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The Center for M igration and D evelopm ent

Working Paper Series • Princeton University

Econ-Informal-T&S-4-9-04.doc

From Migrant Enclaves to Mainstream:

Reconceptualizing Informal Economic Behavior

Donald W. Light
Visiting Researcher
Center for Migration & Development
Department of Sociology, Princeton University,
Wallace Hall, Princeton, NJ 08544
dlight@princeton.edu 609-915-1588

Forthcoming in Theory and Society

Abstract:

The “informal economy” has developed in sociological theory to refer to clusters of

illegal or quasi-illegal activities, usually unreported, by which people in some

immigrant or ethnic communities earn income outside regular businesses and jobs.

This paper first extrapolates a set of characteristics beyond the legal status of such

activities that define the “informal economy.” These provide a richer framework for

future research and the basis for identifying informal economic activity in other

sectors of the legitimate mainstream economy. In fact, informalization seems to

have gone from marginal activities to a mainstream movement to make large sectors

more fluid, network-based and less regulate – the informalized economy. Its
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characteristics are identified. They overlap with the first set but differ principally in

terms of extending Merton’s proposition that different social structures exert

different pressures to engage in non-conforming behavior. The paper concludes with

research and policy implications for a generative sociology that fosters “the

facilitative state,” and cross-sectoral lessons for greater entrepreneurship in marginal

migrant communities.

Acknowledgement. This work was carried out through the support of the Center for

Migration and Development at Princeton University and its Director, Alejandro

Portes. Patricia Fernandez-Kelly provided valuable comments and sponsored a

seminar on an earlier draft. Other faculty and graduate students provided trenchant

criticisms, especially Viviana Zelizer and William Haller. Students and faculty at

UCLA, especially Ron Andersen, offered challenging comments that led to several

changes. Two anonymous reviewers and Karen Lucas helped make the argument

better than it was.

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From Migrant Enclaves to Mainstream:

Reconceptualizing Informal Economic Behavior

The socio-anthropological literature on the economic activities in migrant and ethnic

neighborhoods or enclaves, together with field studies of contract and piece-work,

are rich with close observations about the ways in which people without regular jobs

and outside legitimate businesses develop an “informal economy,” constrained by a

restrictive institutional environment, forged by those in power. This paper will begin

with a reconsideration of the informal economy in order to extrapolate beyond its

current theoretical definition other characteristics that make marginal informal

economies “informal.” Attention will then turn to the prevalence of informal

economic activities in mainstream parts of the economy and to cases where the

informal activities are reshaping mainstream economic institutions and regulations in

the transitional economies of Eastern Europe and the new web-based economy. By

casting a sociological eye across the social landscape for analogues and parallels, as

my mentor Evervett Hughes taught us to do,1 we can see sociological similarities and

differences between the informal economy and the informalization of the economy.

These conceptual linkages bring now-distinct literatures and realities together,

thereby framing new areas for fruitful research.

As informalization has proliferated with the collapse and reconstitution of formal

socialist economies, and as the internet has created a technical capacity for bypassing

normal economic institutions and channels and for networking in any part of the
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society, informal economic behaviors have come to shape economic institutions

rather than work at their margins. What was peripheral and residual has become

mainstream, and what was mainstream is being transformed by the dynamics of what

was peripheral and residual. Legal and regulatory boundaries are being changed or

dissolved in an institutional atmosphere of fluidity. By exercising the sociological

imagination, one can thus draw on studies of informal economic activities among

migrant and ethnic groups to model the nature of transitional and emerging

economies.

In “Social Structure and Anomie,” Robert Merton offered the insightful proposition

that “social structures exert a definitive pressure…to engage in non-conforming

rather than conforming conduct.”2 Merton focused on deviance and anomie, but he

recognized innovation as another kind of non-conformance in his famous Typology

of Modes of Individual Adaptation. Merton defined plus-minus as “rejection of

prevailing values and substitution of new values”, a definition which applies to how

actors regard cultural goals but not to institutionalized means. This observation leads

to considering a new combination in his typology, of accepting cultural goals and not

just rejecting institutional means but substituting new ones. Why stop, however,

with just actors doing this, when whole institutional structures can do so? Changing

social institutions so they exert more pressure for informality and innovation is an

idea that carries out the institutional implications of Merton’s larger theoretical

proposition.
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The Informal Economy Reconsidered

In 1973, Keith Hart first outlined a dualist model of income opportunities in the

formal and informal sectors of Ghana.3 The concept of a hidden, off-record, yet

extensive array of informal economic activities at the margins or interstices of

official economic actors and overlooked by official measures of economic growth,

flourished and spawned conferences, grant programs and a raft of publications. The

term, “informal economy”, came to refer to the reciprocal exchanges in shantytowns,

to the off-record economic activities in “the urban informal sector”, to the

“peripheral economy” and to the “underground economy.”4

Defining the informal economy, however, has become something of a challenge. In

“Making it Underground,” Portes and Sassen-Koob defined the informal economic

sector as “the sum total of income-earning activities with the exclusion of those that

involve contractual and legally regulated employment.”5 Activities in the informal

economy are possibly illegal or at least escape legal regulation, “at the margins of the

law precisely because it is the savings from tax and social security obligations that

give these enterprises their principal competitive advantage.” In “World

Underneath”, Castells and Portes defined the informal economy “by one central

feature: it is unregulated by the institutions of society, in a legal and social

environment in which similar activities are regulated”.6 These are contrasted with

criminal activities which involve illicit goods, but there is a lot of criminal activity
 6

that involves ordinary licit goods. Unregulated is not the same as undocumented,

and neither is it the same as illegal or illicit, as Fiege noted in his typology.7 Portes

depicts informal activities as serving to help households survive, or help capitalists

exploit cheap labor, or entrepreneurs exploit their network and cultural advantages.8

They consist primarily of activities and resources that feed into or work the edges of

the formal sector by providing cheaper labor, inputs or goods.

Self-provision – repairing one’s home or growing one’s food – is another matter,

though that boundary is less clear than indicated. When young parents arrange –

even at extra expense – to provide room for an aging parent, is this self-provision or

an exchange of goods and services within a network that happens to be family?

Suppose the young parents gain a full-time baby-sitter and perhaps a cook, while the

aging parent gains the equivalent services of a home health provider, is this part of

the informal economy or just “family”? The key lies in how “income-earning” is

defined, especially if it includes “money-saving” which therefore leave more cash

for other things. But then isn’t that what hiring informal workers (an unlicensed

handyman who charges less) is all about?

The dependency of the informal economy on the formal economy overlooks the fact

that informal economic activity is all that existed for most of history, when nearly all

economic transactions were informal, interpersonal, and relational. In his historical

essays, Polanyi argued that reciprocity and local customs dominated economic
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exchanges before “the great transformation” to formal, capitalist markets took place,

based on a radical individualism of maximizing self-interest.9 If the first requirement

for formal economic exchange is well-defined and enforceable property rights within

or between established legal entities, then much of economic behavior for centuries

was informal. In his review of Polanyi’s work, Douglass North, the Nobel laureate in

economics, endorses this view and points out that most historically oriented scholars

agree as well.10 Most exchanges took place without cash markets. They were

motivated by duty, kinship, friendship, religion and politics more than profit.

Transaction costs and risks were low and based on trust. Some exchanges were

formal in the sense of being institutionalized, ritualized or routinized. Many were

informal. “These substitutes for markets,” North writes, “not only have dominated

exchange in past societies, but do so today as well.” He seems to be thinking of

exchanges of time and services (and sometimes goods) inside firms, households,

voluntary associations and governmental units, as well as exchanges between them,

an area that has only begun to be explored.11 Historians have documented this theme

in rich detail.12

In his research on early modern England, Muldrew describes a suggestive picture for

contemporary researchers to draw upon for new projects.13 He documents markets

based on semi-formal transactions and contracts. Local tradesmen and producers

had many credits and debts which got cancelled or replaced as new transactions took

place. This system rested on personal knowledge and trust, though a large volume of
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law suits by creditors attested to the risks and limitations of such a system. “People

were constantly involved in tangled webs of economic and social dependency based

only on each other’s work, or the work of others, which linked them together.”

Studies of informal economic transactions in contemporary ethnic enclaves echo

these observations. Family, ethnic, linguistic and cultural ties give people within an

ethnic economy special advantages, such as special networks, access to information

and capital and low-cost labor. This research has led to insightful sociological

concepts, such as enforceable trust, value introjection and bounded solidarity.14

In this context, it would seem valuable to develop a fuller set of defining

characteristics of the informal economy than the illegal or questionable legal status

of means. That criterion itself has some problems. An obvious one is stolen or

smuggled goods: licit goods obtained by illicit means. If one is participating in the

informal economy when one buys a cheap good from a vendor, does it matter how it

was obtained? There may be a good deal of smuggling involved in some ethnic

economies. Does buying from the fence, rather than the thief matter? Another test

case is “muscling” or “persuasion” by setting a fire, beating up or threatening a

competitor so you can later say, “He decided not to open up afterall.” Or “He

decided to relocate his operation.” The goods or services are licit; the means are not.

If a limousine service, or musical show, or restaurant (all formally registered legal

businesses with tax IDs) slips a bill ($100) or does favors for doormen and concierge

staff at major hotels in order to steer customers their way, are these tips or bribes?
 9

They seem like informal, undocumented ways of doing legitimate business in the

formal economy.

