How the Informal Economy Could Help Save the Rest of it

The idea that an itinerant New York City candy vendor pulls in $150 a day ought to have spawned one of the great feel-good financial news stories of 2011.

For almost a decade and a half, Alex McFarland has been a subterranean entrepreneur, roaming the city’s subways in order to cater to people’s need for a sugar buzz at $1 a pop. Alex’s daily haul would put his gross yearly salary at between $40,000 and $55,000 (depending on whether he takes weekends off) – which means he earns as much as an assistant store manager at Wal-Mart or Target.

Alex’s story created some Internet buzz when it slipped onto the Web in October, but most of the mainstream media in the US have greeted the story with indifference.

Yet this tale of a savvy sub-rosa merchant carries some serious global significance. Alex is part of the informal economy – a realm where businesspeople aren’t licensed and often don’t pay taxes. Nearly two-thirds of the planet’s working population, or 1.8 billion people, earn their money like Alex does, and their efforts account for what I estimate to be roughly $10 trillion in economic activity.

Governments routinely argue that merchants like Alex are criminals. But that’s simply not true. When half the workers of the world aren’t included in the legally defined economic system, the proper response isn’t to question their motives, but to question the system. We can start by looking at history. Here in the US, the underground has always been the incubator economy. Dick Sears and Frederick Stanley, the founders of two massive firms that are still with us today – Sears and Stanley Tools – started in business as unlicensed peddlers.

Alex, then, is part of an honourable tradition. He’s his own boss. He doesn’t have to punch a clock or obey annoying corporate rules. He can pick his own route, do his own market research and thrive during dark economic times. What would happen if we offered entrepreneurs like Alex tax forgiveness if they reinvested more of their profits in their own businesses? What if, instead of treating people like Alex as criminals, we saluted their ingenuity and encouraged their entrepreneurial spirit?

Wouldn’t these actions help grow the global economy and save the American dream?

© 2012 Harvard Business School Publishing Corp.

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