notion of “illegal market” compels us to consider the demand side and to investigate the varied ways it relates to the supply side. Following the path opened up by economic sociology scholarship, this article brings illegal markets to the center of the scene in order to develop them conceptually, observe them in a differentiated way, and investigate their relationships with legal structures. From this perspective, the social organization of markets comes to the fore, highlighting such aspects as the formal and informal institutions sustaining illegal markets; the modes of internal coordination that deal with problems such as value, competition, or trust; moral attitudes toward the production, exchange, or consumption of certain products or services; the cultural elements or cognitive dispositions that promote illegal exchanges; the role of state power in defining what is and is not illegal, and thus how it controls certain exchanges; and the role of the enforcement of the law in the emergence, expansion, or extinction of these markets.

Keywords: illegal markets, organized crime, social legitimacy, formal legality, informal institutions, economic sociology

In academic reflection on crime, the reference to illegal markets is by no means new. Criminological literature, as well as the body of scholarship that deals with organized crime, has often referred to heroin (Paoli, Greenfield, & Reuter, 2009; Ruggiero & Vass, 1992), cocaine (Paoli, 2002), alcohol (Radaev, 2015), and ecstasy (Antonopoulos, Papanicolaou, & Simpson, 2009) markets. In sum, there is a particular focus on drug markets. Additionally, Lampe (2016), Paoli (2002), Arlacchi (1998), and Naylor (2003, 2004) acknowledge the existence of illegal markets. However, a cursory overview of this literature allows us to conclude that despite these references, the concept of illegal markets has always been theoretically underdeveloped and, therefore, played a secondary role in academic research. The literature on illegal economic exchanges, for instance, tends to be severely conditioned by the notion of organized crime. In fact, many studies identify illegal markets with organized crime, or use the concept of illegal market as a default category derived from the economic activity performed by criminal organizations. Since these organizations are in businesses consisting of providing illegal goods or services, they are supposedly immersed in a market. Finally, the concept of the illegal market suffers from a lack of internal differentiation; for example, failing to address the degree to which certain formally illegal goods or services are socially accepted or rejected (i.e., to distinguish between illegal markets that enjoy social legitimacy and illegal markets that are perceived as repugnant). In other words, the definition of illegality found in the literature is usually legalistic and not sociological. Whereas in markets for child pornography, human beings, hard drugs, organs, or protected animals legality and legitimacy tend to be aligned; in markets for marijuana, wood based on illegal logging, and for garbage and sweatshop-produced garments both dimensions tend to be dissociated. In current definitions of illegal markets, this differentiation tends to be absent: that is, if a product or service is illegal, it is inferred that it is also socially undesirable. After defining illegal markets as “places within which goods and services are exchanged whose production, sale and consumption are forbidden or strictly regulated by the majority of national states and/or by international legislation” Arlacchi (1998, p. 203) affirms that the exchange of such products “is regarded as an inherent threat to human dignity and the public welfare.” One only need compare the moral resonance of two illegal products such as child pornography and counterfeit clothing to realize the importance of distinguishing between “formal illegality” and “social legitimacy.”1

The purpose of this article is to define illegal markets from a sociological perspective. In order to do this, we will follow the path opened up by economic sociology scholarship over which has in the 21st century proposed bringing illegal markets to the center of the scene, to develop them conceptually, observe them in a differentiated way and investigate their relationships with legal structures. This has been done in dialogue with research on organized crime (Hübschle, 2016) but also with academic works in the field of economic sociology, such as those devoted to the problem of secrecy in exchanges (Steiner, 2010, 2016) or the role of the morality of marijuana entrepreneurs (Dioun & Haveman, 2016). Different from the literature on organized crime, which concerns illegal organizations or criminal activities carried out by its members (Paoli, 2014), the literature on illegal markets investigates the social organization of markets: the formal and informal institutions sustaining mutual exchanges; the modes of internal coordination that deal with problems such as value, competition, or trust; moral attitudes toward the production, exchange, or consumption of certain products or services; the cultural elements or cognitive dispositions that promote illegal exchanges; the role of state power in defining what is and is not illegal, thus controlling certain exchanges; and the role of the enforcement of the law in the emergence, expansion, or extinction of these markets. If, as common definitions would have it, illegal markets can be characterized as arenas of regular exchange, the primary focus needs to be on this social relationship.

Review of the Literature on Illegal Markets

By focusing on the social organization of markets, this article takes a new perspective in order to add to the body of research concerning market exchanges under conditions of illegality. Illegal markets can be characterized as arenas of regular exchange of goods or services for money under conditions of competition and in which the product itself or its production, exchange, or consumption violate legal stipulations (Beckert & Wehinger, 2013; Beckert & Dewey, 2017). This definition contains two parts, the first of which pertains to elements shared by both legal and illegal markets, while the second highlights the feature that sets them apart and describes the specific tonality of this type of exchange: the violation of legal conditions. That is, this definition allows researchers to recognize three interrelated phenomena. First, it reveals state intervention in society. Second, it makes clear that this intervention is far from neutral. Third, it gives serious consideration to the state’s power to delineate and enforce what is and is not legal, and the attempts it makes to govern exchanges and social groups. As a result of using this definition, it becomes clear that illegal markets are produced by the state. What this definition specifically does not entail is that all the aspects constituting the market are necessarily illegal. Instead, only certain actions may be illegal, though these illegal elements can be located within perfectly legal organizations, within legal market structures, or be performed by actors who otherwise operate legally.