Does the scale matter? If “informal” must mean economically marginal, then what

do we call informal economic activities by thriving businesses with substantial

incomes? Informal economic actors are said to ignore safety regulations and other

laws put in place by governments to protect the public; but major firms skirt or wink

at regulations all the time and for the same reason - to lower their costs and facilitate

business. Further, certain kinds of covert, under-the-table, deal-making, and rule-

bending influence-pedaling and deception are accepted as part of normal business in

some industries, though not in others. The sociological opportunity here is to

research and map the types of illicit, informal practices tolerated in different

industries, the extent of their use and how they impact on workers, customers, and

business owners. For example, evidence keeps surfacing that the major

pharmaceutical companies skimp on manufacturing quality, induce the guardians of

safety to suppress negative data, and promote drugs for unapproved uses in order to

maximize sales and profits.15 In fact, these tactics by global pharmaceutical

corporations have become so pervasive and profitable, by extending monopoly prices

to millions of chronically ill patients and to state Medicaid programs, that a political

backlash has developed which is redefining long-standing practices as "wrong", and

declaring them illegal. Thus one has today coalitions of business leaders and

consumer groups declaring that the global giants in prescription drugs are using
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illicit means to achieve licit ends.16 (give e.g. in note) In what ways are these

activities formal or informal? To what degree are they legal, quasi-legal or illegal?

The answer in part depends on having a top-flight legal team that even neutralize

adverse judgments of criminal behavior by appealing them to a higher court and

wearing down the plaintiffs until they give up.

The theoretical distinction between licit and illicit means also overlooks a common

strategy among powerful players: move the goal posts. If the line between formal

and informal is the law, why not arrange to have it changed, as major industries do

so that they can openly enjoy today what were illicit means yesterday? They can go

underground (contributions to politicians and insider influence) and exchange favors

in order to reshape the regulatory terrain so that the scope of the formal economy is

widened to legitimate hitherto illegitimate practices. They can - and do - even get a

new government elected in order to reduce regulations and taxes so that they can

behave more like gypsy businesses. Such anomalies around the concept, as well as

the symbiotic boundary relations between informal and formal, suggest the

limitations of a sectoral approach. Harding and Jenkins concluded that it was a myth,

an academic construct characterized by diffuse evidence and vague, disputed

methods.17

Informal economic behavior is relational and reciprocal in character. It is embedded

in networks of bounded solidarity and tacit trust. That trust, however, can be
 11

exploited, as in “affinity fraud”, in which a presumed fellow compatriot “helps” an

immigrant invest her money by actually helping himself to her money.18 Such

examples indicate the need for closely observed studies of just how bounded

solidarity and tacit trust actually work and how relations embedded in networks

change over time. Relations and boundaries between informal economic actors and

formal ones also vary -- sometimes permeable and sometimes contested, especially

when large corporations use their political power to change the structure of a market

and the parameters of legitimacy.

Extrapolating Characteristics of the Informal Economy

For all these reasons, it is interesting to ask, what characteristics of actors and the

institutional environment besides the legality of means are found in the research on

the informal economic sector? This search beyond the legal characteristic of the

informal economy to social characteristics of informal economic activities leads to

identifying six characteristics. Together they suggest new research foci both for

migration and ethnic studies and for economic sociology in general. They are: 1) a

restrictive institutional environment (of which laws and regulations are a key part);

2) a network-based embeddedness; 3) informal, personal work; 4) pay for

performance; 5) flexible exchange of value (not necessarily money); and 6)

entrepreneurship that exploits opportunities.

1. A Restrictive Institutional Environment

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This characteristic is usually taken for granted, but it needs to be studied as an object

of research. The economic environment may be stable for some actors (especially

those in power) but unstable for others. It may be uncertain and changing, or

consistently uncertain. A suggestive way to read Domestica, for example, an in-

depth study of immigrant workers who clean people’s homes and care for their

children, is that the entire economy for domestic help is inherently uncertain for the

workers because so much depends on personal power, whim and trust.19 If one

stretches one's sociological imagination, one can see analogies between the informal

economic behavior of people in immigrant settlements or ethnic enclaves trying to

get by or get ahead by working the edges of a hostile, formal system; the “economy

of favors” such as blat in the Soviet Union, guanxi in China or zalatwic sprawny in

Poland;20 and other kinds of informal economic behaviors by well-established

companies coping with formal economic structures that they regard as hostile to their

interests. In some cases, the informal activities are best regarded as efforts to get

something more or extra from the mainstream system, like the widespread use of

informal payments or favors in poorly run or poorly funded health care systems.21

In some cases the dynamics of informalization take place at the micro level, and the

macro-structure does not change much, though tensions of transition are always

there: the manipulation of rules and customs to create shadow or parallel markets

that circumvent but also undermine the formal institutional arrangements; the threat

of cheap labor to established contracts and union domains; the danger of horizontal

or vertical capture by informal suppliers or producers; or the loss of market share as

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mainstream customers realize they can get a better deal by going outside regular

markets or breaking its rules.22

Informal economic activity often involves bending, manipulating, ignoring or even

violating laws and regulations that would add cost, complications and problems to

one’s business. Some actors may feign observance. Some may simply not report

what happened or what they did or did not do. Enforcement officers may be aware

of what is happening and choose to ignore it, or even help struggling actors to

manage the regulations.23 Of course, they can crack down on violators when an

event or politics spur enforcement. Informal, shadow economies can also be found

among more educated and resourceful sectors of society. Frenandez-Kelly’s astute

observations of enforcement officers leads one to think of tax evaders and tax

enforcement as a social institution. In the formal economy, for example, tax laws are

enforced by an understaffed, underfunded tax authority that can investigate only a

small percent of suspected violators. Ironically, the same legislators who underfund

enforcement depend utterly on taxes being collected to fund their favorite programs,

and they express outrage at “tax cheats”, though most of them are millionaires who

hire tax lawyers and accountants to minimize the taxes they personally pay. If the

rich save money by bending or ignoring the law, is it that the obverse of the poor

making money by bending or ignoring the law? Tax evasion may be informal

economic behavior, but it is implicitly built into and encouraged by the organization

and behavior of law enforcement.

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2. A network-based embeddedness

In the unregulated informal economy, networks play several critical roles. They

provide norms, key linkages, social capital and various forms of cooperation.24 They

are the basis for enforceable trust and handle (with greater or less success as we have

seen in Muldrew’s work) the problems of deviant behavior with sanctions such as

not reciprocating, isolating or excluding the errant party. The informal economy is

the opposite of neoclassical theory based on many buyers and many sellers who have

no relations that could influence transactions. Neoclassical theory would predict that

such a tainted, impure market would be more inefficient and garner poorer value; but

informal economic transactions probably result in better value, though not all the

time. Transaction costs are probably lower, though at times they could be very high.

Information is likely to be less incomplete or imperfect than in arm’s length

transactions. In short, research with major theoretical implications can be done on

network-based informal economic activities, and there is evidence that they

characterize a significant proportion of mainstream consumer transactions.25

3. Informal, personal work

Work is informal and personal in marginal as well as other informalized economies

in several senses that could be developed into an index of informal work. The

richest material comes from studies of immigrant and other marginal groups. First is

the degree to which the work itself is personally negotiated and altered. Hondegneu-
 15

Sotelo points out that immigrant women who carry out domestic work do not regard

themselves as ‘employees’ and the women who hire them do not regard themselves

as ‘employers’. She describes the constant negotiations around not only duties but

also space, dress, visibility, food, privacy and degree of familiarity.26 Keeping

personal work impersonal, “personal instrumentalism,” requires constant boundary

maintenance that at times breaks down.

Second is the degree to which work is based on trust and how, to use Portes’

wonderfully ironic concept, enforceable that trust is. In the informal economy of

domestic help, issues of trust are highly salient, and formal agencies to find

trustworthy help fill in the spaces where the informal networks peter out. In other

sectors, such as home repairs, the people contracting are trying to cut overhead and

regulatory costs but not quality and use networks to gain a sense of whose work is

trustworthiness.

Third is the degree to which the channels of information, contacts, references and

new work are informal. Fourth is the degree to which people rely on their informal

relations to gain skills, both technical and cultural, as well as favors. Hondegneu-

Sotelo emphasizes the role of the invisible “parallel universe” of women doing

domestic work for teaching new immigrants the skills of work and also interpersonal

and cultural skills.

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Fifth, work is informal and personal to the degree that culture plays a role, especially

the ability to “read” the cues of customers from different cultures and classes and

establish personal connections, if not relations. Many unstated norms prevail. If the

work or relationship (they are intertwined) is to be continuous, personal knowledge

of what a customer wants is the single most valuable “asset.” House cleaners, for

example, who have one way of doing things “right” (like scrubbing hard), will be

used by like-minded customers but quickly let go by others for "wearing my things

out.” A house cleaner (paid cash, no benefits, no taxes, no stability) who can figure

out that one client likes hard scrubbing but another likes a light touch, that a third

does not mind strong chemicals being used but a fourth wants no chemicals used,

quickly gets all the work she wants and is kept on for years, even paid when the

house is closed just to keep her from switching to another homeowner waiting for

her to have an opening in her schedule.

