From migrant enclaves to mainstream:Reconceptualizing informal economic behavior

DONALD W. LIGHTUniversity of Medicine & Dentistry and Princeton University

Abstract. The “informal economy” has developed in sociological theory to refer toclusters of illegal or quasi-illegal activities, usually unreported, by which people insome immigrant or ethnic communities earn income outside regular businesses andjobs. This article first extrapolates a set of characteristics beyond the legal status ofsuch activities that define the “informal economy.” These provide a richer frameworkfor future research and the basis for identifying informal economic activity in othersectors of the legitimate mainstream economy. In fact, informalization seems to havegone from marginal activities to a mainstream movement to make large sectors morefluid, network-based, and less regulated—the informalized economy. Its characteristicsare identified. They overlap with the first set but differ principally in terms of extendingMerton’s proposition that different social structures exert different pressures to engagein non-conforming behavior. The article concludes with policy implications for fos-tering greater entrepreneurship in marginal migrant communities, and it suggests newways for economic sociologists to study network transactions in modern corporationsof informal economic activity through generative sociology.

The socio-anthropological literature on the economic activities in mi-grant and ethnic neighborhoods or enclaves, together with field studiesof contract and piece-work, are rich with close observations about theways in which people without regular jobs and outside legitimate busi-nesses develop an “informal economy,” constrained by a restrictiveinstitutional environment, forged by those in power. This article beginswith a reconsideration of the informal economy in order to extrap-olate beyond its current theoretical definition to other characteristicsthat make marginal informal economies “informal.” We then turn tothe prevalence of informal economic activities in mainstream parts ofthe economy and to cases where the informal activities are reshapingmainstream economic institutions and regulations in the transitionaleconomies of Eastern Europe and the new web-based economy. Bycasting a sociological eye across the social landscape for analoguesand parallels, as my mentor Everett Hughes taught us to do,1 we can

Theory and Society 33: 705–737, 2004.C© 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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see sociological similarities and differences between the informal econ-omy and the informalization of the economy. These conceptual linkagesbring now-distinct literatures and realities together, thereby framingnew areas for fruitful research.

As informalization has proliferated with the collapse and reconstitutionof formal socialist economies, and as the Internet has created a technicalcapacity for bypassing normal economic institutions and channels andfor networking in any part of the society, informal economic behaviorshave come to shape economic institutions rather than work at theirmargins. What was peripheral and residual has become mainstream,and what was mainstream is being transformed by the dynamics ofwhat was peripheral and residual. Legal and regulatory boundaries arebeing changed or dissolved in an institutional atmosphere of fluidity. Byexercising the sociological imagination, one can thus draw on studiesof informal economic activities among migrant and ethnic groups tomodel the nature of transitional and emerging economies.

In “Social Structure and Anomie,” Robert Merton offered the insight-ful proposition that “social structures exert a definitive pressure . . . toengage in non-conforming rather than conforming conduct.”2 Mertonfocused on deviance and anomie, but he recognized innovation as an-other kind of non-conformance in his well-known Typology of Modesof Individual Adaptation. Merton defined plus–minus as “rejection ofprevailing values and substitution of new values,” a definition that ap-plies to how actors regard cultural goals but not to institutionalizedmeans. This observation leads to considering a new combination in histypology, of accepting cultural goals and not just rejecting institutionalmeans but substituting new ones. Why stop, however, with only actorsdoing this, when whole institutional structures can do so? Changingsocial institutions so that they exert more pressure for informality andinnovation is an idea that carries out the institutional implications ofMerton’s larger theoretical proposition.

The informal economy reconsidered

In 1973, Keith Hart first outlined a dualist model of income oppor-tunities in the formal and informal sectors of Ghana.3 The conceptof a hidden, off-record, yet extensive array of informal economicactivities at the margins or interstices of official economic actors andoverlooked by official measures of economic growth, flourished and

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spawned conferences, grant programs and a raft of publications. Theterm, “informal economy,” came to refer to the reciprocal exchangesin shantytowns, to the off-record economic activities in “the urbaninformal sector,” to the “peripheral economy,” and to the “undergroundeconomy.”4

Defining the informal economy, however, has become something of achallenge. In “Making it Underground,” Portes and Sassen-Koob de-fined the informal economic sector as “the sum total of income-earningactivities with the exclusion of those that involve contractual and legallyregulated employment.”5 Activities in the informal economy are pos-sibly illegal or at least escape legal regulation, “at the margins of thelaw precisely because it is the savings from tax and social security obli-gations that give these enterprises their principal competitive advan-tage.” In “World Underneath,” Castells and Portes defined the informaleconomy “by one central feature: it is unregulated by the institutionsof society, in a legal and social environment in which similar activitiesare regulated.”6 These are contrasted with criminal activities that in-volve illicit goods, but there is a lot of criminal activity that involvesordinary licit goods. Unregulated is not the same as undocumented,and neither is it the same as illegal or illicit, as Fiege noted in histypology.7 Portes depicts informal activities as serving to help house-holds survive, or help capitalists exploit cheap labor, or entrepreneursexploit their network and cultural advantages.8 They consist primarilyof activities and resources that feed into or work the edges of the formalsector by providing cheaper labor, inputs, or goods.

Self-provision—repairing one’s home or growing one’s food—is an-other matter, though that boundary is less clear than indicated. Whenyoung parents arrange—even at extra expense—to provide room foran aging parent, is this self-provision or an exchange of goods and ser-vices within a network that happens to be family? Suppose the youngparents gain a full-time baby-sitter and perhaps a cook, while the agingparent gains the equivalent services of a home health provider, is thispart of the informal economy or just “family”? The key lies in how“income-earning” is defined, especially if it includes “money-saving,”which therefore leaves more cash for other things. But then isn’t thatwhat hiring informal workers (an unlicensed handyman who chargesless) is all about?