Despite overlapping with strands of literature treating the topics of organized crime and the informal economy, the definition of illegal markets as arenas of regular exchange contains five elements that set it apart from such approaches. First, market exchanges are shifted to the foreground, signaling that this is a social space structured around sellers and buyers. With the investigation centered on market exchanges, an alternative view of the study of illegality in the economy is offered that is also more comprehensive than that provided by a focus on criminal organizations. This alternative view encompasses the study of the interactions between the supply and demand sides, recognizes the demand side as the driver of exchanges that take place on illegal markets, and emphasizes the interfaces that exist between illegal and legal action. Furthermore, actors face coordination problems when their transactions violate the law, and these are also considered. Second, since it focuses on the trade of products and services, the definition of illegal markets is commodity driven and not offender driven; that is, criminal organizations play a role but are not at the center of the approach. The third element that sets this definition apart is the use of the word “illegal,” which, in contrast to more euphemistic qualifiers such as “shadow,” “underground,” or “black,” is explicit about the nature of the phenomenon under investigation; namely, market exchanges that violate the law in some way.2 Fourthly, the inclusion of exchanges involving products or services that are illegal to produce, exchange, or consume results in an approach that expands what the literature customarily defines as the informal economy. Such research focuses above all on distinguishing between wage employment and self-employment (Hart, 1973), alongside an interest in studying the avoidance of regulations (Centeno & Portes, 2006; Portes, 2010). Here, these phenomena are recognized as sharing some commonalities with the new perspective, while also being in many ways distinct. Certainly, the boundaries between economic informality and illegality in markets are often blurred, and they are usually found in combination. In particular, markets enjoying a great deal of social tolerance such as the one for counterfeit garments contain people violating official norms (counterfeiting) as well as people circumventing labor or security regulations. In sum, while the real combination of both is an empirical question, the distinction remains analytically relevant. Fifthly and finally, a systematic comparison between the functioning of illegal and legal markets becomes possible through this shift in focus onto markets. So, too, can we facilitate the investigation of illegality in a broader context that includes the debate on markets, capitalism, and the role of the state therein.

Since this perspective considers more than just supplier interaction along the value chain and the role played by law enforcement, the shift in the way illegality in the economy is observed means a broader set of actors fall under the scrutiny of researchers. Moreover, because illegal markets and illegality in markets are seen in terms of the normal operation of economic processes, illegality is no longer solely linked to a set of actors seen as outsiders operating anomalously in an otherwise legal economy.

The social phenomenon of the illegal market exhibits wide variation and a multifaceted nature; in order to become an object of study, typological distinctions must be drawn. While the presence of law-breaking behaviors is a given in markets, especially illegal ones, such behaviors differ widely in the context of, for instance, the heroin market (Paoli, Greenfield, & Reuter, 2009), in which the production, transportation, selling, and consumption of the product are all illegal, compared with the illegal markets for antiquities, in which goods are procured through looting (frequently in the aftermath of wars or other violent events) before being transported to destinations such as renowned galleries in London or Amsterdam. However, the heterogeneous category of illegal markets has been systematized according to a typology (see Figure 1) in which five different types of illegality linked to markets are identified (Beckert & Wehinger, 2013; Beckert & Dewey, 2017; Wehinger, 2011).

Type I describes a market for goods (or services) that are explicitly forbidden, which includes the traded commodities themselves as well as the “production” of the same. Examples of this type include the markers for drugs, child pornography, and child prostitution, among others. The prohibition of the good/service results in the trade and consumption thereof also being prohibited. Transactions involving such products constitute markets in their own right, which usually function without links to the legal economy. In this type of market, the legal definitions supporting prohibitions are usually backed by broad moral consent. For example, prohibitions regarding child pornography or certain drugs are strongly supported by different social groups, and anyone seen to question the prohibitions risks being socially discredited. In this context, legalization processes appear as transformations depending on large social and cultural changes, rather than resulting from social activism. Meanwhile, the illegalization of, for example, a new and dangerous drug takes place rapidly (see Table 2).

Type II involves products that have been procured illegally (i.e., stolen). As such, the traded product is defined as legal, but its sale and purchase (if the buyer is aware of the product’s origins) is illegal because the seller broke the law in acquiring the product. For instance, market transactions involving stolen cars, antiques, or artworks fall into this category. Either the transactions surrounding these products take place on separate markets set up for trading the stolen products, or the goods are funneled into legal markets. The types of markets in which stolen goods circulate do not permit legalization, only illegalization. Inasmuch as the traded goods have been obtained by violating property rights, legalization cannot take place unless such violation of property rights is also legalized. In this type of market there are no specific prohibition laws: the source of the illegality—that is, what determines what is legal and illegal—are the property rights themselves.