4. Pay for Performance

One of the characteristics emphasized in research on employers and work in

migrant and ethnic enclaves is the tendency to pay workers, both above board and

under the table, only when they produce and only for producing. Benefits, insurance,

pension contributions, and vacation days are not part of the deal. Costs are kept lean

and low. If workers get sick or are no longer needed, their job ends. Unions have

played a significant role in protecting workers and providing the humane cushions of

pensions, sick and disability pay, health care benefits, and paid time off.
 17

Studies of piece work implicitly or explicitly note another aspect of getting paid for

what you do -- keeping sunk costs and capital investment to a minimum. Ignoring

laws to protect workers from unsafe, polluting or unhealthy conditions all help to

minimize sunk costs. Informal economy businesses focus on maximizing production

and income using minimum capital. In contract work, workers may be expected to

provide and use their own space, tools or equipment. “--And all we pay for is the

product,” as one employer explained.27 Work is unstable, insecure and based on

piece work.

Unlike employees, contract workers have their performance measured with every

batch. They may or may not constitute an enclave, a sub-culture or some other social

community that can rely on “enforceable trust” or “bounded solidarity” to hold

exploitation in check. Yet such work can be mutually beneficial. For example, in

her study of informal workers in the San Francisco Bay area, Lozano found that most

had quit jobs in traditional companies because they could not stand the structure and

bossing that was part of a proper job on an assembly line: “Next thing you know,

your boss is coming out in a bad mood and telling the supervisor we need this stuff.

And then, like pushing dominoes, she’d come over and…” Piecework allows

workers to be their own boss. They do not have to be subjected to the oppressions or

harassments that can occur in a traditional bureaucracy.

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There are various forms of subcontracting, such as vertical subcontracting and

horizontal subcontracting, with varying degrees of control over the materials, tools or

machines, and labor process.28 Women are preferred because they are considered

more reliable than men, more stable, more careful, more patient, more able to follow

orders and willing to take less pay. States often proscribe violations of regulations,

but turn a blind eye to allow these activities because they produce jobs, revenues,

and benefits to large corporations.29

5. Flexible Exchange of Value

Sociologically speaking, the exchange of value can involve not only tokens of value,

such as money, but also the relationships involved in the exchange and the process

and rituals of exchange.30 In the neoclassical economic model, exchange is

impersonal and based on money as a common coinage of value. But informal

economic actors draw upon connections and relationships, or build them if they did

not exist before, so that the relationship is part of the value being exchanged, a

unique “extra” that is not interchangeable.

One feature that makes the informal economy “informal” is the flexible exchange of

many kinds of valued services and goods in “paying for” work. In Lomnitz’s classic

study of a shantytown, no one had much money; but her close observations of

networks show that personally constructed exchanges had other benefits (and hidden

costs) because they bound parties together in forms of interdependency and

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obligation. They created and reflected relationships with short-term or longer ties.

Likewise, the forms of social capital identified by Portes and Sesenbrenner become

more salient than they do in traditional formal economies.31 Value introjections,

reciprocity, bounded solidarity and enforceable trust are sociological concepts that

identify specific four valued “goods” and ways in which relationships and

transactions take place. They provide informal and cultural ways to monitor

economic exchange beyond a formal, legal structure. Related to enforceable trust is

trustworthiness, a fifth valued feeling of trust or confidanza which is different from,

though related to, enforceable trust or bounded solidarity (Lomitz). In a domain that

is informal, plastic, creative, ad hoc, and off record, informal economic behaviors

involve other dimensions too, such as creative and pliable notions of ‘money’ or

compensation, special uses or understandings of official currency, as well as other

forms of compensation and barter.32

6. Entrepreneurship

Informal economic activity often involves entrepreneurship and hustle, even if

only on the personal scale of day laborers hustling for pick-up work.

Entrepreneurship can be rewarded more fully than pay in a regular economy because

pay for performance, minimum sunk costs and personal work get fully translated into

quick income. Boundary-spanning and boundary-managing workers can play both

sides. The ability to organize or assemble what a customer needs (say, for an interior

decorating or repair job) and to adapt to changing market conditions are critical for
 20

sustained success. Like workers, entrepreneurs have to find opportunities and read

cues, only they want more than a job for themselves. They do not want merely to

give gypsy-car rides in their used car, or cater themselves, or do interior painting.

Entrepreneurs want to organize a fleet, or create a catering business or assemble an

interior decorating firm. They often are masters of inter-cultural and interpersonal

relations. They use their ties to migrant or ethnic groups to get good help, and their

inter-cultural skills to get business from more affluent groups. If entrepreneurship is

given its head, it changes institutional means, cultural goals and the social structure

itself.

An entrepreneurial informal economy among the educated and resourceful that I

know particularly well is the shadow world around waiting lists for surgery in

England. A symbiotic relationship exists between informally working the rules and

the government enforcing them, as several hundred thousand patients waiting for

operations in English National Health Service (NHS). Budgets are inadequate to pay

for enough nurses, surgeons, supplies, and recovery beds. The resulting ‘waiting

list’ appears to be a formal queuing system for allocating scarce resources. But

surgeons actually build up and manage their own lists as they see fit.33 The result is

networks of thousands of lists managed in unrecorded ways. Surgeons use their

waiting lists as a cross-over mechanism between their public job and their private

practice, through which they can encourage patients to have their operation done

privately in a week or two by paying thousands of dollars to “go private,” rather than
 21

suffer while waiting to get it free. Sanctioning this arrangement is a formal contract

that legitimates this system of informal economic behavior and rewards working the

rules, norms and fundamental values of a public service. Research has documented

the resulting informal economic behavior – surgeons starting operating sessions late,

ending them early, leaving an NHS operation to do one private in a surgical suite

nearby, and not sorting out organizational problems that lead to cancelled

operations.34 A syndrome of unacknowledged shortages, organizational structures in

which no one is responsible for all aspects of surgery, few criteria for waiting list

management, incomplete data collection and accounts of waiting list management

that do not comport with the facts (beginning with calling it a “list”) support this

informal, shadow economy that earns many surgeons $300,000-500,000 a year in

extra income during their salaried workweek. British surgeons claim to work a 60-

65 hours week, but on average they operate only on 4-8 NHS patients a week,

averaging a hour a case.35 This is principal cause of the infamous British waiting

lists and only recently has this syndrome been addressed by sweeping changes in

each of its constituent parts, changes which aim to address the causes of the informal

economy and pull its activities in to the mainstream organization of services.36

To sum up before turning to entrepreneurship as the main event, let us summarize by

saying that the effort here is to provide a fuller, more richly textured framework for

thinking about the informal economy and doing research on it than just focusing on
 22

the legal character of actions, important as that may be. While all these

characteristics are found in formal mainstream businesses – for example, Microsoft

creating and selling software programs – they constitute more prevalent and defining

characteristics of the informal economy. Others may wish to amend or extend these

other characteristics; but they provide a broader, more differentiated starting point

for future analysis, summarized in Figure 1.

[Figure 1 about here]

Entrepreneurial informalization as the main event

Contrary to the expectations of some analysts, informal economic activity did not

fade away with advanced capitalism but has thrived in major economies as well as in

developing nations.37 In the late 1980s, Portes and Sassen-Koob noted that “very

small enterprises” with fewer than 11 employees constituted more than three-

quarters of all U.S. firms. Work characterized by low wages, short career ladders,

temporary or unstable employment, few rules or rights and many ports of entry has

obvious advantages for any business. About half of all American workers are

employed in the secondary sector. But informalization refers to more than the

continuing proliferation of small firms. Although the secondary sector of dual labor

markets is supposed to be segmented from the primary sector, Kalleberg and

Sorensen concluded that the empirical evidence indicated interaction and mobility

between the two.38 The “process of informalization,” with its flexible labor

arrangements, sub-contracting, and decentralized arrangements, has grown, though

 23

still supplementary and subordinate to major firms.39 As companies have sought

cheap labor through “globalization”, countries eager for the business have competed

to reduce obligations to the state (taxes) and to the well-being of workers (safety,

pensions) so that formerly illicit practices or circumventions have become legitimate.

This included new forms of inequality through exploitation.40 Accompanying this

development has been the weakening and privatization of the state, massive rural-to-

urban migration, global economic restructuring, and the rise of the internet as a way

to hire cheap labor abroad without immigration. The roomfuls of skilled customer

service representatives for your credit cards, phone company, bank, computer or

software firm might be called electronic immigration. Where once it was held that

the formal economy creates its own informal economies, now widespread

informalization creates its own need for setting formal limits. That is to say,

governments are now trying to catch up with the consequences of global

informalization, and their role now is ambivalent, to facilitate new forms of

informalization while trying to keep them from becoming too exploitative.

By the 1990s, researchers had concluded that informalization “has become, by every

available measure, truly world-encompassing….the unmaking of once formalized

relations…” It has become “elevated from its former ‘marginal’ to its current

‘leading’ economic-sector status…as the breeding ground for the microenterprise

system…”41 Configurations of power, tastes and fashion are constantly changing.