The dependency of the informal economy on the formal economy over-looks the fact that informal economic activity is all that existed for

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most of history, when nearly all economic transactions were informal,interpersonal, and relational. In his historical essays, Polanyi arguedthat reciprocity and local customs dominated economic exchanges be-fore “the great transformation” to formal, capitalist markets took place,based on a radical individualism of maximizing self-interest.9 If the firstrequirement for formal economic exchange is well defined and enforce-able property rights within or between established legal entities, thenmuch of economic behavior for centuries was informal. In his reviewof Polanyi’s work, Douglass North, a Nobel laureate in economics, en-dorses this view and points out that most historically oriented scholarsagree as well.10 Most exchanges took place without cash markets. Theywere motivated by duty, kinship, friendship, religion, and politics morethan 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 formarkets,” North writes, “not only have dominated exchange in past so-cieties, but do so today as well.” He seems to be thinking of exchangesof time and services (and sometimes goods) inside firms, households,voluntary associations, and governmental units, as well as exchangesbetween them, an area that has only begun to be explored.11 Historianshave documented this theme in rich detail.12

In his research on early modern England, Muldrew describes a sug-gestive picture for contemporary researchers to draw upon for newprojects.13 He documents markets based on semi-formal transactionsand contracts. Local tradesmen and producers had many credits anddebts that got cancelled or replaced as new transactions took place. Thissystem rested on personal knowledge and trust, though a large volumeof law suits by creditors attested to the risks and limitations of such asystem. “People were constantly involved in tangled webs of economicand social dependency based only on each other’s work, or the workof others, which linked them together.” Studies of informal economictransactions in contemporary ethnic enclaves echo these observations.Family, ethnic, linguistic, and cultural ties give people within an ethniceconomy advantages, such as special networks, and access to infor-mation, capital, and low-cost labor. This research has led to insightfulsociological concepts, such as enforceable trust, value introjection, andbounded solidarity.14

In this context, it would seem valuable to develop a fuller set of definingcharacteristics of the informal economy than the illegal or questionablelegal status of means. That criterion itself has some problems. An

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obvious one is stolen or smuggled goods: licit goods obtained by illicitmeans. If one is participating in the informal economy when one buysa cheap good from a vendor, does it matter how it was obtained? Theremay be a good deal of smuggling involved in some ethnic economies.Does buying from the fence, rather than the thief matter? Another testcase is “muscling” or “persuasion” by setting a fire, or beating up orthreatening a competitor, so you can later say, “He decided not to openup after all.” Or “He decided to relocate his operation.” The goods orservices are licit; the means are not. If a limousine service, or musicalshow, or restaurant (all formally registered legal businesses with taxIDs) slips a bill ($100) or does favors for doormen and concierge staff atmajor hotels to steer customers their way, are these tips or bribes? Theyseem like informal, undocumented ways of doing legitimate businessin the formal economy.

Does the scale matter? If “informal” must mean economicallymarginal, then what do we call informal economic activities by thriv-ing businesses with substantial incomes? Informal economic actors aresaid to ignore safety regulations and other laws put in place by govern-ments to protect the public; but major firms skirt or wink at regulationsall the time and for the same reason—to lower their costs and facilitatebusiness. Further, certain kinds of covert, under-the-table deal-making,rule-bending, influence-pedaling, and deception are accepted as partof normal business in some industries, though not in others. The so-ciological opportunity here is to research and map the types of illicit,informal practices tolerated in different industries, the extent of theiruse and how they affect workers, customers, and business owners. Forexample, evidence keeps surfacing that the major pharmaceutical com-panies skimp on manufacturing quality, induce the guardians of safetyto suppress negative data, and promote drugs for unapproved uses inorder to maximize sales and profits.15 In fact, these tactics by globalpharmaceutical corporations have become so pervasive and profitable,by extending monopoly prices to millions of chronically ill patients andto state Medicaid programs, that a political backlash has developed thatis redefining long-standing practices as “wrong,” and declaring themillegal. Thus, one has today coalitions of business leaders and consumergroups declaring that the global giants in prescription drugs are usingillicit means to achieve licit ends.16 In what ways are these activities for-mal 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 neu-tralize even adverse judgments of criminal behavior by appealing themto a higher court and wearing down the plaintiffs until they give up.

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The theoretical distinction between licit and illicit means also overlooksa common strategy among powerful players: move the goal posts. If theline between formal and informal is the law, why not arrange to haveit changed, as major industries do so that they can openly enjoy todaywhat were illicit means yesterday? They can go underground (contri-butions to politicians and insider influence) and exchange favors inorder to reshape the regulatory terrain so that the scope of the formaleconomy is widened to legitimate hitherto illegitimate practices. Theycan—and do—even get a new government elected in order to reduceregulations and taxes so that they can behave more like gypsy busi-nesses. Such anomalies around the concept, as well as the symbioticboundary relations between informal and formal, suggest the limita-tions of a sectoral approach. Harding and Jenkins concluded that it wasa myth, an academic construct characterized by diffuse evidence andvague, disputed methods.17

Informal economic behavior is relational and reciprocal in character.It is embedded in networks of bounded solidarity and tacit trust. Thattrust, however, can be exploited, as in “affinity fraud,” in which a pre-sumed fellow compatriot “helps” an immigrant invest her money by ac-tually helping himself to her money.18 Such examples indicate the needfor closely observed studies of just how bounded solidarity and tacittrust actually work and how relations embedded in networks changeover time. Relations and boundaries between informal economic ac-tors and formal ones also vary—sometimes permeable and sometimescontested, especially when large corporations use their political powerto 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 ofactors and the institutional environment besides the legality of meansare found in the research on the informal economic sector? This searchbeyond the legal characteristic of the informal economy to social char-acteristics of informal economic activities leads to identifying six char-acteristics. Together they suggest new research foci both for migrationand ethnic studies and for economic sociology in general. They are: (1) arestrictive institutional environment (of which laws and regulations area key part); (2) a network-based embeddedness; (3) informal, personalwork; (4) pay for performance; (5) flexible exchange of value (not nec-essarily money); and (6) entrepreneurship that exploits opportunities.

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A restrictive institutional environment

This characteristic is usually taken for granted, but it needs to be stud-ied as an object of research. The economic environment may be stablefor some actors (especially those in power) but unstable for others. Itmay be uncertain and changing, or consistently uncertain. A suggestiveway to read Domestica, for example, an in-depth study of immigrantworkers who clean people’s homes and care for their children, is that theentire economy for domestic help is inherently uncertain for the work-ers because so much depends on personal power, whim, and trust.19

If one stretches one’s sociological imagination, one can see analogiesbetween the informal economic behavior of people in immigrant set-tlements or ethnic enclaves trying to get by or get ahead by workingthe edges of a hostile, formal system; the “economy of favors” suchas blat in the Soviet Union, guanxi in China, or zalatwic sprawny inPoland;20 and other kinds of informal economic behaviors by well-established companies coping with formal economic structures thatthey regard as hostile to their interests. In some cases, the informalactivities are best regarded as efforts to get something more or extrafrom the mainstream system, like the widespread use of informal pay-ments or favors in poorly run or poorly funded health care systems.21

In some cases the dynamics of informalization take place at the microlevel, and the macro-structure does not change much, though tensionsof transition are always there—the manipulation of rules and customsto create shadow or parallel markets that circumvent but also under-mine the formal institutional arrangements; the threat of cheap laborto established contracts and union domains; the danger of horizontalor vertical capture by informal suppliers or producers; or the loss ofmarket share as mainstream customers realize they can get a better dealby going outside regular markets or breaking its rules.22

Informal economic activity often involves bending, manipulating, ig-noring, or even violating laws and regulations that would add cost,complications, and problems to one’s business. Some actors may feignobservance. Some may simply not report what happened or what theydid or did not do. Enforcement officers may be aware of what is happen-ing and choose to ignore it, or even help struggling actors to managethe regulations.23 Of course, they can crack down on violators when anevent or politics spur enforcement. Informal, shadow economies canalso be found among more educated and resourceful sectors of society.Fernandez-Kelly’s astute observations of enforcement officers lead oneto think of tax evaders and tax enforcement as a social institution. In the

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formal economy, for example, tax laws are enforced by an understaffed,under-funded tax authority that can investigate only a small percent ofsuspected violators. Ironically, the same legislators who under-fundenforcement depend utterly on taxes being collected to fund their fa-vorite programs, and they express outrage at “tax cheats,” though mostof them are millionaires who hire tax lawyers and accountants to min-imize the taxes they personally pay. If the rich save money by bendingor ignoring the law, is that the obverse of the poor making money bybending or ignoring the law? Tax evasion may be informal economicbehavior, but it is implicitly built into and encouraged by the organi-zation and behavior of law enforcement.