Type III describes markets in which the products traded have been falsified, counterfeited, or forged. Though a specific prohibition with regard to the act of counterfeiting is often lacking (in the case of counterfeiting works of art, for example), trading in such products is outlawed. A considerable portion of illegal transactions in the economy concerns counterfeit products, which includes counterfeited trademarks for consumer goods and spare parts for industrial goods. This category also includes counterfeit medicines, which may be harmful to patients on account of stating the incorrect dose of the effective substance on the packaging, or through containing no dosage at all. Around 50% of the global pharmaceutical market is estimated to be falsified and counterfeited medicines, though the rate is considerably higher in many of the world’s less economically developed countries (WHO, 2010). Transactions surrounding counterfeit products are conducted either within separate markets, or in the legal markets for the authentic product. The third type of illegal market, in which counterfeited and forged goods are exchanged, does not permit legalization either, since the existence of these goods implies the violation of trademark laws. In that sense, in the same way as in the second type of illegal market, legalization will only be feasible if such trademark laws are abolished. Illegalization in markets of this type is determined solely by trademark law.

Type IV describes transactions involving legal products, but for which the trade of those products is subject to legal prohibitions. This type of market is exemplified by, for example, the trade in human organs, adoptions, and (depending on the country) surrogate motherhood. The illegal aspect of surrogacy is not the pregnancy; rather, it is the contractual relation between the carrier and eventual “recipient” of the child concerning the transfer from one party to another that is prohibited. This type of market has been frequently characterized in the literature as a “contested,” “repugnant,” or “noxious” market (Satz, 2010; Trespeuch & Steiner, 2015). That is, the trade of such products is often perceived to be morally offensive, even if the market has been legalized. For the most part, transactions occur separately from the legal economy. In this category of illegal markets, in which goods are perfectly legal but their exchange is banned, both legalization and illegalization is related to fierce social, moral, and even technical debate. In general, it is not property rights that are at stake in this type of market but the survival or vital aspects of actors such as children (adoptions), or the exposure to “dangerous forces” (lottery). These are markets in which considerations regarding the body and the psyche of human beings are crucial.

The fifth and final type of illegality pertains to products that are in principle legal to produce, exchange, or consume, but the process of production or exchange involves actors violating existing regulations: for instance, importing cigarettes but circumventing tax laws, violating insider trading rules on the stock market, trading weapons without the appropriate permissions, and exporting diamonds without a Kimberley certificate (Engwicht, 2016a, 2016b). This type exemplifies a great deal of what is considered to be the informal economy. Generally, such illegal behavior does not lead to the constitution of a market in its own right (i.e., instances such as Volkswagen engineers manipulating diesel engines to falsify emissions tests do not result in the formation of an illegal market). However, certain commodities do: with alcohol (Radaev, 2015), cigarettes (Shen, Antonopoulos, & Lampe, 2010), and precious stones providing possible examples. Type five represents the most complex type, while probably also being the most frequently occurring due to the hugely divergent forms rule violation can take, as well as exhibiting the closest interrelation of legal and illegal aspects. Examples of rule violations include failing to adhere to norms in the production process, which might include breaking labor or environmental laws. Elsewhere, the violated norms could be those pertaining to the characteristics of the product traded (if it breaches safety standards, for instance); norms related to the transaction itself (if the seller is not in possession of the appropriate license to trade, for example, or the buyer has access to information prior to purchase that breaks rules on insider trading); or regulations designed to protect the rights of third parties (failing to honor tax obligations to the state, for instance, or to pay royalties to artists).

Table 1. Dimensions of Illegality in the Different Types of Illegal Markets.

Type

Product Illegal

Consumption/Possession Illegal

Market Exchange Illegal

Violation of Regulation

Example

Type 1 illegal products

x

x

x

x

Hard drugs

Type 2 Stolen goods

x

x

x

Stolen artworks

Type 3 Counterfeit goods

(x)

x

x

Fake Rolex watches

Type 4 Repugnant goods

x

x

Organ transplants

Type 5 Rule violations

x

Informal markets Libor manipulation

Source: Beckert and Dewey (2017).

The typology described above is given in Table 1, which displays the dimensions defining each type of illegal transaction. It is noted here that this is a purely analytical typology; that is, from an empirical perspective, we can observe market transactions that are illegal according to more than one of the given categories, or products may vary in their legal status in different contexts. The highly complex nature of the empirical phenomena under investigation makes the overdetermination of the typology given here impossible to avoid: a categorization that would apply to any other typology that could be suggested in its place. What this typology is able to do is raise awareness for the researcher and aid them in distinguishing between the different forms of illegality that may be present—alone or in combination—in different markets. It offers, therefore, both a glimpse into the wide range of possibilities for breaching legal stipulations in markets, as well as providing a useful tool with which the researcher can structure the field. In addition, we hope to contribute to countering the trend for type 1 markets (particularly drug markets) to dominate research on illegal markets, where in reality such markets represent only a limited part of the phenomenon of illegality in markets.