Sometimes they happen at the inner core, like a technological breakthrough that
 24

changes the course of an industry.42 Sometimes they happen in the external

environment, such as a political upheaval. Of course, the more pervasive instability

and change are, the more room is opened for entrepreneurial behaviors.43

Culturally, entrepreneurial informalization is spreading in traditional, formal markets

by becoming a state of mind characterized by asking boundary-testing questions such

as, “Why not? Who says we can’t?” For example, the socially and legally

constructed world of licensed cab companies restricts private livery cabs to carrying

only call-in customers and prohibiting them from picking up people hailing a cab,

except in low-income fringe areas.44 Yellow cabs hold the monopoly on street pick-

ups but are subject to costly regulations and licenses, which are reflected in their

high fares. The formal, regulated industry has also set standards. Drivers must attend

an 80-hour training course, pass an English-proficiency test, buy a new car every

three years, and meet safety standards. Yet the monopolistic limits on the number of

taxi licenses to maximize revenues on every shift have led to a shortage of yellow

cabs. Livery drivers are responding to this unmet need by using their personal,

unmarked cars to invade the large pick-up market downtown. Of course, the

presiding regulator states, “It’s illegal and we have to stop it.” But in fact, the

informal economic actors are informalizing the formal, regulated market. Yellow

taxi drivers see that they too can make much more with a private car that does both

call-in and pick-up business and circumvents the costly regulations. As they

abandon the yellow cabs, a shortage of drivers has developed, which makes business
 25

even more attractive for anyone who comes over to the informal market. Private cars

are now routinely coming down to midtown Manhattan hotels, and giving payoffs to

hotel doormen. Customers are happy to get quick rides and negotiate the fare on a

one-to-one basis. They do not care about rules and regulations. “It’s vicious circle,”

said the president of the association for owners of yellow cabs, or rather an

informalizing of the formal economic structure. “Why should I go through all these

hassles,” asked one yellow cap driver, “when I can just go out and make a lot of

money doing it on my own?”

An historic cultural-political revolution from below and from the inside out occurred

with the collapse of the Berlin Wall and communist regimes in the former Soviet

Union and Eastern Europe. These developments put dynamic change into Merton’s

comparative observations about how different social structures put different amounts

of pressure on actors to break out of conforming behavior, because the legal,

economic and cultural structures themselves get changed. The informalization

processes “reflect the character of the specific social and economic order in which

they occur.”45 In Eastern Europe, various entrepreneurial efforts developed to

experiment and combine, from the pieces of the old formal institutions, new forms of

capitalism and entrepreneurship - what Stark has called “recombinant property” and

“bricolage”.46 He and others have done conceptually suggestive research on how

businessmen and investors addressed the extremes of formal rigidity, contradictions

and dislocation in aging socialist economies. They developed informal networks,

 26

bargaining arrangements, coping strategies to meet planned targets, and informal

entrepreneurships.47 Thus, when the formal socialist institutions collapsed, the sub-

rosa relationships, networks and organizational forms became the basis for

recombining organizational forms and property using “a multiplicity of legitimating

principles”and a “polyphony of accounts.”48 What was peripheral and residual has

become mainstream, and what was mainstream is being transformed by the dynamics

of what was peripheral and residual.

Beyond this collapse in the late 1980s, informal economic behaviors led in many

entrepreneurial countries to new mixed forms, and to the creative development by

Stark of a new conceptual vocabulary: “moebius-strip ownership” in which what is

public and what is private, and what is formal and what is informal, are combined in

to “hybrid mixtures” and form “organizational hedging” and “metaphoric networks,”

in which assets are regrouped across formal boundaries so that the most relevant

economic unit is the network of firms rather than any given firm. 49 This so-called

mixed economy consists, not so much of public firms mixed with private firms, as

“new forms of property in which the qualities of private and public are dissolved,

interwoven, and recombined.”50 So also with the distinction between formal and

informal sectors, as actors developed strategies for risk-taking through risk-spreading

and risk shedding and through enhancing their adaptability through flexible

resourcing.
 27

Technological informalization

The third and most revolutionary change that contributes to the informalization of

the mainstream, formal economy is the development of the internet. The

transformative power of the internet makes it much easier to ignore and even

manipulate formal economic institutions, rules, regulations and nation-states that

have become impediments to themselves. Multi-billion dollar corporations are

using the best legal teams in the world to fight an onslaught of web-based

competitors who exploit their products; but each new protection or barrier is

overcome by a new strategy.

Napster is a paradigmatic case, though one could research others, like the

proliferation of web-based sources of prescription drugs that, for the first time, are

breaking down the formal economy that the pharmaceutical giants have constructed

into an air-tight legal monopoly over prices in the United States. Invented by a 19

year old college drop-out as a way “to build communities around different types of

music,” Napster generated such a large black market of teen-agers downloading

copyrighted music from each other’s computers illegally that it has informalized the

market and spawned a new generation of technologies to facilitate informal,

reciprocal transactions of copyrighted materials at little or no cost.51 It was as if

Shawn Fanning, the college drop-out whom friends called “Nappy” after his shaggy

hair, had embezzled the world's music in order to give it away to anyone who wanted

it. Beyond the recording industry, the CEO of Intel realized that Napster’s peer-to-
 28

peer networking could link together the unused computer power of millions of PCs

so that huge mainframe jobs could be done cheaply and quickly.52 “It’s fast. It’s

simple. It’s infinitely scalable,” he said.

The industry giants have been spending large sums to criminalize free downloading.

They persuaded Congress to pass the Digital Millenium Copyright Act, which has

the chilling effect of making any Internet service provider liable for any material

posted by its users, and the Copyright Term Extension Act, which adds 20 years of

protection to all past and present copyright materials.53 These are examples of major

corporations changing the law to criminalize non-legal activities. They also designed

and built into music files anti-copying protections. Still, sales of CDs kept dropping

every year. The loss between 1999 and 2002 was put at $2 billion. Companies

started reducing their prices, but it has had limited effect against the alternative of

downloading only the songs one wants for nothing.54

While the law suits by the formal giants to criminalize informal sharing were going

through the courts, the number of people using Napster kept growing, to 38 million,

then 51 million, and then 60 million. 55 One household in ten in the U.S. used

Napster, and its penetration was greater abroad: 30 percent of Canadian households,

25 percent in Argentina, 24 percent in Spain. Trying to criminalize and shut down

Napster and other systems is taking place largely in the United States, and represents

a defense of the formal-economy industry against a new technology of

 29

informalization. Newer, more powerful systems of peer-to-peer sharing and

exchange keep appearing. The Bitbop Tuner was invented, a web-based “tuner” that

allows users to scan 10,000 radio stations and download what they want. Gnutella

allows free exchange of movies, text and photos as well as music; KaZaA allows

worldwide users to download not only music but television shows and movies 24

hours a day; and Freenet allows exchanges while encrypting users’ files so that they

are not traceable. Its inventor, Ian Clarke, wants to liberate all intellectual property.

One expert predicts that “the recording industry, as we know it, is history.”

Napster’s major successor, KaZaA, poses a formidable threat because its e-conomy

revolutionaries incorporated it in Vanuatu (an obscure island in the South Pacific),

manage it from Australia, have its servers in Denmark, keep its source code in

different places (last spotted in Estonia) and allegedly live themselves in the

Netherlands or Sweden. KaZaA had 60 million users in 150 countries as of fall,

2002. Defending lawyers maintained that courts have no jurisdiction because it has

no assets or significant business dealings.56 A federal judge ruled that file-sharing

programs like KaZaA were significantly different from Napster and cannot be held

responsible for how people use them to violate copyright, because file-sharing occurs

between individuals’ personal computers rather than through central servers.

Surveys showed that two-thirds of people downloading music do not care whether it

is copyrighted, but two-thirds would also stop if threatened with fines.

 30

In response, the recording industry filed 261 lawsuits in September 2003 against user

who had placed more than 1,000 songs in a folder.57 The “blizzard of lawsuits” were

intended to hit the nodes in the networks of file-sharing and to change the perception

that using the internet to copy songs is free. Critics argued that treating customers

like criminals would incite a backlash. “We have more Americans using file-sharing

than voted for the president,” observed a civil liberties attorney, “and the record

industry’s position is to scare them into submission?”58 The chilling effect seems to

have worked; the number of people downloading files in the United States, at least,

has dropped sharply.59

While lawsuits in the U.S. have shut down free downloading systems like Napster or

forced them to alter themselves, the major recording corporations have been forced

to napsterize themselves and figure out how to still make money.60 They have been

forced to develop alongside their pre-packaged collections on CDs or DVDs forms

of pay per play or subscribe to play from a library, with new electronic security

devices to prevent free downloading. They have developed several subscriber

systems, plus pay-per-download, that commercialize the informal downloading and

sharing activities into new business services. It is not easy because there are millions

of very bright teenagers trying to crack or circumvent the legitimate commercial

channels. 61 Jon Lech Johansen, for example, the now legendary young Norwegian,

designed software to crack DVD security codes and then designed a program to

circumvent Apple Computer’s iTunes anti-copying codes.62 His open-source posting

 31

will allow anyone to improve on it as well as share it. His posting is accompanied by

a kind of motto: “So sue me.”

Outside the United States, free downloading and file-sharing is rampant. “People in

their 60s are burning CDs at home,” said an industry leader in Germany.

