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In a recent op-ed, Bernd Debusmann laments a “loophole” in US “money laundering” regulations:

In order to get around draconian (if generally ineffectual) restrictions on carrying large amounts of cash in and out of the country without explaining it to this or that bureaucrat’s satisfaction, government-unapproved entrepreneurs have started making use of stored-value cards — gift cards, debit cards, what have you.

Because he conflates the symptom (violent drug cartels) with the disease (the absurd notion that what you choose to medically, religiously or recreationally eat, drink, snort, inject or otherwise ingest is anyone’s business but yours), Debusmann is deeply concerned that government hasn’t snapped shut the rusty jaws of yet another trap on this “loophole.” “[T]ighter regulations,” he writes, “surely can’t hurt.”

On that count, he’s very, very right. But not in the way he thinks. Tighter regulations can’t hurt because tighter regulations can’t work.

The “shadow economy” — that portion of the economy which government remains mostly powerless to shut down, to regulate or to impose its customary protection rackets (“taxes”) on — represents both the last remnant of an economically functional society and that society’s best chance of avoiding, or at least shortening and weathering, the next Dark Age.

We’ve long since passed the point where government has any hope of shutting down a substantial portion of the “shadow economy.” It’s never been very good at that anyway. Even at the height of the Soviet police state’s power, hard currency and Levi Strauss® blue jeans were moved across the borders with impunity. Even at the height of Prohibition, it wasn’t hard to find a drink.

The ubiquity of electronic networks and the availability of strong encryption are making it ever easier for traders to move and hide, and harder for governments to detect and seize, stored value. Sure, actual physical goods — be they “illicit” drugs or untaxed products of any description — are still vulnerable to seizure; but no more so than they ever were, which wasn’t very. The ability to securely pay for or receive payment for those goods, away from the eyes of the state, means more volume in those goods and more kinds of goods being traded in that way … and less government revenues available to be spent on stemming the tide.

Even with the game rigged in its favor — a proclaimed monopoly on the use of force and a self-arrogated “right” to regulate and seize at will — the unfree market is steadily losing share to the free market. Debusmann’s desired “tighter regulations” won’t reverse that trend. In fact, they’ll almost certainly accelerate it, for at least two reasons:

First, tighter regulations on “official economy” instruments like debit and gift cards will simply spur the creation of new repositories for value — repositories built beyond the reach of government from the get-go — and new instruments for accessing those repositories. If there’s a crackdown on “official economy” debit and gift cards, the “shadow economy” will quickly move to “shadow” cards — or, more likely, to thumb drives and encrypted Internet transactions. As a matter of fact, I suspect (I have no inside knowledge, mind you) that that’s already happening in a big way.

There’s a Darwinian imperative at work here. The technologies which work best are the ones which survive. And they don’t just survive, they thrive and eventually replace their predecessors in the ecological niche … then begin expanding into new niches. Just like increased use of antibiotics results in the emergence of antibiotic-resistant bacteria, increased regulation of technology results in the emergence of regulation-resistant technology. If you don’t believe me, just ask Apple about Cydia and the iPhone Dev Team.

Secondly, whole idea of “money laundering” is to move value out of the “shadow” economy and into the “official” one. But as the “shadow” economy grows, there’s less need to move value back and forth between the two. More and more types of goods and services come to be exchanged entirely within the “shadow” economy, because that’s where the money is (and it’s more attractive right up front if for no other reason than that the tax burden is eliminated, or at least minimized).

There’s a tipping point beyond which the benefits offered by participation in the “shadow economy” outweigh the risks associated with ignoring or eluding the state’s enforcers to participate in it. Between the increasingly crushing burdens of taxation and regulation on one hand, and the improving security and reliability of the free market on the other, I suspect we passed that point some time ago.

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