A network-based embeddedness

In the unregulated informal economy, networks play several criticalroles. They provide norms, key linkages, social capital, and variousforms of cooperation.24 They are the basis for enforceable trust andhandle (with greater or less success as we have seen in Muldrew’swork) the problems of deviant behavior with sanctions such as notreciprocating, or isolating, or excluding the errant party. The infor-mal economy is the opposite of neoclassical theory based on manybuyers and many sellers who have no relations that could influencetransactions. Neoclassical theory would predict that such a tainted, im-pure market would be more inefficient and garner poorer value; butinformal economic transactions probably result in better value, thoughnot all the time. Transaction costs are probably lower, though at timesthey could be very high. Information is likely to be less incompleteor imperfect than in arm’s length transactions. In short, research withmajor theoretical implications can be done on network-based infor-mal economic activities, and there is evidence that they characterize asignificant proportion of mainstream consumer transactions.25

Informal, personal work

Work is informal and personal in marginal as well as other informalizedeconomies in several senses that could be developed into an index ofinformal work. The richest material comes from studies of immigrantand other marginal groups. First is the degree to which the work itselfis personally negotiated and altered. Hondegneu-Sotelo points out thatimmigrant women who carry out domestic work do not regard them-selves as “employees” and the women who hire them do not regardthemselves as “employers.” She describes the constant negotiations

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around not only duties but also space, dress, visibility, food, privacy,and degree of familiarity.26 Keeping personal work impersonal, “per-sonal instrumentalism,” requires constant boundary maintenance thatat times breaks down.

Second is the degree to which work is based on trust and how, to usePortes’ wonderfully ironic concept, enforceable that trust is. In theinformal economy of domestic help, issues of trust are highly salient,and formal agencies to find trustworthy help fill in the spaces wherethe 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 they use networks to gain a sense of whose workis trustworthy.

Third is the degree to which the channels of information, contacts,references, and new work are informal. Fourth is the degree to whichpeople rely on their informal relations to gain skills, both technicaland cultural, as well as favors. Hondegneu-Sotelo emphasizes the roleof the invisible “parallel universe” of women who do domestic workteaching new immigrants the skills of work and also interpersonal andcultural skills.

Fifth, work is informal and personal to the degree that culture plays arole, especially the ability to “read” the cues of customers from dif-ferent cultures and classes and establish personal connections, or evenrelations. Many unstated norms prevail. If the work or relationship(they are intertwined) is to be continuous, personal knowledge of whata customer wants is the single most valuable “asset.” House cleaners,for example, who have one way of doing things “right” (like scrub-bing hard), will be used by like-minded customers but quickly let goby others for “wearing my things out.” A house cleaner (paid cash,no benefits, no taxes, no stability) who can figure out that one clientlikes hard scrubbing but another likes a light touch, that a third doesnot mind strong chemicals being used but a fourth wants no chemicalsused, quickly gets all the work she wants and is kept on for years, evenpaid when the house is closed just to keep her from switching to anotherhomeowner waiting for her to have an opening in her schedule.

Pay for performance

One of the characteristics emphasized in research on employers andwork in migrant and ethnic enclaves is the tendency to pay workers,both above board and under the table, only when they produce and only

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for producing. Benefits, insurance, pension contributions, and vacationdays are not part of the deal. Costs are kept lean and low. If workers getsick or are no longer needed, their jobs end. Unions have played a sig-nificant role in protecting workers and providing the humane cushionsof pensions, sick and disability pay, health care benefits, and paid timeoff. Studies of piece work implicitly or explicitly note another aspectof getting paid for what you do—keeping sunk costs and capital invest-ment to a minimum. Ignoring laws that protect workers from unsafe,polluting, or unhealthy conditions, helps to minimize sunk costs. Infor-mal economy businesses focus on maximizing production and incomeusing minimum capital. In contract work, workers may be expectedto provide and use their own space, tools, or equipment. “And all wepay for is the product,” as one employer explained.27 Work is unstable,insecure, and based on piece work.

Unlike employees, contract workers have their performances measuredwith every batch. They may or may not constitute an enclave, a sub-culture, or some other social community that can rely on “enforceabletrust” or “bounded solidarity” to hold exploitation in check. Yet suchwork can be mutually beneficial. For example, in her study of informalworkers in the San Francisco Bay area, Lozano found that most had quitjobs in traditional companies because they could not stand the structureand bossing that was part of a proper job on an assembly line: “Nextthing you know, your boss is coming out in a bad mood and telling thesupervisor we need this stuff. And then, like pushing dominoes, she’dcome over and. . . ” Piece work allows workers to be their own boss.They do not have to be subjected to the oppressions or harassmentsthat can occur in a traditional bureaucracy.

There are various forms of subcontracting, such as vertical subcontract-ing and horizontal subcontracting, with varying degrees of control overthe materials, tools or machines, and labor process.28 Women are pre-ferred because they are considered more reliable than men, more stable,more careful, more patient, more able to follow orders, and willing totake less pay. States often proscribe violations of regulations, but turn ablind eye to allow these activities because they produce jobs, revenues,and benefits to large corporations.29

Flexible exchange of value

Sociologically speaking, the exchange of value can involve not onlytokens of value, such as money, but also the relationships involved in the