“Housewives who should be cooking are burning.”63 In Germany it appears that

3/4th of all CDs are burned; in China it is 9/10ths. Meantime, the creators of KaZaA

have developed Skype, a method for making phone calls free from computers, and

they have an extension of it that enables users to also make phone calls from phone

through the internet. The program, voice over internet protocol, (VoIP), bypasses

FCC rules. Their goal is to make a global free phone system.64

Some argue that the real revolution lies beyond making copies or not, in making

music liquid: “You can filter it, bend it, archive it, rearrange it, remix it, mess with it.

…With digitization, music went from being a noun to a verb…music is becoming a

commodity that is traded, cocreated and coproduced by a networked audience.”65 If

so, informalization goes to the lodestone, an economy without property rights in an

e-commons.

Many of the same inventive forms and informal strategies that were used in Eastern

Europe for managing uncertainty and risk as formal economies collapsed are also

found in the new e-conomy of the internet, even though the contexts are quite
 32

different. Stark, for example, has found that informal networking in Silicon Alley is

analogous to what he observed in post-socialist Hungary - innovation through

recombination, maximizing adaptability and organizational learning, minimizing

hierarchy and maximizing organizational heterogeneity, forming network ties of

reciprocity and interlocking ownership, managing portfolios of interdependent

resources and using multiple frames of value and legitimacy to give accounts in a

rapidly changing environment.66 In Net Ready, Amir Hartman and John Sifonis

draw on their intimate knowledge of Cisco Systems and other e-businesses to

identify the characteristics of the new internet economy and how to succeed in it.

Transaction times and costs drop to near-zero, and one can quickly gain access to the

suppliers, customers, and markets of traditional firms in the formal economy, which

in turn informalizes them. More and more business sectors or industries take on a

permanently transitional character -- to where no one is sure. New research is

needed to assess the extent to which different sectors of the economy are changing

from stable, predictable market relations to unstable relations, from a reliance on

capital and place to movement and ethernet-space, from positioning to value

migration, from long-term planning to ad hoc, real-time execution, from structured

formal alliances to building networks of informal alliances and personal

relationships.

Internet technology also allows many kinds of businesses to deal with each customer

on a one-to-one basis, to know their individual tastes and to give them just the
 33

products, services or information they want. Mass customization or “customized

silos of interactivity” are now common.67 Each customer can tell them what they are

interested in and what they want, and that is exactly what they will get, until they

decide they want something else. Businesses can “create a dialog with their

customers” and also with each other by creating communities of interest and

developing partnerships.

To sum up, in brazen challenges to the legal, regulatory and institutional structure of

some legitimate business sectors, in collapsed socialist formal economies and in the

new internet e-conomy, informalization are also characterized by entrepreneurship,

pay for performance, informal work based on networks and flexible use of money

and other valued exchanges in a changing, uncertain environment that rewards

adaptability in other realms other than shantytowns, migrant urban areas and ethnic

enclaves.

Characteristics of an informalized economy

Observers of the internet e-conomy add new insights to previous studies of dynamics

in informal economic markets, ones that may be useful to researchers of

undocumented or quasi-official economic activities and that have policy implications

for how to foster economic growth in marginal economies. In an informalized

economy, there is a different emphasis on breaking the rules, even the “unbreakable

rules,” of business. This echoes marginal and underground entrepreneurs in poor

 34

neighborhoods going beyond licit means to keep costs down and build up a business;

but cutting corners and skirting regulations are limited strategies compared to

creating new ways to do business, finding new ways to make money and creating

new markets. Discussions of the differences between being a rule taker, a rule

shaker, a rule breaker or a rule maker in the e-conomy could benefit the economic

development in immigrant communities. 68 Such cross-fertilization opens up new

ways of conceptualizing and researching the symbiotic relationships between rules,

laws and informal economic activities.

[Figure 2 about here]

1. From a restrictive to a responsive environment

Perhaps the most important attribute missed in studies of marginal informal

economies, but emphasized in the literature on the e-conomy, is the importance of a

responsive and supportive environment. Despite the very different context,

descriptions of e-commerce sound like those of marginal and underground actors

struggling to get by and hopefully succeed. There are large, established corporations

ready to crush any successful venture that threatens them, as well as other start-ups

who are competing for the same business, and there are regulations designed to

frustrate innovators or make innovative tactics illegal. But these similarities are

precisely why Saxenian found that the new e-conomy did not flourish around Route

128 but did in Silicon Valley. Saxenian emphasizes the nurturing role of Stanford in

contrast to MIT and Harvard in setting up programs and making arrangements for
 35

learning and institutional support.69 Could Stanford serve a similar role for nurturing

the poor, marginal economy of East Palo Alto as it has for Silicon Valley nearby?

Mentoring, sponsoring ventures, enabling innovators to share and collaborate,

creating "families" with "fathers" and skill-sharing are featured in explaining why

Silicon Valley grew so rapidly. When policy makers ask how best to foster

economic growth in migrant and other low-income communities, they might look to

the leading edges of the new informalized economy. Studying e-businesses may

yield insights into how migrant communities can foster entrepreneurship and

economic growth better.

2. Embedded in networks

As virtually all the discussion and literature cited emphasize, networks lie at the

heart of the informalized economy, with all of the same attributes and dynamics

mentioned for the informal economy. The scale is usually much larger, even to the

point of referring to virtually unknown parties who are electronically linked at part of

a “network”, a very different reality from personal networks. Some of the forms of

embeddedness, then, are more technical than interpersonal. Embeddedness in

networks can have its downsides. It can tie one down, restrict activities with those

outside the network, weigh one down with obligations, produce spite or feuds, or

envelope one with a confining culture.70

3. Informal, personal work

 36

The same five dimensions of informal, personal work identified in marginal

economies apply to informalized economies. In transitional, unstable and fluid

economic sectors, informal networking is used to establish and maintain trust; but it

is equally vital in very rigid, formal economies.71 Likewise, Saxenian emphasizes

the importance of social networks for advancing technical developments in Silicon

Valley.72 Similar themes are emphasized in books on the importance of networking,

valuing customers and customization in the internet e-conomy.73 Observers

emphasize that personal relations with one’s clients, even if partial and electronic,

are the key to success. Through electronic customization, one wants to know the

individual tastes of each customer and shape the product and service to satisfy their

desires and needs.

4. Pay for performance

Pay for performance has been spreading as the process of informalizing the formal

economy proliferates, only the tokens of exchange have become much more varied

and uncertain, such as low pay to get in on the ground floor of a new technology, or

stock options instead of full salary in a start-up that may go bankrupt, or may be

bought out for a hundred times its current value.

Pay for performance may help entrepreneurs minimize their running costs, but it is

worse for workers, whether in a migrant community, an ethnic enclave or in New

York City’s Silicon Alley. Unorganized workers can be exploited through a

 37

“corresponding sharp drop in wages, disappearance of fringe benefits, and

deterioration of working conditions.”74 Guy Standing has documented the

widespread damage to the workforce when a conservative government removed

long-standing employment protections in order to make a whole nation “labor

flexible”, in order to foster entrepreneurial behavior and enlarge the informal sector

of temporary, contract labor.75 While informalization of the economy sounds

exciting from the viewpoint of entrepreneurs, it returns workers to the world that led

to all the laws and regulations to protect them from hazards and exploitation in the

first place.76

5. Flexible exchange of value

In a very different economic setting than marginal economies, internet companies

too often lack cash or want to make what they have stretch; so they create value

chains of exchange, define special pots of money, trade valued services around

meaning constructs, and work hard for nothing in hopes of future rewards.77 One

important difference is that in some lines of work, such as innovative technology or

creative work, participants are dedicated to the work itself, its concepts and the

technology. They value, share, exchange or fall out over ideas or approaches. In

other lines of work, such as house cleaning or child-caring, techniques may be shared

but the work is essentially alienating, which itself can be a basis of sharing. REF

This major difference seems related to another, that alienating work is accompanied

by strong hierarchy and oppression, while self-realizing work is organized with

 38

minimal hierarchy, collaborative supervision and sharing. Perhaps this basic

difference implies that informal economic behavior is most common at the bottom

end or the leading edges of more routinized, formal economies. The more

transitional those economies become, then, the more flexible exchanges of value may

become. Such flexibilities, however, are easily exploitable by entrepreneurs who

invoke promises of future fortunes in order to get cheap labor.78

6. Tolerating entrepreneurial failure and false starts

Given an uncertain, changing environment, observers and advisers of the e-conomy

emphasize the ability to distinguish between “early days” or “dips” and a failing

business where one needs to cut one’s losses. Waste and overlap are inherent in new

ventures too. They emphasize the importance of accepting false starts, dead ends

and failures as natural parts of entrepreneurship and innovation, which in turn means

constant self-organizing and re-organizing. These qualities remind one of scientific

research and how informal, flexible structures and networks lie behind the

production of formally constructed scientific results.79

Saxenian found that business leaders in Silicon Valley understood the need to accept

false starts and failures better than leaders in the better-established zone of hi-tech

firms along Route 128.80 If false starts and failures are not tolerated, entrepreneurs

will seek what is reliable and routine and stay small or become obsolete. This must

be a critical attribute of entrepreneurs in low-income neighborhoods as well. Close

 39

research on what differentiates success from failure in low-income immigrant and

ethnic neighborhoods could provide valuable insights. At the same time, those

institutional and regulatory attributes that constitute “tolerance” in this case could be

come out of the hide of unprotected workers, depending on which parameters are

loosened.

