Excerpts from the WIP book "The Many Faces of Los Angeles"

Abstract: The Underground Economy

The economy of the greater LosAngeles area is diverse.  It is characterized by wealth in the suburbs and the valleys, and by poverty in the inner-cities.  Gross Domestic Product(GDP), the measure of economic well-being, is much higher in the wealthier areas.  However, GDP is under-stated in the inner-cities and much of the wealth of these areas is disguised by the lack of attribution of the underground, and undocumented, economic activity.

The legitimate economy dominates the more well-off areas of the greater Los Angeles area.  Such economic activity as office work, construction, and retail work rarely goes undocumented.  Thus, the GDP of these areas more accurately describes their economic well-being.   In the inner-cities, much of the economic activity is underground, thus, understating the economic well-being of the populace in these areas.

In the inner-cities, much of the construction work, which accounts for a large portion of the economy, is not reported to government agencies.  Thus, the salaries for these professions, which average well over $50,000 a year, are not taken into account.   Furthermore, small family businesses often follow the same model whereas the incomes and salaries accredited to employers and employees go un-reported.  Therefore, much of the economic activity in the inner-city goes undocumented.  

Another measure of the economy in these areas that is understated in these areas, is the relative cost of living.   While living in the wealthier areas of the city, a hair-cut will often cost $25, while in the more depressed areas of the city the same service can be purchased for slightly upwards of $5.  This is true of many goods and services in the inner-city.  Although the average salary, already under-reported, is less in the city than it is in the suburbs, the cost of living is less in the inner-cities.  Therefore, the standard of living in these two distinct areas is more equitable under closer observation than it is from a rudimentary glance.

The two distinct manifestations of the economy in the wealthier areas as opposed to the more impoverished areas reflect two different sets of economies.  From the perspective of the casual observer, the two different manifestations of the economy represent alarming inequalities.  However, from a neo-classical economical  outlook as well as a functionalist outlook, the economies have evolved independently of one another to create the maximum level of well-being and wealth for all.

Conflict theorists would argue that the two distinct economies are instigated by those in power attempting to maintain their elite position in society.  Thus, the extreme inequities that are perceived  to  exist are said to be attributed to the privileged in our society.  The GDP in these areas are not seen to be understated and the lower salaries and cost of living is said to be engineered to exploit the cheap labor in these areas.

Symbolic-interactionists view the economy to stem from the smaller institutions of society.  They surmise that the economy grew from social institutions such as family, church, and our educational establishments.  The fact that much of the economy is underground is symptomatic of this conception.  Moreover, those the drive the economy often lack the education to formalize their businesses often continuing the family business in the same shape and form that their father’s did.

Post-modernists would welcome the theory espoused earlier by neo-classical economists.  They would also agree with some assumptions of the symbolic-interactionist an to argue that the economy creates maximum utility for itself within the pre-established confines of functionalist confines and from root institutions such as church and familiar structure.  

The theories such as social capital and human capital theory are also welcomed from the perspective of the post-modernist.  The social capital available in the inner-cities is often represented by a large family and a small network of acquaintances.  Thus, from this small amount of social capital is often utilized to find labor and supply employment.  Human capital theory is often helpful in understanding the underground economy in Los Angeles.  The occupants of these areas often have little education, but oftentimes have a strong work-ethic.  The lack of education is offset by the capability of most to learn a trade.  Thus, the economy functions in such a way as to take advantage of the social and human capital available.   Those willing to work, work and the mechanisms of the economy take on a different form according to the skills and attributes of the members of the communities.

The underground economy that has manifested in the inner-cities is thought to be beneficial to it's citizenry by functionalists, creating the maximum possible utility to match those with the specific skills and attributes of the populace of the inner-city.  Conflict theorists insist that the economic structure that exists in these areas of the city was created for the shear exploitation of the impoverished by those in power to maintain their privileged position in society.  It is their position that these perceived inequities must be alleviated.  Symbolic-interactionists view is similar to that of the functionalists in that they believe the economy has evolved independently to create the maximum benefit to all.  Post-modernists also do not wish to place blame, rather they welcome innovative theories to better explain the functioning of the economy.  Concepts such as human capital theory and social capital theory are welcome to explain the reasons for the manifestation of an underground economy and to examine such a phenomenon.