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exchange and the process and rituals of exchange.30 In the neoclassicaleconomic model, exchange is impersonal and based on money as acommon coinage of value. But informal economic actors draw uponconnections 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 flexi-ble exchange of many kinds of valued services and goods in “payingfor” work. In Lomnitz’s classic study of a shantytown, no one hadmuch money, but her close observations of networks show that per-sonally constructed exchanges had other benefits (and hidden costs)because they bound parties together in forms of interdependency andobligation. They created and reflected relationships with short-term orlonger ties. Likewise, the forms of social capital identified by Portes andSesenbrenner become more salient than they do in traditional formaleconomies.31 Value introjections, reciprocity, bounded solidarity, andenforceable trust are sociological concepts that identify specific fourvalued “goods” and ways in which relationships and transactions takeplace. They provide informal and cultural ways to monitor economicexchange beyond a formal, legal structure. Related to enforceable trustis trustworthiness, a fifth valued feeling of trust or confidanza whichis different from, though related to, enforceable trust or bounded soli-darity (Lomitz). In a domain that is informal, plastic, creative, ad hoc,and off record, informal economic behaviors involve other dimensionstoo, such as creative and pliable notions of “money” or compensation,special uses or understandings of official currency, as well as otherforms of compensation and barter.32

Entrepreneurship

Informal economic activity often involves entrepreneurship and hustle,even if only on the personal scale of day laborers hustling for pick-upwork. Entrepreneurship can be rewarded more fully than pay in a regulareconomy because pay for performance, minimum sunk costs, and per-sonal work get fully translated into quick income. Boundary-spanningand boundary-managing workers can play both sides. The ability toorganize or assemble what a customer needs (say, for an interior dec-orating or repair job) and to adapt to changing market conditions arecritical for sustained success. Like workers, entrepreneurs have to findopportunities and read cues—only they want more than a job for them-selves. They do not want merely to give gypsy-car rides in their used

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cars, or cater themselves, or do interior painting. Entrepreneurs wantto organize a fleet, or create a catering business or assemble an interiordecorating firm. They often are masters of inter-cultural and interper-sonal relations. They use their ties to migrant or ethnic groups to getgood help and their inter-cultural skills to get business from more afflu-ent groups. If entrepreneurship is given its head, it changes institutionalmeans, cultural goals, and the social structure itself.

An entrepreneurial, informal economy among the educated and re-sourceful that I know particularly well is the shadow world aroundwaiting lists for surgery in England. A symbiotic relationship existsbetween informally working the rules and the government enforcingthem, as several hundred-thousand patients wait for operations in theEnglish National Health Service (NHS). Budgets are inadequate to payfor enough nurses, surgeons, supplies, and recovery beds. The result-ing “waiting list” appears to be a formal queuing system for allocatingscarce resources. But surgeons actually build up and manage their ownlists as they see fit.33 The result has been networks of thousands oflists managed in unrecorded ways. Surgeons have used their waitinglists as a cross-over mechanism between their public jobs and theirprivate practice, through which they could encourage patients to havetheir operation done privately in a week or two by paying thousands ofdollars to “go private,” rather than suffer while waiting to get it free.Sanctioning this arrangement is a formal contract that legitimates thissystem of informal economic behavior and rewards working the rules,norms, and fundamental values of a public service. Research has doc-umented the resulting informal economic behavior—surgeons startingoperating sessions late, ending them early, leaving an NHS operationto do a private one in a surgical suite nearby, and not sorting out orga-nizational problems that lead to cancelled operations.34 A syndrome ofunacknowledged shortages, organizational structures in which no oneis responsible for all aspects of surgery, few criteria for waiting list man-agement, incomplete data collection of accounts that do not comportwith the facts (beginning with calling it a “list”) support this informal,shadow economy that earns many surgeons $300,000–500,000 a year inextra income during their salaried workweek. British surgeons claim towork 60–65 hours a week, but on average they operate only on 4–8 NHSpatients a week, averaging an hour a case.35 This is the principal causeof the infamous British waiting lists, and only recently has this syn-drome been addressed by sweeping changes in each of its constituentparts, changes which aim to address the causes of the informal economyand pull its activities into the mainstream organization of services.36

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Table 1. Characteristics of the marginalinformal 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

To summarize before turning to entrepreneurship as the main event,the effort here is to provide a fuller, more richly textured frameworkfor thinking about the informal economy and for doing research onit rather than just focusing on the legal character of actions, impor-tant as that may be. While all these characteristics are found in formalmainstream businesses—for example, Microsoft creating and sellingsoftware programs—they constitute more prevalent and defining char-acteristics of the informal economy. Others may wish to amend orextend these other characteristics; but they provide a broader, moredifferentiated starting point for future analysis, summarized in Table 1.

Entrepreneurial informalization as the main event

Contrary to the expectations of some analysts, informal economic activ-ity did not fade away with advanced capitalism but has thrived in majoreconomies as well as in developing nations.37 In the late 1980s, Portesand Sassen-Koob noted that “very small enterprises” with fewer than11 employees constituted more than three-quarters of all U.S. firms.Work characterized by low wages, short career ladders, temporary orunstable employment, few rules or rights, and many ports of entry hasobvious advantages for any business. About half of all American work-ers are employed in the secondary sector. But informalization refers tomore than the continuing proliferation of small firms. Although the sec-ondary sector of dual labor markets is supposed to be segmented fromthe primary sector, Kalleberg and Sorensen concluded that the em-pirical 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—thoughstill supplementary and subordinate to major firms.39 As companieshave sought cheap labor through “globalization,” countries eager forthe business have competed to reduce obligations to the state (taxes)

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and to the well-being of workers (safety, pensions), so that formerlyillicit practices or circumventions have become legitimate. This in-cluded new forms of inequality through exploitation.40 Accompanyingthis development has been the weakening and privatization of the state,massive rural-to-urban migration, global economic restructuring, andthe rise of the Internet as a way to hire cheap labor abroad withoutimmigration. The roomfuls of skilled customer service representativesfor credit cards, phone companies, banks, computers or software firmsmight be called electronic immigration. Where once it was held that theformal economy creates its own informal economies, now widespreadinformalization created its own need for setting formal limits. That isto say, governments are now trying to catch up with the consequencesof global informalization—and their role now is ambivalent—to fa-cilitate new forms of informalization while trying to keep them frombecoming too exploitative.

By the 1990s, researchers had concluded that informalization “hasbecome, by every available measure, truly world-encompassing. . . theunmaking of once formalized relations. . . ” It has become “elevatedfrom its former ‘marginal’ to its current ‘leading’ economic-sectorstatus. . . 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 break-through that changes the course of an industry.42 Sometimes they hap-pen in the external environment, such as a political upheaval. Of course,the more pervasive instability and change are, the more room is openedfor entrepreneurial behaviors.43

Culturally, entrepreneurial informalization is spreading in traditional,formal markets by becoming a state of mind characterized by askingboundary-testing questions such as, “Why not? Who says we can’t?”For example, the socially and legally constructed world of licensedcab companies restricts private livery cabs to carrying only call-in cus-tomers and prohibit them from picking up people hailing a cab, exceptin low-income fringe areas.44 Yellow cabs hold the monopoly on streetpick-ups but are subject to costly regulations and licenses, which arereflected in their high fares. The formal, regulated industry has alsoset standards. Drivers must attend an 80-hour training course, pass anEnglish-proficiency test, buy a new car every three years, and meetsafety standards. Yet the monopolistic limits on the number of taxilicenses to maximize revenues on every shift have led to a shortageof yellow cabs. Livery drivers are responding to this unmet need by