7. Encouraging organizational flexibility and networking

An attribute that is implicit in micro studies of marginal and underground economic

activities, but becomes more obvious in studies of larger scale, is the ability and

willingness to be open-minded and creative in how economic activities are organized

and with whom entrepreneurs partner. Flexibility is implied in the term “informal”

itself. Stark and other social scientists emphasize this attribute in their studies of

entrepreneurs, both before the collapse of formal socialist economic institutions and

after. “Co-existing organizational forms”, “recombinant property”, “bricolage”, and

“heterarchy” are terms as inventive as the actions and actors they characterize. In e-

commerce, a “core attribute” is the “need for partnership”. Hartman and Sifonis

write, “Your ability to quickly select partners and create virtual organizations, and

then dissolve those partnerships just as quickly is essential for success in the E-

conomy.”81 “Webs of informal alliances” are contrasted with “structured formal

alliances” in the traditional, formal economy. “Partnering” is contrasted with

“competing” as critical to competing successfully.

 40

A different set of values and culture accompanies a flexible approach to

organization. Leasing is better than owning, which can tie up resources and

frustrate nimbleness. Horizontal partnering maximizes network scale rather than

physical scale. Outsourcing minimizes staff, property and stock. These are the

kinds of attributes that Saxenian, in her comparative study, found were missing in

companies on Route 128 but present in Silicon Valley as it eclipsed the former. Soft-

assembly is an important concept, the temporary assembling of people, networks and

resources to solve a problem.82 Open corporate architecture and heterarchy

complement this concept of soft assembly. Another important idea is asset

ambiguity and interdependence,83 in shifting or complex environments of legitimacy.

These ideas suggest the need for more studies of the techniques and dynamics that

distinguish those entrepreneurs in ethnic or migrant enclaves who succeed from

those who fail or stay marginalized, that is, research of market dynamics and inter-

preneurial relations over time. Were a sample of entrepreneurs studied

prospectively, so that one could observe how some succeeded and most failed, the

role of attributes such as these could be observed.

Conclusions

This paper has attempted to widen the range of characteristics found in the informal

economy and link them to the larger informalized economy in order to join up now

separate domains of economic sociology and encourage research across them for

comparative research of economic environments. Those linkages invite further

 41

efforts to draw together the literatures in related fields and to design new kinds of

research. One could investigate how formal and informal elements interact in

different businesses. Even businesses quite analogus to one another, such as

restaurants and grocery stores, operate in quite different ways. Significant variations

are also likely to be found in different economic domains, or spheres of people’s

economic lives. I have only hinted, for example, at the extent to which I believe

health care largely takes place at the informal economic level, a level entirely missed

by most health economics. They concern external exchanges, and the depths to

which medical work does not fit economic theory indicates the depth to which most

complex medical work centers around informal economic exchanges.84

One implication of this sociological reconceptualization of informal economic

activities is that they do not increase with stronger state controls but rather can be

fostered by facilitating and enabling state programs and flexible regulations. This is

the central purpose of growing work and conferences on the repressive nature of

copyright and patent law, and on the need to redesign them so that they reward

innovation rather than stifle it. When informal activities are defined in terms of the

legality of means used, then the “paradox of the state” – that the stronger the state,

the greater the scope of informal activity – is true by definition.85 The more rules

and enforcement, the more opportunities there are to break, manipulate or

circumvent. It would follow that a highly repressive state would generate the

maximum amount of informal activity. Legally speaking, doubling the number of

 42

restrictive regulations doubles the targets for informal efforts to circumvent or

subvert them, but in a rather repressed, counterproductive way. In this vein, the

capacity and intent of the state are defined in terms of its being a regulator,

policeman and tax collector.86 Another approach offered here is to define informal

economic activities by a number of characteristics that are much more positive and

could be nurtured by minimizing restrictive laws and developing what might be

called the facilitative state.87 Their entrepreneurial and innovative character is

celebrated as the leading edge of advanced economies. To put the matter another

way, a facilitative state could capitalize on the energy, struggle and creativity that

now go into working around its laws and nurture it.

In the spirit of public sociology, one could use the insights from the linkages here to

informal behaviors to do research on more effective ways to foster economic growth

in low-income neighborhoods. Some policy recommendations already come to

mind. One needs to foster a culture and set of facilitating programs that regard

failure as a sign that someone tried something new, aimed high and took risks.88 One

also needs a culture of performance assessment, an emphasis on finding out why

good ventures failed, how going ones can do better and what to do next. Assessment

should focus on consumers, on market performance, rather than on productivity or

other performance measures. Identifying weakest links and eliminating worst-

performing elements may be more important and difficult than identifying the

strongest elements.89 Cross-breeding good elements from two failures is another

 43

idea from e-commerce that requires good performance assessment. This kind of

generative sociology could foster new kinds of studies of migrant and marginal

economies. Theoretically, these ideas extend Merton’s observation about the role of

social structure in pressuring people to engage in non-conforming activities. One

can use the observation as a starting point for identifying and designing social

structures that foster innovation and enterprise, rather than pressuring them to

become deviant.

A supportive environment would include political leaders, law enforcement agents

and governmental regulators who tolerate rule-bending and who focus on the

boundaries between being productively illegitimate and criminal. One needs to think

about how the environment can be sculpted and scaffolded so that it can be “read”

more easily and so that it facilities success - ideas from biological analogies to

economic ecology.90 In general, as Clark puts it, for informal economic

development, one must come “to view aspects of the environment as equal partners

in soft-assembled problem-solving.”91 One can draw on such un-sociological

language and imagery to advance public sociology. Research may find that a

nurturing environment needs incubation zones, places or terms or conditions that

allow new enterprises to be protected during their formative period. Research is also

needed on the conditions that foster or truncate network development.92 For

example, I am advising the Scottish Executive on ways to foster self-help groups

among patients with chronic disorders so that they can exchange valued services on a
 44

largely non-monetary basis and reduce the need for costly services in the formal

health care system by developing what might be called the facilitative state. This is

how one sociologist, at least, segways between theory and praxis.

- end -
 45

Figure 1

Characteristics of the Marginal Informal Economy

1. Illegal or quasi-legal means

2. A networked-based embeddedness

3. A restrictive institutional environment

4. Informal, personal work

5. Pay for performance

6. Flexible exchange of value

7. Entrepreneurship
 46

Figure 2

Characteristics of the Marginal Informal Economy

and the Mainstream Informalized Economy

Marginal Informal Economy Mainstream Informalized Economy

1. Illegal or quasi-legal means 1. Legal or quasi-legal means

2. A networked-based embeddedness 2. A networked-based embeddedness

3. A restrictive institutional environment 3. A supportive institutional environment

4. Informal, personal work 4. Informal, personal work

5. Pay for performance 5. Pay for performance

6. Flexible exchange of value 6. Flexible exchange of value

7. Entrepreneurship 7. Tolerating Entrepreneurial Failure and False

Starts

8. Encouraging Organizational Flexibility and

Networking
 47

Notes

1
Everett Cherrington Hughes, The Sociological Eye (Chicago: Aldine-Atherton,

1971).
2
Robert K. Merton, “Social Structure and Anomie,” in Robert K. Merton, Social

Theory and Social Structure (New York: The Free Press, 1968 enlarged edition), 186.
3
Keith Hart, “Informal Income Opportunities and Urban Employment in Ghana,”

Journal of Modern African Studies 11 (1973):61-89.

4
On shantytowns, see Larissa Adler Lomnitz’s classic Networks and Marginality:

Life in a Mexican Shantytown (San Francisco: Academic Press, 1977). On the urban

informal sector, see S.V. Sethuraman, The Urban Informal Sector in Developing

Countries (Geneva: International Labor Office, 1981). For the peripheral economy see

Kenneth L. Wilson and Alejandro Portes, “Immigrant Enclaves: An Analysis of the

Labor Market Experiences of Cubans in Miami,” American Journal of Sociology 86

(1980):295-318, and for the underground economy see V. Tanzi, “The Hidden

Economy, a Cause of Increasing Concern,” FMI Bulletin 9 (1980): 34-37.

5
Quotations are from pp 31 and 32 of Alejandro Portes and Saskia Sassen-Koob,

“Making It Underground: Comparative Material on the Informal Sector in Western

Market Economies,” American Journal of Sociology 93 (1987): 30-61.

6
Manuel Castells and Alejandro Portes, “World Underneath: The Origins, Dynamics,

and Effects of the Informal Economy,” in Alejandro Portes, Manuel Castells, and

Lauren A. Benton, editors, The Informal Economy: Studies in Advanced and Less

Developed Countries (Baltimore: Johns Hopkins University Press, 1989), 11-37.

Quote is from p 12, emphasis in original.

 48

7
Edgar L. Fiege, The Underground Economies (New York: Cambridge University

Press, 1989).
8
Alejandro Portes, “The Informal Economy and its Paradoxes,” in Neil J. Smelser and

Richard Swedberg, editors, The Handbook of Economic Sociology (Princeton:

Princeton University Press, 1994).

9
See, Karl Polanyi, The Great Transformation (New York: Reinhart, 1944); Karl

Polanyi, Trade and Markets in the Early Empires (edited by Conrad Arensberg and

Harri Pearson) (New York: The Free Press: 1957); and Primitive, Archaic and

Modern Economies (edited by George Dalton) (Boston: Beacon Press, 1971).