However, research in this field must also take into account the fact that the distinction between legal and illegal is neither a homogenous one, nor a static one. How certain products and transactions are assessed varies according to both location and time. For example, surrogacy is legal in India but not in Germany (Rudrappa, 2015), and Iran is the only country in the world in which it is legal to conduct commercial transactions for organs for the purposes of transplantation (Steiner, 2010). Discrepancies arise, too, within the same jurisdiction, as Paoli and Greenfield (2017) demonstrate in their study of the “quasi-illegal” market that exists in Italy for doping products in sport. They show that legal ambiguities are one of the main hurdles to prosecuting actors engaged in the market for doping products.

Finally, taking the classification as reference we can conclude that some arenas of exchange will be subject to either legalization or illegalization more frequently than others. For instance, types I and IV are dynamic markets; that is, arenas of exchange subject to continuous change. Meanwhile, types II and III are static markets, meaning arenas of exchange that tend to be organized parallel to their legal counterparts and are difficult to alter due to existing illegality.

Table 2. Dynamics of Legalization and Illegalization According to the Different Types of Illegal Markets

Type of Product/Service

Dynamics of Legalization and Illegalization

Market Type I

Drugs

Legalization depends on large cultural transformations

Child Pornography

Child Prostitution

Marihuana, Tobacco, Alcohol

Market Type II

Stolen cars, antiquities, artwork

Legalization unlikely unless property rights are abolished

Market Type III

Counterfeited products

Legalization unlikely unless trademark laws are abolished

Market Type IV

Human organs

Contested arenas of exchange. Continuous attempts to legalize or illegalize

Waste

Adoptions

Rhino horn

Diamonds

These distinctions, which result from evaluating the role of both the legalization and illegalization of arenas of economic exchange in relation to different types of markets, are crucial for a better and closer analysis of both processes.

Informal Institutions in Illegal Markets

Available research on illegal markets is partly organized around one central question—namely, what are the institutional mechanisms that allow the internal coordination of actors and activities? Such mechanisms can be defined as “socially shared rules, usually unwritten, that are created, communicated, and enforced outside officially sanctioned channels” (Helmke & Levitsky, 2006, p. 5). This question arises from the fact that mechanisms generally regarded as vital to the functioning of a legal market, such as conflict resolution, regulation of competition, and formal sources of credit, are all absent in an illegal market. However, lacking such legal frames has proved to be no barrier to the emergence of new illegal markets. Furthermore, even without these frames there is competition and actors making investments, whereas violence, though often regarded as inevitable in the context of illegal activity, is not a dominant presence. Thus, we may conclude that there must be alternative informal institutions present in illegal markets that allow them to function so successfully.

To gain a more thorough understanding of the internal coordination of illegal markets, it is necessary to analyze these informal social mechanisms. As an example, we can observe that silence and secrecy are essential in order to complete exchanges on illegal market and can be the result either of institutionalization through agreements that may be more or less explicit, or of official regulations designed specifically to promote opacity and ignorance. Examples of the former include the markets for looted antiquities, which go on to be sold in exclusive London galleries (Mackenzie & Green, 2009), and organs illegally traded for transplantation (Steiner, 2010); for the latter, the classic example is that of tax havens (Volkov, 2011). Elsewhere, research into mafias has shown that selling private protection is a mechanism that oils social relationships, in particular in contexts in which there are high levels of interpersonal distrust (Campana, 2011; Gambetta, 1993; Volkov, 2002; Varese, 2004). To briefly mention the “banking” of illegal markets, informal institutions such as the “hawala” system found in the Arab world (El-Qorchi, Maimbo, & Wilkson, 2003) or “pasanaku,” an ancient group-based method for raising money and financing individual needs originating in the Andes, have been shown to play a role alongside formal institutions such as tax havens, loan sharks, or micro-finance organizations.

The Interface With the State

In studying the interface between illegal markets and state structures, we find a mechanism vital for such markets’ operation. This mechanism is usually referred to as corruption but can also be understood in terms of protection rackets, whereby protection is a “service,” which the state provides illegally, or provision is made by extra-legal organizations such as the mafia. Regarding the mafia, protection can be seen as shielding the receivers of the protection from some anonymous person carrying out harmful actions; in the case that the state is the provider, (illegal) protection shields the recipient from the law itself. Illegal state protection is necessarily provided by official authorities and therefore entails the non-enforcement, or de facto suspension, of the law. The illegal service for sale is the suspension of the enforcement of the law, which creates a space in which social relationships are governed by extra-legal principles. In other words, the state itself appears as a criminal actor in illegal markets.3