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invading the large pick-up market downtown with their personal un-marked cars. Of course, the presiding regulator states, “It’s illegal andwe have to stop it.” But in fact, the informal economic actors are infor-malizing the formal, regulated market. Yellow taxi drivers see that theytoo can make much more with a private car that does both call-in andpick-up business and circumvents the costly regulations. As they aban-don the yellow cabs, a shortage of drivers has developed, which makesbusiness even more attractive for anyone who comes over to the infor-mal market. Private cars are now routinely coming down to midtownManhattan hotels, and giving payoffs to hotel doormen. Customers arehappy to get quick rides and negotiate the fare on a one-to-one basis.They do not care about rules and regulations. “It’s a vicious circle,”said the president of the association for owners of yellow cabs, orrather it is an informalizing of the formal economic structure. “Whyshould I go through all these hassles,” asked one yellow cab driver,“when I can just go out and make a lot of money doing it on myown?”

A very different kind of informalization is the historic cultural-politicalrevolution from below and from the inside out occurred with the col-lapse of the Berlin Wall and communist regimes in the former SovietUnion and Eastern Europe. These developments illustrate Merton’scomparative observations about how different social structures put dif-ferent amounts of pressure on actors to break out of conforming be-havior as the legal, economic, and cultural structures themselves getchanged. The informalization processes “reflect the character of thespecific social and economic order in which they occur.”45 In EasternEurope, various entrepreneurial efforts developed to experiment andcombine, from the pieces of the old formal institutions, new formsof capitalism, and entrepreneurship—what Stark has called “recombi-nant property” and “bricolage.”46 He and others have done conceptuallysuggestive research on how businessmen and investors addressed theextremes of formal rigidity, contradictions, and dislocation in agingsocialist economies. They developed informal networks, bargainingarrangements, coping strategies to meet planned targets, and informalentrepreneurships.47 Thus, when the formal socialist institutions col-lapsed, the sub-rosa relationships, networks, and organizational formsbecame the basis for recombining organizational forms and propertyusing “a multiplicity of legitimating principles” and a “polyphony ofaccounts.”48 What was peripheral and residual has become mainstream,and what was mainstream is being transformed by the dynamics of whatwas peripheral and residual.

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Beyond this collapse in the late 1980s, informal economic behaviorsled in many entrepreneurial countries to new, mixed forms and tothe 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 into “hybridmixtures” and form “organizational hedging” and “metaphoric net-works,” in which assets are regrouped across formal boundaries so thatthe most relevant economic unit is the network of firms rather thanany given firm.49 This so-called mixed economy consists not so muchof public firms mixed with private firms as in “new forms of propertyin which the qualities of private and public are dissolved, interwoven,and recombined.”50 So also with the distinction between formal andinformal sectors, as actors developed strategies for risk-taking throughrisk-spreading and risk-shedding and through enhancing their adapt-ability through flexible resourcing.

Technological informalization

A third, more revolutionary change that contributes to the informal-ization of the mainstream, formal economy is the development of theInternet. The transformative power of the Internet makes it much eas-ier to ignore and even manipulate formal economic institutions, rules,regulations, and nation-states that have become impediments to them-selves. Multi-billion dollar corporations are using the best legal teamsin the world to fight an onslaught of web-based competitors who ex-ploit their products; but each new protection or barrier is overcome bya new strategy.

Napster is a paradigmatic case, though one could research others, likethe proliferation of web-based sources of prescription drugs that, forthe first time, are breaking down the formal economy that the pharma-ceutical giants have constructed into an air-tight legal monopoly overprices 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 teenagers downloadingcopyrighted music from each other’s computers illegally that it has in-formalized the market and spawned a new generation of technologiesto facilitate informal, reciprocal transactions of copyrighted materialsat little or no cost.51 It was as if Shawn Fanning, the college drop-outwhom friends called “Nappy” after his shaggy hair, had embezzled theworld’s music in order to give it away to anyone who wanted it. Beyond

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the recording industry, the CEO of Intel realized that Napster’s peer-to-peer networking could link together the unused computer power ofmillions of PCs so that huge mainframe jobs could be done cheaplyand quickly.52 “It’s fast. It’s simple. It’s infinitely scalable,” he said.

The industry giants have been spending large sums to criminalize freedownloading. They persuaded Congress to pass the Digital MilleniumCopyright Act, which has the chilling effect of making any Internetservice provider liable for any material posted by its users, and theCopyright Term Extension Act, which adds 20 years of protection toall past and present copyright materials.53 These are examples of majorcorporations changing the law to criminalize non-legal activities. Theyalso designed and built into music files anti-copying protections. Still,sales of CDs kept dropping every year. The loss between 1999 and2002 was put at $2 billion. Companies started reducing their prices,but it has had limited effect against the alternative of downloading onlythe songs one wants for nothing.54

While the law suits by the formal giants to criminalize informal sharingwere going through the courts, the number of people using Napster keptgrowing, to 38 million, then 51 million, and then 60 million.55 Onehousehold in 10 in the United States used Napster, and its penetrationwas greater abroad: 30 percent of Canadian households, 25 percent inArgentina, and 24 percent in Spain.

Trying to criminalize and shut down Napster and other systems istaking place largely in the United States, and represents a defense of theformal-economy industry against a new technology of informalization.Newer, more powerful systems of peer-to-peer sharing and exchangekeep appearing. The Bitbop Tuner was invented, a web-based “tuner”that allows users to scan 10,000 radio stations and download what theywant. Gnutella allows free exchange of movies, text, and photos aswell as music; KaZaA allows worldwide users to download not onlymusic but television shows and movies 24 h a day; and Freenet allowsexchanges while encrypting users’ files so that they are not traceable.Its inventor, Ian Clarke, wants to liberate all intellectual property. Oneexpert predicts that “the recording industry, as we know it, is history.”

Napster’s major successor, KaZaA, poses a formidable threat becauseits e-conomy revolutionaries incorporated it in Vanuatu (an obscureisland in the South Pacific), manage it from Australia, have its serversin Denmark, keep its source code in different places (last spotted inEstonia) and allegedly live themselves in The Netherlands or Sweden.

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KaZaA had 60 million users in 150 countries as of fall, 2002. Onemight call it a globalized informal corporation. Defending lawyersmaintained that courts have no jurisdiction because it has no assets orsignificant business dealings.56 A federal judge ruled that file-sharingprograms such as KaZaA were significantly different from Napster andcannot be held responsible for how people use them to violate copyright,because file-sharing occurs between individuals’ personal computersrather than through central servers. Surveys showed that two-thirds ofpeople downloading music do not care whether it is copyrighted, buttwo-thirds would also stop if threatened with fines.