10
See, Douglass C. North, “Markets and Other Allocation Systems in History: The

Challenge of Karl Polanyi,” Journal of European Economic History 6 (1977):703-16.

Quote from 709.

11
See Kathryn Edin, Making Ends Meet: How Single Mothers Survive Welfare and

Low-wage Work (New York: Russell Sage, 1997).

12
See, Alan MacFarlane, The Origins of English Individualism (Oxford: Blackwell,

1978); C.B. MacPherson, The Political Theory of Possessive Individualism

(Oxford:Claredon Press, 1962).

13
See, Craig Muldrew, “Interpreting the market: the ethics of credit and community

relations in early modern England,” Social History 18 (1993):163-183. Quote from p

174.
14
For these key concepts, see, Alejandro Portes and Julia Sesenbrenner,

“Embeddedness and Immigration: Notes on the Social Determinants of Economic

Action,” American Journal of Sociology 98 (1993): 1320-50. See also Ivan Light and
 49

Steven Karageorgis, “The Ethnic Economy,” in Neil J. Smelser and Richard

Swedberg, editors, The Handbook of Economic Sociology (Princeton: Princeton

University Press: 1994), 647-671.

15
On repeated breeches of manufacturing quality, see Linda Johnson, “Schering-

Plough cuts sales jobs,” Washington Post 25 June 2002.

(www.washingtonpost.com/ac2/wp-dyn/A43804-2002Jun25 ). One example of

suppressing information that a drug may be ineffective or harmful is found in Peter

Juni, Anne WS Rutjes and Paul A Pieppe, “Are selective COX 2 inhibitors superior to

traditional non steroidal anti-imflammatury drugs,” BMJ 324 (2002): 1287-8. Off-

label (unapproved) use is widespread and widely encouraged and rarely policed as for

example in Anon, “Lilly gets subpoena over drug” New York Times 15 Aug 2002.

www.nytimes.com/aponline/health/AP-Lilly-Subpoena.html.
16
An overview of the grassroots movement and political backlash is presented in

Donald Light, Ramon Castellblanch, Pablo Arrendondo, Deborah Socolar, ”No Exit

and the Organization of Voice in Biotech and Pharmaceuticals,” Journal of Health

Politics, Policy and Law 28 (2003): 473-507. See the web sites for Business for

Affordable Medicine (www.bamcoalition.org), Prescription Access Litigation

(www.prescriptionaccesslitigation.org), Stop Patient Abuse Now

(www.SPANcoalition.org), the Gray Panthers (www.graypanthers.org), the Alliance

for Retired Americans (www.retiredamericans.org) and Families USA

(www.familiesusa.org). (accessed 4 Feb 2004)

17
Philip Harding and Richard Jenkins, The Myth of the Hidden Economy (Milton

Keynes: Open University Press: 1989).

 50

18
Susan Sachs, “Welcome to America, and to Stock Fraud,” New York Times 15 May

(2001): A1, B6; Diana B. Henriques, “Grupo Mexicano Chief and Others Accused of

Insider Trading,” New York Times 10 May (2001):D5.

19
Pierrette Hondagneu-Sotelo, Domestica: Immigrant Workers Cleaning and Caring

in the Shadows of Affluence (Berkeley: University of California Press, 2001).

20
See, M. M. Yang, Gifts, Favours and Banquets: The Art of Social Relationships in

China (Ithaca: Cornell University Press, 1994); and Alena V. Ledeneva,. Russia’s

Economy of Favours: Blat, Networking and informal Exchange (Cambridge UK):

Cambridge University Press, 1998).

21
See, for example, T. Ensor and A. Savelyeva, “Informal payments for health care in

the former Soviet Union,” Health Policy and Planning 13 (1998): 41-49; R.

Thompson and S. Witter, “Informal payments in transitional economies: implications

for health sector reform,” International Journal of Health Planning and Management

15 (2000): 159-187; A. Murthy and Elian Mossialos, “Informal payments in EU

accession countries,” Euro Observer 5(2)(2003): 1-3.

22
See, for example, Victor Nee, “Organizational Dynamics of Market Transition:

Hybrid Forms, Property Rights, and Mixed Economy in China,” Administrative

Science Quarterly 37 (1992):1-27; Bryan Roberts, “Employment Structure, Life

Cycle, and Life Chances: Formal and Informal Sectors in Guadelajara,” in Alejandro

Portes, Manuel Castells, and Lauren A. Benton, editors, The Informal Economy:

Studies in Advanced and Less Developed Countries (Baltimore: Johns Hopkins

University Press, 1989), 41-59; David Stark, “Rethinking Internal Labor Markets:

New Insights from a Comparative Perspective,” American Sociological Review

 51

51(1986):492-504; David Hughes, Jean V. McHale and Lesley Griffiths, “Settling

Contract Disputes in the National Health Service: Formal and Informal Pathways,” in

R.G. Flynn and G. Williams, editors, Contracting for Health: Quasi-markets and the

NHS (Oxford: Oxford University Press, 1997), 98-113.

23
Patricia M. Fernandez-Kelly, “Social and Cultural Capital in the Urban Ghetto:

Implications for the Economic Sociology of Immigration.” in Alejandro Portes,

editor, The Economic Sociology of Immigration: Essays on Networks, Ethnicity and

Entrepreneurship (New York: Russell Sage Foundation, 1995), 213-47.

24
Alejandro Portes and William Haller, “The Informal Economy,” in Neil Smelser and

Richard Swedberg, editors, Handbook of Economic Sociology, 2nd edition (New York:

Russell Sage Foundation, 2004).

25
Paul DiMaggio and Hugh Louch, “Socially embedded consumer transactions: for

what kinds of purchases do people ost often use networks?” American Sociological

Review 63 (1998): 619-637.

26
Hondagneu-Sotelo, op cit. For personal instrumentalism, see, Jennifer Bickham

Mendez, “Of Mops and Maids: Contradictions and Continuities in Bureaucratized

Domestic Work,” Social Problems 45 (1998): 114-35.

27
In, Beverly Lozano, The Invisible World: Transforming American Business with

Outside and Home-Based Workers. (New York: Free Press, 1989), p 27.
28
Beneria and Roldan, op. cit., Ch 3-4.
29
Observed by Fernandez-Kelly, op. cit. and Mark Grannovetter, “The Economic

Sociology of Firms and Entrepreneurs.” in Alejandro Portes, editor, The Economic

 52

Sociology of Immigration: Essays on Networks, Ethnicity and Entrepreneurship. (New

York: Russell Sage Foundation, 1995), 128-166.

30
See Zelizer, op. cit.
31
See Portes and Sesenbrenner, op. cit.
32
See Viviana A. Zelizer, The Social Meaning of Money ( New York: Basic Books,

1994); and Zelizer, “Sociology of Money,” in Neil J. Smelser and Paul B. Baltes,

editors, International Encyclopedia of the Social & Behavioral Sciences (Amsterdam:

Elsevier, 2001), vol. 15, 9991-4.

33
See, John Yates, Why Are We Waiting? (Oxford: Oxford University Press, 1987)

and Donald W. Light, ”The Real Ethics of Rationing.” BMJ 315 (1997):112-15.
34
Details are documented in the Audit Commission report, The Doctors’ Tale: The

Work of Hospital Doctors in England and Wales (London: Her Majesty’s Stationary

Office, 1995); and John Yates, Private Eye, Heart and Hip: Surgical Consultants, the

National Health Service and Private Medicine (London: Churchill Livingstone, 1996).

Continued evidence is provided in John Yates, An Independent Report on the Trauma

and Orthopaedic Service in South Warwickshire (Birmingham (UK): Inter-Authority

Comparisons and Consultancy, 2000).

35
Donald W. Light, “Betrayal by the Surgeons,” The Lancet 347 (1996):812-13.
36
See the landmark speech by the Secretary of State for Health, Alan Milburn “The

new NHS – developing the NHS Plan.” London: Speech delivered at the Royal

College of Surgeons, 18 May 2000. An overview can be found in Donald W. Light,

“How Waiting Lists Work and their Hidden Agenda,” Consumer Policy Review (UK)
 53

10(4)(2000): 126-132, and Light, “The two-tier syndrome behind waiting lists,” BMJ

320 (2000):1349.
37
Discussed in Portes and Sassen-Koob, op. cit.
38
In, Arne L. Kalleberg and Aage B.Sorensen, “The Sociology of Labor Markets.”

Annual Review of Sociology 5 (1979):367.

39
See Portes and Sassen-Koob, op. cit., p 55
40
On informalization now, see, Saskia Sessen “The Demise of Pax Americana and

the Emergence of Informalization as a Systemic Trend,” in Frank Tabak and

Michaeline A. Crichlow, editors, Informalizataion: Process and Structure. (Baltimore:

The Johns Hopkins University Press: 1999), 91-115. On then, see, Larissa Adler

Lomnitz, “Informal Exchange Networks in Formal Systems: A Theoretical Model,”

American Anthropologist 90 (1988):42-55. Quote from p. 54.

41
Frank Tabak and Michaeline A. Crichlow, editors, Informalizataion: Process and

Structure (Baltimore: The Johns Hopkins University Press: 1999). Quotes from pp 1,

6.