Studies of mafia groups have been successful in gaining a robust understanding of such groups’ principal business, showing that it entails the production, promotion, and sale of private protection (Chu, 2000; Campana, 2011; Gambetta, 1993; Volkov, 2002; Varese, 2004). The notion of “sale of protection” has been instrumental in allowing scholars to recognize similar patterns occurring between state agencies and criminal groups, which include the state-sponsored “protective umbrellas” of gambling houses and prostitution rings in China (Gong, 2002; Shieh, 2005; Wang, 2012, 2014; Zhang & Chin, 2008) and the Mafiya, or “roofs,” in Russia (Galeotti, 1998; Stephenson, 2016; Volkov, 2002). Alternatively, protection rackets in both North and South America are generally described as being rooted in a lack of state capacity or willingness to enforce the law. The legitimacy of prohibited products was shown to play an important role by, for example, studies on the gambling business in Chicago (Haller, 1971; Reuter, 1984) and on prostitution, gambling, and betting in other locations (Gardiner, 1970). Indeed, protection rackets are partly motivated by the “popular desire to consume such illegal services as gambling and prostitution” (Gardiner, 1967, p. 124). Further south, institutions of protection set up by Mexico’s political elites, law enforcement agencies and drug trafficking organizations have been shown to be a consistent presence in the county’s recent history (Lupsha, 1991). For their part, Snyder and Duran-Martinez (2009) compared Colombia and Mexico, and their findings suggest that state-sponsored protection rackets are not necessarily the cause of great violence. This has proved to be an important discovery for future analysis of legitimacy in illegal markets. The variety of contexts in which institutions of protection have been discovered is wide: for instance, similar structures have been identified in the case of street vending in Mexico (Cross & Peña, 2006) and drug trafficking (Arias, 2006) and gambling (Misse, 2007) in Rio de Janeiro.

There have been two theoretical approaches to state’s establishing protection rackets as a response to crime, whereby it has been called either state regulation of illegal market actors (Sain, 2008), or the sale of protection to the same (Dewey, 2012, 2015). These two cases have in common the fact that the state responds by implementing the selective enforcement of the law, which is shown to be an informal way of negotiating order, extracting both economic and political resources and keeping crime under control. Such state-sponsored protection rackets appear only rarely in the available literature and thus constitute an under-analyzed phenomenon. Instead, the situation is taken to be a case of law enforcement personnel simply “turning a blind eye,” or alternatively as plain corruption. In so doing, studies are usually unable to furnish fine-grained accounts of the workings of protection rackets and how they function in the context of illegal economies. Tinkering with laws, bureaucratic knowledge, and legal gaps, as well as manipulating official procedures, may happen at various levels of state structures and provoke distinctive outcomes. Future research needs to determine whether the motivations for these actions are mainly economic, or if morality plays a role. In the same fashion, it remains open whether the role played by politics and political regimes fosters or impedes this powerful instrumentalization of legal mechanisms.

The basic prerequisite to determine the presence of a state-sponsored protection racket is the intentional non-enforcement of the law by political and police actors, the aim of which is to capture economic resources. This non-enforcement of the law serves as an interface between state authorities and illegal markets and is highly relevant for two reasons: the first of which is that it provides a valuable asset to actors involved in the exchange of officially banned goods and services. In fact, the literature on corruption and organized crime is almost unanimous in its assessment that illegal market actors are prepared to pay for the non-enforcement described, since they avoid a situation in which their goods are confiscated or they themselves are prosecuted and/or incarcerated. The second reason pertains to the fact that non-enforcement can generate economic resources for the authorities and provide them with a source of power over criminal groups. Key to this constellation is the power that state servants (above all police forces) have to manipulate the application of the law: they are free to suspend enforcement and turn it into a commodity for sale to actors whose illegal actions mean that they require “protection” from it. But alongside the possibility of suspending the enforcement of the law, there is also the option of enforcing the law as it should be enforced. The latter option constitutes a constant threat that state agents hold over illegal market actors, thereby making social relationships between them asymmetrical. With these two options at their disposal—enforcing or suspending the law as they choose—state actors attain a degree of control over actors and transactions in illegal markets. Scholars often wonder if this is not a case of extortion rather than of protection. In that respect, Federico Varese (Varese, 2014, p. 350) offers an instructive explanation regarding the mafia. When state agents extract resources for services, those services are, in fact, delivered. Though these services may be overpriced and of substandard quality, protection is still legitimately being provided. Indeed, it is demonstrated here that the growth of the illegal market and the free participation of outlaws therein indicates the successful provision of protection.4

As mentioned, the situation described is often misconstrued as a case of law enforcement officers “turning a blind eye”; that is, the sale of protection is seen instead as the sale of inaction. The two share some commonalities, and there are occasions in which the observer could legitimately claim that inaction and protection are the same phenomenon. For example, in an exchange in which a car driver caught breaking some rule hands over payment to a police officer in order to escape paying the larger, official fine, we can say that the driver is protected from the law through the inaction (failing to apply the official fine) of the officer. Elsewhere, the sale of protection can be clearly differentiated from the sale of inaction. For instance, police officers may cease their normal duties, which leads to the demand for a specific kind of protection. In one such case, a shop owner’s failure to give the police “additional contributions” for protection leads to retaliatory police inaction (Dewey, 2012). By allowing the shop owner to fall victim to crime, the police render the protection necessary and thereby begin to receive payment for the protection they originally offered. Thus inaction creates the demand for protection; that is, protection generally requires action on the part of the protector, contrary to the commonly held view that protection means “doing nothing.” We may observe, then, that protection results from organization. In sum, where state-sponsored protection rackets are mechanisms designed to extract economic resources, they also function in such a way as to provide authorities with the ability to control illegal actors and exchanges.