In response, the recording industry filed 261 lawsuits in September2003 against users who had placed more than 1000 songs in a folder.57

This “blizzard of lawsuits” was intended to hit the nodes in the networksof file-sharing and to change the perception that using the Internet tocopy songs is free. Critics argued that treating customers like criminalswould incite a backlash. “We have more Americans using file-sharingthan voted for the president,” observed a civil liberties attorney, “andthe record industry’s position is to scare them into submission?”58 Thechilling effect seems to have worked; the number of people download-ing files in the United States, at least, has dropped sharply.59

While lawsuits in the United States have shut down free download-ing systems like Napster or forced them to alter themselves, the majorrecording corporations have been forced to napsterize themselves andfigure out how to continue to make money.60 They have been forcedto develop alongside their pre-packaged collections on CDs or DVDsnew forms of pay-per-play or subscribe-to-play from a library, withnew electronic security devices to prevent free downloading. Theyhave developed several subscriber systems, and pay-per-download, thatcommercialize the informal downloading and sharing activities intonew business services. It is not easy because there are millions ofbright teenagers trying to crack or circumvent the legitimate commer-cial channels.61 Jon Lech Johansen, for example, the now legendaryyoung Norwegian, designed software to crack DVD security codes andthen designed a program to circumvent Apple Computer’s iTunes anti-copying codes.62 His open-source posting will allow anyone to improveon 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 ram-pant. “People in their 60s are burning CDs at home,” said an in-dustry leader in Germany. “Housewives who should be cooking are

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burning.”63 In Germany it appears that three-fourth of all CDs areburned; in China it is nine-tenths. Meantime, the creators of KaZaAhave developed Skype, a method for making phone calls free from com-puters, and they have an extension of it that enables users also to makephone calls from phone through the Internet. The program, voice overInternet protocol (VoIP), bypasses FCC rules. Their goal is to make aglobal free phone system.64

Some argue that the real revolution lies beyond making copies intomaking music liquid: “You can filter it, bend it, archive it, rearrangeit, remix it, mess with it. . . . With digitization, music went from be-ing a noun to a verb. . . music is becoming a commodity that is traded,cocreated, and coproduced by a networked audience.”65 If so, infor-malization goes to the lodestone, an economy without property rightsin an e-commons.

Many of the same inventive forms and informal strategies that wereused in Eastern Europe for managing uncertainty and risk as formaleconomies collapsed are also found in the new e-conomy of the Inter-net, even though the contexts are quite different. Stark, for example, hasfound that informal networking in Silicon Alley is analogous to whathe observed in post-socialist Hungary—innovation through recombi-nation, maximizing adaptability and organizational learning, minimiz-ing hierarchy and maximizing organizational heterogeneity, formingnetwork ties of reciprocity and interlocking ownership, managing port-folios of interdependent resources, and using multiple frames of valueand legitimacy to give accounts in a rapidly changing environment.66

In Net Ready, Amir Hartman and John Sifonis draw on their intimateknowledge of Cisco Systems and other e-businesses to identify thecharacteristics of the new Internet economy and how to succeed in it.Transaction times and costs drop to near-zero, and one can quicklygain access to the suppliers, customers, and markets of traditionalfirms in the formal economy, which in turn informalizes them. Moreand more business sectors or industries take on a permanently transi-tional character—to where no one is sure. New research is neededto assess the extent to which different sectors of the economy arechanging; that is, from stable, predictable market relations to un-stable relations, from a reliance on capital and place to movementand Ethernet-space, from positioning to value migration, from long-term planning to ad hoc, real-time execution, from structured for-mal alliances to building networks of informal alliances and personalrelationships.

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Internet technology also allows many kinds of businesses to deal witheach customer on a one-to-one basis, to know their individual tastesand to give them just the products, services, or information they want.Mass customization or “customized silos of interactivity” are nowcommon.57 All customers can tell them what they are interested inand what they want, and that is exactly what they will get, until theydecide they want something else. Businesses can “create a dialog withtheir customers” and also with each other by creating communities ofinterest and developing partnerships.

To summarize, in brazen challenges to the legal, regulatory, and in-stitutional structure of some legitimate business sectors in collapsedsocialist formal economies and in the new Internet e-conomy, informal-ization is also characterized by entrepreneurship, pay for performance,informal work based on networks and flexible use of money and othervalued exchanges in a changing, uncertain environment that rewardsadaptability in 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 stud-ies of dynamics in informal economic markets, ones that may be usefulto researchers of undocumented or quasi-official economic activitiesand that have policy implications for how to foster economic growthin marginal economies. In an informalized economy, there is a differ-ent emphasis on breaking the rules, even the “unbreakable rules,” ofbusiness. This echoes marginal and underground entrepreneurs in poorneighborhoods going beyond licit means to keep costs down and buildup a business; but cutting corners and skirting regulations are limitedstrategies compared to creating new ways to do business, finding newways to make money, and creating new markets. Discussions of thedifferences between being a rule taker, a rule shaker, a rule breaker, ora rule maker in the e-conomy could benefit the economic developmentin immigrant communities.68 Such cross-fertilization opens up newways of conceptualizing and researching the symbiotic relationshipsamong rules, laws, and informal economic activities (see Table 2).

From a restrictive to a responsive environment

Perhaps the most important attribute missed in studies of marginal in-formal economies, but emphasized in the literature on the e-conomy,

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Table 2. Characteristics of the marginal informal economy and the mainstream in-formalized 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 institutionalenvironment

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 andfalse starts

8. Encouraging organizational flexibilityand networking

is the importance of a responsive and supportive environment. Despitethe very different context, descriptions of e-commerce sound like thoseof marginal and underground actors struggling to get by and hopefullysucceed. There are large, established corporations ready to crush anysuccessful venture that threatens them, as well as other start-ups whoare competing for the same business, and there are regulations designedto frustrate innovators or make innovative tactics illegal. But these sim-ilarities are precisely why Saxenian found that the new e-conomy didnot flourish around Route 128 but did in Silicon Valley. Saxenian em-phasizes the nurturing role of Stanford in contrast to MIT and Harvardin setting up programs and making arrangements for learning and insti-tutional support.69 Could Stanford serve a similar role for nurturing thepoor, marginal economy of East Palo Alto as it has for Silicon Valleynearby? Mentoring, sponsoring ventures, enabling innovators to shareand collaborate, creating “families” with “fathers,” and skill-sharingare featured in explaining why Silicon Valley grew so rapidly. Whenpolicy makers ask how best to foster economic growth in migrant andother low-income communities, they might look to the leading edgesof the new informalized economy. Studying e-businesses may yield in-sights into how migrant communities can foster entrepreneurship andeconomic growth better.