42
Anna Lee Saxenian, Regional Advantage: Culture and Competition in Silicon

Valley and Route 128 (Cambridge: Harvard University Press, 1994), Ch 4.

43
Amir Hartman and John Sifonis, Net Ready (New York: McGraw-Hill, 2000).
44
Randy Kennedy, “Yellow Taxis Battle to Keep Livery Cabs Off Their Turf,” New

York Times 10 May (2001): A1, B7.

45
Page 298 in Alejandro Portes, Manuel Castess and Lauren A Benton, “Conclusion:

The Policy Implications of Informality,” in Alejandro Portes, Manuel Castells, and

Lauren A. Benton , editors, The Informal Economy: Studies in Advanced and Less
 54

Developed Countries, edited by. (Baltimore: Johns Hopkins University Press, 1989),

298-311.
46
David Stark, “Recombinant Property in East European Capitalism,” American

Journal of Sociology 101 (1996):993-1027; David Stark, “Heterarchy: Distributing

Authority and Organizing Diversity,” in John Henry Clippinger III, editor, The

Biology of Business: Decoding the Natural Laws of Enterprise (San Francisco:

Jossey-Bass, 1999), 153-180.

47
See, Stark, op. cit. 1986 and 1989; Charles Sabel and David Stark, “Planning,

Politics and Shop-Floor Power: Hidden Forms of Bargaining in Soviet-Imposed State-

Socialist Societies,” Politics and Society 11 (1982):439-75; and Ivan Szelenyi,

Socialist Entrepreneurs (Madison: University of Wisconsin Press, 1988).

48
Page 995 in Stark, op. cit., 1996.
49
See Stark, op. cit.; Gary Gereffi,. “The Organization of Buyer-Driven Global

Commodity Chains: How U.S. Retailers Shape Overseas Production Networks,” in

Gary Gereffi and Miguel Kornzeniewicz, editors, Commodity Chains and Global

Capitalism (Westport, Conn: Praeger, 1994), 95-122; Gary G. Hamilton, William

Zeile and Wan-Jin Kim, “The Network Structure of East Asian Economies,” in S.R.

Clegg and S.G. Redding, editors, Capitalism in Contrasting Cultures (Berlin: Walter

de Gruyter, 1990).
50
Page 1016 in Stark, op. cit., 1996.
51
See, Steven Levy, “The Noisy War over Napster.” Newsweek 5 June (2000): 46-8.
52
Regarding the infinite scalability of Napster, see Stephanie Stahl, “Peer-to-peer

Computing - Napster’s Legacy?” Information Week 28 August (2000).

 55

53
Robert S. Boynton, “The Tyranny of Copyright?” New York Times Magazine 25

January 2004: 40-45.

54
Neil Strauss, “Executives Can See Problems Beyond File Sharing,” New York Times

9 September 2003: C1, C6.

55
On Napster’s penetration at the time, see Brian Garrity, “Napster’s Status Outside the

U.S.” Billboard 14 April (2001).

56
See Any Harmon, “Music Industry In Global Fight on Web Copies.” New York Times

7 October 2002: A1, A6.

57
Amy Harmon, “261 lawsuits filed on music sharing.” New York Times 9 September

2003: C1, C6. For follow responses see Amy Harmon and John Schwartz, “Despite

suits, musing file sharers shrug off guild and keep sharing,” New York Times 19

September 2003: A1, C2.

58
Adam Liptak, “The music industry reveals its carrots and sticks,” New York Times 14

September 2003: wk5.

59
See two articles by John Schwartz, “In survey, fewer are sharing files (or admitting

it).” New York Times 5 January 2004: C1; and “For the ex-buccaneer, a pillage-free

playlist.” 1 January 2004: E1.

60
See, Jack Ewing, “A New Net Powerhouse?” Business Week Nov. 13 (2000):46;

Chris Sherman, “Napster: Copyright Killer or Distribution Hero?” Online Magazine

Nov (2000): Parts 1 and 2; Amy Harmon, “Music Industry in Global Fight On Web

Copies,” New York Times 7 Oct (2002): A1, A6.

61
On the industry trying to charge for what is free, see Amy Harmon, “Grudgingly,

music labels sell their songs online,” New York Times 1 July (2002): C1, C3. On the
 56

industry using informal networking to see products, see Lynette Holloway, “Declining

CD Sales Spur Labels to use Street Marketing Teams,” New York Times 30 September

(2002): C1, C8. For the industry’s paradigm shift, see the seminar overview by Kevin

Kelly, “Where Music Will be Coming From,” New York Times Magazine 17 March

(2002): 29-31. On Bitbop Tuner, see Naween A. Mangi, “Son of Napster,” Business

Week 21 May (2001): SB10.

62
Associated Press, op. cit.
63
Mark Landler, “For Music Industry, U.S. is only the Tip of a Piracy Iceberg,” New

York Times 26 September 2003: A1, C4.

64
Nicholas Thomson, “Sir, to whom may I direct your free call?” New York Times 12

October 2003: BU1, 10.

65
Kelley, op cit., 30.
66
See, Stark, op. cit., 1999.
67
Hartman and Sifonis, op. cit., p. xix.
68
For ways to create new markets and suggestive ideas about rule shakers and

makers, see Hartmann and Sifonis, op cit.

69
Saxenian, op. cit.
70
See Brian Uzzi, “Social structure and competition in interfirm networks: the paradox

of embeddedness,” Administrative Science Quarterly 42 (1997): 35-67; Mark

Grannovetter, “The Economic Sociology of Firms and Entrepreneurs.” in Alejandro

Portes, editor, The Economic Sociology of Immigration: Essays on Networks,

Ethnicity and Entrepreneurship. (New York: Russell Sage Foundation, 1995), 128-

166.
 57

71
In a range of contexts, see, Ledneva, op cit., Saxenian, op. cit., and David Stark,

“Coexisting Organizational Forms in Hungary’s Emerging Mixed Economy,” in

Victor Nee and David Stark, editors, Remaking the Economic Institutions of

Socialism: China and Eastern Europe (Stanford, CA: Stanford University Press,

1989), 137-68.
72
In different contexts, see, Hondegneu-Sotelo, op. cit. and Saxenian, op. cit.
73
See Hartman and Sifonis, op. cit.
74
Lourdes Beneria and Martha Roldan, The Crossroads of Class and Gender.

(Chicago: University of Chicago Press, 1987), p 38.

75
Guy Standing, “The ‘British Experiment’: Structural Adjustment or Accelerating

Decline?” in Alejandro Portes, editor, The Economic Sociology of Immigration:

Essays on Networks, Ethnicity and Entrepreneurship. (New York: Russell Sage

Foundation, 1995), 279-97.

76
For an interesting study see Vicki Smith, Crossing the Great Divide: Workers Risk

and Opportunity in the New Economy (Ithaca: ILR Press, 2001).

77
See Hartman and Sifonis, op. cit. and Philip Anderson, “Seven levers for guiding the

evolving enterprise,” in John Henry Clippinger III, editor, The Biology of Business:

Decoding the Natural Laws of Enterprise, (San Francisco: Jossey-Bass, 1999), 113-

152.
78
Stephan Paternot and Todd Krizelman, A Very Public Offering (New York: John

Wiley & Sons, 2001). Anthony G. Perkins and Michael C. Perkins, The Internet

Bubble (New York: HarperCollins, 2002). John Cassidy, Dot.Con: The Greatest Story

Ever Sold (New York: HarperCollins, 2002).

 58

79
See, for example, G. Nigel Gilbert and Michael Mulkay, Opening Pandora’s Box: A

sociological analysis of scientists’ discourse (Cambridge (UK): Cambridge University

Press, 1984).
80
Saxenian, op. cit.
81
Page xxv in Hartman and Sifonis, op. cit.
82
See, Andy Clark, “Leadership and influence: the manager as coack, many and

artificial DNA,” in John Henry Clippinger III, editor, The Biology of Business:

Decoding the Natural Laws of Enterprise (San Francisco: Jossey-Bass, 1999), 47-66;

Walter Powell, “Inter-organizational collaboration in the biotechnology industry,”

Journal of Institutional and Theoretical Economics 152 (1996):197-225.

83
See Stark, op. cit., 1999.
84
See the landmark book by Tom Rice, Health Economics Reconsidered, 2nd edition.

(Chicago: Health Administration Press, 2002), and Donald W. Light, “The

sociological character of markets in health care,” in G.L. Albrecht, R. Fitpatrick and

S.C. Scrimshaw, editors, Social Studies in Health and Medicine. (London: Sage,

2000).
85
Portes and Haller, op. cit.
86
Miquel Angel Centeno and Alejandro Portes, “The Informal Economy in the

Shadow of the State,” in Patricia Fernandez-Kelly and Jon Sheffner, Out of the

Shadows: The Informal Economy and Political Movements in Latin America.

(Princeton: Princeton University Press, 2004).

 59

87
For possibilities, see Robert Kloosterman and Jan Rath, Immigrant Entrepreneurs:

Venturing Abroad in the Age of Globalization. (New York: New York University

Pres, 2003).
88
See, Hartman and Sifonis, op. cit., p 25.
89
See, Anderson op. cit., p 126
90
See, Clippinger, op. cit., pp. 51, 130.
91
Page 50 in Clark, op. cit.
92
See, Anderson, op. cit.