The Interface With Politics

The interfaces between politics and illegal markets have become much better understood following the study of illegality from the perspective of illegal markets. Many avenues of inquiry have been opened through such research, including the investigation of exchanges between state servants and illegal market actors, how they are structured or how they are related. This active strand of research underscores the major role played by criminal organizations in the political-criminal “dirty togetherness.” In addition, some in this field have attempted to understand political activities as part of a wider social context, such as in (illegal) markets. This has meant finding a new vantage point from which to better observe illegal markets, rather than concentrating on criminal organizations, and entails a qualitative shift regarding the approaches to questions in this field. The new point of departure is the definition of illegal markets outlined above: arenas of the voluntary exchange of goods and services whose production or consumption is officially banned (Arlacchi, 1998; Beckert & Dewey, 2017; Beckert & Wehinger, 2013; Lampe, 2016). The illegal markets approach includes both the supply and demand side of markets: the former generally represented by more or less structured illegal enterprises (Haller, 1990) that, in order to pursue their goals, usually need to form various connections with state actors, such as through “protection rackets,” “corrupt exchanges” (Della Porta & Vannucci, 1999), “forbearance” (Holland, 2017), inaction originating in ignorance, or conflict . Additionally, the way in which the market as a whole functions is also taken as an object of study in order to uncover relations to politics. The illegal markets perspective, therefore, reveals not only the links between politics and those who supply illegal goods—from drug traffickers to car dismantlers or people smugglers— but also highlights the political links to those who consume illegal goods and to the by-products produced through the functioning of the illegal market.

The Characteristics of Illegal MarketsClick to view larger

Figure 1. Dimensions of the legal/illegal and the legitimate/illegitimate

(Source: Dewey, 2017).

With this new focus on relationships between politics and consumers and the externalities of illegal markets comes the need to differentiate between illegal markets that may be either socially legitimate or socially illegitimate. As a brief overview of the literature on organized crime reveals, markets are frequently categorized according to the black/white distinction of illegal equals “bad” and legal “good.” However, within the category of illegal markets, several scholars have identified a scale: at one end are those illegal markets that are socially tolerated and enjoy more or less legitimacy and, at the other, those illegal markets perceived as repugnant. Several authors (Schendel & Abraham, 2005; Dewey, 2015; Engwicht, 2016a; Hübschle, 2016) elaborate that the level of legitimacy, tolerance, and acceptance that a market receives is dependent upon the commodity being traded, the side effects of its exchange, or society’s wider moral conceptions. For structural reasons, the commodity traded on the market in question is particularly relevant because illegal markets are especially demand-driven (Beckert & Wehinger, 2013; Lampe, 2016). Additionally, consumer behavior and preferences plays an important role when politicians or private companies are weighing the potential benefits of the market. If we take the production and consumption of counterfeit clothing (Dewey, 2017) and the diamond trade in postwar countries as examples (Engwicht, 2016b), we find situations where there is a widely held perception that illegal market activity leads to positive side effects and that the commodity traded is morally acceptable. These two factors constitute social legitimacy, which is highly valuable to political actors and highly significant in a situation of rampant social inequality.

An additional element to consider is the “social life” (Appadurai, 1986) of commodities, which is not necessarily linked to the state’s definition of them as legal or illegal. The reactions of states and governments, and the way the commodity is traded depends in part on whether it is tolerated, accepted, or instantly rejected, and whether it is prohibited and what the social context of that prohibition is. How cultural elements can impact the structure of exchanges is the topic of studies in relation to certain drug markets, for instance in the case of cannabis (Sandberg, 2012) or heroin (Dwyer & Moore, 2010; see also Bucerius, 2007). In terms of side effects or externalities, these are produced in both illegal and legal markets. Though illegal markets generally have a reputation for producing negative externalities, such as physical violence, predation, or fraud, they rarely do so exclusively. Positive externalities produced by illegal markets include the creation of informal jobs, increased consumption, and the granting of access to a minimum of economic citizenship; these factors help the market to achieve greater legitimacy (Dewey, 2015; Engwicht, 2016a; Hübschle, 2016; Schendel & Abraham, 2005). It is easy to see, however, that such externalities can be highly influential to authorities in certain sociopolitical contexts. The perspective outlined here also reveals a further important aspect in which moral considerations concerning the trade of officially banned goods can be shown to develop into political resources. One such instance is the case of the rhino horn, which is taken to China and Vietnam after being sourced from animals hunted illegally in South Africa (Hübschle, 2017). Moralization in this context serves as a way to achieve certain political goals: emotion surrounding the market is deliberately inflamed in order that institutions responsible for countering the illegal rhino horn trade may be reinforced. The outcome of political elections hangs on whether fear can be successfully induced in the population to the extent that new security policies are accepted (Findlay, 2009). It is the same process that occurs in the case that a socially tolerated product is commercialized. The phenomenon can be shown in any number of cases, such as in the markets for counterfeit garments, garbage, stolen foodstuffs, cigarettes, and alcohol (Aguiar, 2007; Misse, 2007; Radaev, 2015). Taking the example of illegal garment production, studies on Prato, Italy, or Buenos Aires, Argentina, have shown that the products traded in these markets are perceived as innocuous. In addition, the exchange of counterfeit and illegally produced garments in the markets is felt to produce the positive side effects, such as the aforementioned creation of informal jobs, fostering of consumption, among others. Such cases are illuminating in showing the importance of governmental interest, where the illegal market in question is seen to produce externalities that solve specific political problems.