Embedded in networks

As virtually all the discussion and literature cited emphasize, networkslie at the heart of the informalized economy, with all of the same

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attributes and dynamics mentioned for the informal economy. The scaleis usually much larger, even to the point of referring to virtually un-known parties who are electronically linked at part of a “network,”a very different reality from personal networks. Some of the formsof embeddedness, then, are more technical than interpersonal. Embed-dedness in networks can have its downsides. It can tie one down, restrictactivities with those outside the network, weigh one down with obliga-tions, produce spite or feuds, or envelop one with a confining culture.70

Informal, personal work

The same five dimensions of informal, personal work identified inmarginal economies apply to informalized economies. In transitional,unstable, and fluid economic sectors, informal networking is used toestablish and maintain trust; but it is equally vital in very rigid, formaleconomies.71 Likewise, Saxenian emphasizes the importance of socialnetworks for advancing technical developments in Silicon Valley.72

Similar themes are emphasized in books on the importance of network-ing, valuing customers, and customization in the Internet e-conomy.73

Observers emphasize that personal relations with one’s clients, even ifpartial and electronic, are the key to success. Through electronic cus-tomization, one wants to know the individual tastes of each customerand shape the product and service to satisfy their desires and needs.

Pay for performance

Pay for performance has been spreading as the process of informalizingthe formal economy proliferates, only the tokens of exchange havebecome much more varied and uncertain, such as low pay to get in onthe ground floor of a new technology, or stock options instead of fullsalary in a start-up that may go bankrupt, or may be bought out for ahundred times its current value.

Pay for performance may help entrepreneurs minimize their runningcosts, but it is worse for workers, whether in a migrant community,an ethnic enclave, or in New York City’s Silicon Alley. Unorganizedworkers can be exploited through a “corresponding sharp drop inwages, disappearance of fringe benefits, and deterioration of workingconditions.”74 Guy Standing has documented the widespread damage tothe workforce when a conservative government removed long-standingemployment protections in order to make a whole nation “labor flexi-ble,” to foster entrepreneurial behavior and enlarge the informal sector

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of temporary, contract labor.75 While informalization of the economysounds exciting from the viewpoint of entrepreneurs, it returns workersto the world that led to all the laws and regulations to protect them fromhazards and exploitation in the first place.76

Flexible exchange of value

In a very different economic setting from marginal economies, Inter-net companies too often lack cash or want to make what they havestretch; so they create value chains of exchange, define special potsof money, trade valued services around meaning constructs, and workhard for nothing in hopes of future rewards.77 One important differenceis that in some lines of work, such as innovative technology or creativework, participants are dedicated to the work itself, its concepts and thetechnology. They value, share, exchange, or fall out over ideas or ap-proaches. In other lines of work, such as house cleaning or child-caring,techniques may be shared but the work is essentially alienating, whichitself can be a basis of sharing. This major difference seems relatedto another difference—that alienating work is accompanied by stronghierarchy and oppression, while self-realizing work is organized withminimal hierarchy, collaborative supervision, and sharing. Perhaps thisbasic difference implies that informal economic behavior is most com-mon at the bottom end or the leading edges of more routinized, formaleconomies. The more transitional those economies become, then, themore flexible exchanges of value may become. Such flexibilities, how-ever, are easily exploitable by entrepreneurs who invoke promises offuture fortunes in order to get cheap labor.78

Tolerating entrepreneurial failure and false starts

Given an uncertain, changing environment, observers and advisers ofthe 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 emphasizethe importance of accepting false starts, dead ends, and failures asnatural parts of entrepreneurship and innovation, which in turn meansconstant self-organizing and re-organizing. These qualities remind oneof scientific research and how informal, flexible structures and networkslie behind the production of formally constructed scientific results.79

Saxenian found that business leaders in Silicon Valley understoodthe need to accept false starts and failures better than leaders in the

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better-established zone of hi-tech firms along Route 128.80 If falsestarts and failures are not tolerated, entrepreneurs will seek what isreliable and routine and stay small or become obsolete. This must bea critical attribute of entrepreneurs in low-income neighborhoods aswell. Close research on what differentiates success from failure in low-income immigrant and ethnic neighborhoods could provide valuableinsights. At the same time, those institutional and regulatory attributesthat constitute “tolerance” in this case could come out of the hide ofunprotected workers, depending on which parameters are loosened.

Encouraging organizational flexibility and networking

An attribute that is implicit in micro studies of marginal and under-ground economic activities, but becomes more obvious in studies oflarger scale, is the ability and willingness to be open-minded and cre-ative in how economic activities are organized and with whom en-trepreneurs partner. Flexibility is implied in the term “informal” itself.Stark and other social scientists emphasize this attribute in their studiesof entrepreneurs, both before the collapse of formal socialist economicinstitutions and after. “Co-existing organizational forms,” “recombi-nant property,” “bricolage,” and “heterarchy” are terms as inventiveas the actions and actors they characterize. In e-commerce, a “core at-tribute” is the “need for partnership.” Hartman and Sifonis write, “Yourability to quickly select partners and create virtual organizations, andthen dissolve those partnerships just as quickly is essential for suc-cess in the E-conomy.”81 “Webs of informal alliances” are contrastedwith “structured formal alliances” in the traditional, formal economy.“Partnering” is contrasted with “competing” as critical to competingsuccessfully.

A different set of values and culture accompanies a flexible approach toorganization. Leasing is better than owning, which can tie up resourcesand frustrate nimbleness. Horizontal partnering maximizes networkscale rather than physical scale. Outsourcing minimizes staff, prop-erty, and stock. These are the kinds of attributes that Saxenian, in hercomparative study, found were missing in companies on Route 128but present in Silicon Valley as it eclipsed the former. Soft-assembly isan important concept, the temporary assembling of people, networks,and resources to solve a problem.82 Open corporate architecture andheterarchy complement this concept of soft assembly. Another im-portant idea is asset ambiguity and interdependence,83 in shifting orcomplex environments of legitimacy. These ideas suggest the need for

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more studies of the techniques and dynamics that distinguish thoseentrepreneurs in ethnic or migrant enclaves who succeed from thosewho fail or stay marginalized, that is, research of market dynamics andinter-preneurial relations over time. Were a sample of entrepreneursstudied prospectively, so that one could observe how some succeededand most failed, the role of attributes such as these could be observed.