Final Remarks

This article delineates a research perspective that brings to the fore the investigation of illegal conduct in markets from the point of view of the social organization of markets. Rather than starting out from an offender-driven definition of illegal markets (i.e., one in which organized criminals are the center), the definition presented draws on a commodity-driven understanding of illegal markets. This includes considering the production, exchange, and consumption of illegal goods and services. This commodity-based definition allows the observation of a wide array of social and economic settings, each providing a different perspective and portraying different actors and products. Additionally, this novel perspective acknowledges that formal legality may not coincide with social legitimacy because the production, the exchange, or consumption are subject of social tolerance (i.e., commodities are not perceived as harmful or, in some cases, even beneficial). In that sense, the illegal markets perspective opens up new understandings of the functioning of illegal markets, the ways political actors could react to them, the social consequences of their existence, and their development in connection with changes in the social environments they operate in. This article shows that illegality in the economy can be investigated from the perspective of markets in order to provide additional insights that are not accessible via perspectives focusing on organized crime.

In following the perspective of the social organization of illegal markets, research becomes attuned to the investigation of the demand side. The view is widened to include a broader set of actors, taking in more than just supplier interaction along the value chain and the role played by law enforcement. Additionally, illegal markets and illegality in markets are classified under the normal operation of economic processes; thus, illegality is no longer bound exclusively to a set of actors seen as outsiders operating anomalously in an otherwise legal economy. The research agenda concerning illegal markets has set an important target of taking the capitalist process of accumulation into account in their analysis. This is a topic that historians have explored in great depth (Tagliacozzo, 2005; Karras, 2009; Steege, 2007; Roodhouse, 2013; Griffiths, 2002) but one in which political scientists and sociologists investigating current configurations of the economy have only scratched the surface on. The analysis of illegal markets in the context of early-21st-century capitalist dynamics would provide a perspective on illegality that is not divorced from pressing research topics such as growing inequality, the institutionally and personally anchored incentive for high profits, the ongoing commodification of formerly “untouched” aspects of life, and the exploitation of natural resources.

Further Sources

Two small bodies of literature may enhance the understanding of illegal markets and their relationship to the state. The first consists of studies beginning to recognize extra-legal forms of state financing (Beckert & Dewey, 2017). Contrary to the classic view that state financing through resources obtained illegally should be seen as corruption, these studies argue that considerable portions of these resources are channeled largely toward enhancing state performance. This observation is by no means new: Alan Smart’s (1999) study on China, for instance, showed that corruption money does benefit individual officials but for the most part goes toward furthering collective interests. However, recent ethnographies on the state shed new light on this phenomenon. Milne (2015), for example, analyzes how state authorities are involved in large-scale illegal timber extraction in Cambodia. Officially appointed forest rangers patrolled an area that was to be flooded due to the Chinese-backed construction of a hydropower dam, including 4,179 hectares of conservation area. The rangers imposed an informal tax, levied on every rosewood truck and independent logger, and the collected money was then channeled upward. Contradicting common assumptions, Milne shows that these monies were used to finance armed forces and civil servants, building offices, and constructing roads, schools, and wells, among other things. A similar constellation is presented by To (2015, p. 244), who describes how resources derived from illegal activities related to logging went toward financing several farmers’ and women’s organizations, and costs associated with communicating government policies on crime control, cultivation techniques, and health care. What these and other, similar empirical accounts (Baker & Milne, 2015; Sain, 2008; Verbrugge, 2015) show is that illegal markets enjoying high social tolerance may be subject to extra-legal taxation carried out informally by state authorities or in partnership with intermediaries or community brokers. Interesting, too, is the observation that can be derived from these studies that it is the existence of official regulations—and not the absence—that enables these connections. Official rules are “resources” ready to be manipulated and a clear way to engineer new methods of resource extraction.

A second small body of research relevant for a better understanding of some illegal markets refers to a phenomenon known as “dual state” (Fraenkel, 1969), “parallel state” (Briscoe, 2008; Cucchiarelli & Giannuli, 1997; Paxton, 2004; Sain, 2016) or “deep state” (Mérieau, 2016; Söyler, 2013; Tunander, 2009). This strand of research is concerned with unaccountable and unelected power groups deeply embedded in state structures whose actions have huge influence on democratic regimes. Hans J. Morgenthau’s The Decline of Democratic Politics (Morgenthau, 1962) is a foundational text on this topic as it highlighted the extra-constitutional influence of a “special bureau” within the U.S. Department of State. Such groups are relevant to a discussion on illegal markets because they are active in spheres where “the market,” usually defined as an arena of exchange, instead tends to adopt the form of networks of trade. Examples are the illegal trade of weapons and human trafficking, in which competition tends to be limited and trade is facilitated by specific networks of organized criminals. These networks also function as sources of different “resources,” such as extrajudicial executions designed to manipulate the political agenda, the provision of illegal arms and/or sophisticated equipment, or money laundering. The members of these groups usually hold positions in different branches of the state apparatus, usually the military, police forces and judiciary, and are particularly concerned with security issues. For these reasons they are also closely linked to the military-industrial complex (Söyler, 2013, p. 311). These groups, who are not accountable for their actions and are granted ongoing impunity through their participation in patronage networks, enjoy high levels of autonomy. Informality, autonomy and unaccountability provoke, over time, an asymmetry between the “on the books” and “off the books” sectors of the state; it creates a tutelage function over democratic policies.

Further Reading

Baker, J., & Milne, S. (2015). Dirty money states: Illicit economies and the state in Southeast Asia. Critical Asian Studies, 47(2), 151–176.Find this resource:

    Beckert, J., & Dewey, M. (Eds.). (2017). The architecture of illegal markets. Toward an economic sociology of illegality in the economy. Oxford, U.K.: Oxford University Press.Find this resource:

      Briscoe, I. (2008). The proliferation of the parallel state. Working Paper 71. Madrid, Spain: Fundación Para Las Relaciones Internacionales Y El Diálogo Exterior.Find this resource:

        Cucchiarelli, P., & Giannuli, A. (1997). Lo Stato parallelo: l’Italia “oscura” nei documenti e nelle relazioni della Commissione stragi. Rome, Italy: Gamberetti.Find this resource:

          Fraenkel, E. (1969). The dual state; a contribution to the theory of dictatorship. New York, NY: Octagon Books.Find this resource:

            Mérieau, E. (2016). Thailand’s deep state, royal power and the constitutional court (1997–2015). Journal of Contemporary Asia, 46(3), 445–466.Find this resource:

              Milne, S. (2015). Cambodia’s unofficial regime of extraction: Illicit logging in the shadow of transnational governance and investment. Critical Asian Studies 47(2), 200–228.Find this resource:

                Morgenthau, H. J. (1962). The decline of democratic politics. Chicago, IL: University of Chicago Press.Find this resource:

                  Paxton, R. O. (2004). The anatomy of fascism. New York, NY: Knopf.Find this resource:

                    Sain, M. F. (2016). La casa que no cesa: infortunios y desafíos en el proceso de reforma de la ex SIDE. Buenos Aires, Argentina: Editorial Octubre.Find this resource:

                      Tunander, O. (2009). Democratic state vs. deep state: Approaching the dual state of the West (pp. 56–72). In E. Wilson (Ed.), Government in the Shadows: Parapolitics and Criminal Sovereignty. London: Pluto Press.Find this resource:

                        Smart, A. (1999). Predatory rule and illegal economic practices. In J. M. Heyman (Ed.), States and illegal practices (pp. 99–128). Oxford, U.K.: Berg.Find this resource:

                          Söyler, M. (2013). Informal institutions, forms of state and democracy: The Turkish deep state. Democratization, 20(2), 310–334.Find this resource:

                            To, P. X. (2015). State territorialization and illegal logging: The dynamic relationships between practices and images of the state in Vietnam. Critical Asian Studies, 47(2), 229–252.Find this resource:

                              Verbrugge, B. (2015). Undermining the state? Informal mining and trajectories of state formation in eastern Mindanao, Philippines. Critical Asian Studies, 47(2), 177–199.Find this resource:

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                                                                                                                                                                                        Notes:

                                                                                                                                                                                        (1.) Here we follow Mayntz’s distinction between “formal legality” and “social legitimacy.” At the core of this distinction is the Weberian conception of legitimacy as belief and not as an objective quality of things. It is an empirical question whether social legitimacy refers to legality (i.e., legal norms enjoy a degree of legitimacy) or such social legitimacy refers to an extra-legal set of norms or forms of authority. The relevance of this distinction lies in the fact that legality may not enjoy legitimacy and legitimacy may not be connected to legality. A similar distinction has been proposed by Engwicht (2017).

                                                                                                                                                                                        (2.) Although it may be interpreted as normative, the emphasis on illegality is intended to clarify the fact that the state intervenes in society by way of proscribing or allowing certain behaviors.

                                                                                                                                                                                        (3.) The author is indebted to Renate Mayntz who helped to specify the difference between mafia and state protection rackets. Although at first sight state-sponsored protection rackets appear as a protection against the “law” (i.e., not against potential violent retaliation), a closer look shows that law enforcement agencies that provide this kind of illegal service are highly corrupt institutions and therefore have close links to criminals. This way, in the first place, buyers of protection rackets pay for not being caught by the law but also in order to avoid violent actions carried out by criminals outsourced by law enforcement agencies.

                                                                                                                                                                                        (4.) It is worth mentioning that state-illegal market relationships are not necessarily always skewed in favor of the state. A case in point concerns illegal markets in which certain actors have considerable social and political power, a situation that may render law enforcement helpless.