Conclusion: The facilitating state

This article attempts to widen the range of characteristics found in theinformal economy and link them to the larger informalized economyin order to join up now separate domains of economic sociology andimmigration studies, to encourage research across them for compara-tive research of economic environments. Those linkages invite furtherefforts to draw together the literatures in related fields and to designnew kinds of research. One could investigate how formal and informalelements interact in different businesses. Even businesses quite analo-gous to one another, such as Mexican restaurants and Korean grocerystores, operate in quite different ways. Significant variations are alsolikely to be found in different economic domains, or spheres of peo-ple’s economic lives. I have only hinted, for example, at the extent towhich I believe health care largely takes place at the informal economiclevel, a level entirely missed by most health economics concerned withexternal exchanges. The depth to which medical work does not fit eco-nomic theory indicates the depth to which most complex medical workcenters around informal economic exchanges.84

One implication of this sociological reconceptualization of informaleconomic activities is that they do not increase with stronger statecontrols but rather can be fostered by facilitating and enabling stateprograms and flexible regulations. This is the central purpose of grow-ing work and conferences on the repressive nature of copyright andpatent law, and on the need to redesign them so that they reward inno-vation rather than stifle it. When informal activities are defined in termsof the legality of means used, then the “paradox of the state”—that thestronger the state, the greater the scope of informal activity—is true bydefinition.85 The more rules and enforcement there is, the more oppor-tunities there are to break, manipulate, or circumvent. It would followthat a highly repressive state would generate the maximum amount ofinformal activity. Legally speaking, doubling the number of restrictiveregulations doubles the targets for circumventing them, but in a rather

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repressed, counterproductive way. In this vein, the capacity and intentof the state are defined in terms of its being a regulator, policeman, andtax collector.86 By contrast, informal economic activities have been de-fined here by a number of characteristics that are much more positiveand could be nurtured by minimizing restrictive laws and developingwhat might be called the facilitative state.87 Their entrepreneurial andinnovative character is celebrated as the leading edge of the economy.To put the matter another way, a facilitative state could capitalize onthe energy, struggle, and creativity that now go into working around itslaws and nurture it.

In the spirit of public sociology, one could use the insights from thelinkages here to informal behaviors to do research on more effectiveways to foster economic growth in low-income neighborhoods. Somepolicy recommendations already come to mind. One needs to foster aculture and set of facilitating programs that regard failure as a sign thatsomeone tried something new, aimed high, and took risks.88 One alsoneeds a culture of performance assessment, an emphasis on finding outwhy good ventures failed, how going ones can do better, and what to donext. Assessment should focus on consumers, on market performance,rather than on productivity or other performance measures. Identifyingweakest links and eliminating worst-performing elements may bemore important and difficult than identifying the strongest elements.89

Cross-breeding good elements from two failures is another idea frome-commerce that requires good performance assessment. This kindof generative sociology is not done now in studies of migrant andmarginal economies. Yet in a less business-fashion language, eachof these themes can be found in the personal efforts by enterprisingimmigrants to get a business going. Theoretically, these ideas extendMerton’s observation about the role of social structure in pressuringpeople to engage in non-conforming activities. One can use theobservation as a starting point for identifying and designing socialstructures that foster innovation and enterprise, rather than pressuringthem to become deviant.

A supportive environment would include political leaders, law enforce-ment agents, and governmental regulators who tolerate rule-bendingand who focus on the boundaries between being productively illegiti-mate and criminal. One needs to think about how the environment canbe sculpted and scaffolded so that it can be “read” more easily andso that it facilities success—ideas from biological analogies to eco-nomic ecology.90 In general, as Clark puts it, for informal economic

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development, one must come “to view aspects of the environment asequal partners in soft-assembled problem-solving.”91 One can draw onsuch un-sociological language and imagery to advance public sociol-ogy. Research may find that a nurturing environment needs incubationzones, places or terms or conditions that allow new enterprises to beprotected during their formative period. Research is also needed on theconditions that foster or truncate network development.92 For example,I am advising the Scottish Executive on ways to foster self-help groupsamong patients with chronic disorders so that they can exchange val-ued services on a largely non-monetary basis and reduce the need forcostly services in the formal health care system by developing whatmight be called the facilitative state. This is how one sociologist, atleast, segues between theory and praxis.

Acknowledgments

This work was carried out through the support of the Center for Mi-gration and Development at Princeton University and its Director, Ale-jandro Portes. Patricia Fernandez-Kelly provided valuable commentsand sponsored a seminar on an earlier draft, where faculty and grad-uate students provided trenchant criticisms, especially from WilliamHaller. Students and faculty at UCLA, especially Ron Andersen, of-fered challenging comments that led to several changes. Theory andSociety Editors and reviewers and Karen Lucas helped make the essaybetter than it was.

Notes

1. Everett Cherrington Hughes, The Sociological Eye (Chicago: Aldine-Atherton,1971).

2. Robert K. Merton, “Social Structure and Anomie,” in Robert K. Merton, editor,Social Theory and Social Structure (New York: The Free Press, 1968, enlargededition), 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 theurban informal sector, see S.V. Sethuraman, The Urban Informal Sector in Devel-oping Countries (Geneva: International Labor Office, 1981). For the peripheraleconomy, see Kenneth L. Wilson and Alejandro Portes, “Immigrant Enclaves:An Analysis of the Labor Market Experiences of Cubans in Miami,” AmericanJournal of Sociology 86 (1980): 295–318. And for the underground economy, seeV. Tanzi, “The Hidden Economy, a Cause of Increasing Concern,” FMI Bulletin9 (1980): 34–37.

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5. Quotations are from 31 and 32 of Alejandro Portes and Saskia Sassen-Koob,“Making it Underground: Comparative Material on the Informal Sector in WesternMarket Economies,” American Journal of Sociology 93 (1987): 30–61.

6. Manuel Castells and Alejandro Portes, “World Underneath: The Origins, Dynam-ics, and Effects of the Informal Economy,” in Alejandro Portes, Manuel Castells,and Lauren A. Benton, editors, The Informal Economy: Studies in Advanced andLess Developed Countries (Baltimore: Johns Hopkins University Press, 1989),11–37. Quote is from 12, emphasis in original.

7. Edgar L. Fiege, The Underground Economies (New York: Cambridge UniversityPress, 1989).

8. Alejandro Portes, “The Informal Economy and its Paradoxes,” in Neil J. Smelserand Richard Swedberg, editors, The Handbook of Economic Sociology (Princeton:Princeton University Press, 1994).

9. See, Karl Polanyi, The Great Transformation (New York: Reinhart, 1944); KarlPolanyi, Trade and Markets in the Early Empires, edited by K. Polanyi, ConradArensberg 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: TheChallenge of Karl Polanyi,” Journal of European Economic History 6 (1977):703–716. Quote from 709.

11. See Kathryn Edin, Making Ends Meet: How Single Mothers Survive Welfare andLow-wage Work (New York: Russell Sage, 1997).

12. See, Alan MacFarlane, The Origins of English Individualism (Oxford: Black-well, 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 Com-munity Relations in Early Modern England,” Social History 18 (1993): 163–183.Quote from 174.

14. For these key concepts, see, Alejandro Portes and Julia Sesenbrenner, “Embed-dedness and Immigration: Notes on the Social Determinants of Economic Ac-tion,” American Journal of Sociology 98 (1993): 1320–1350. See also Ivan Lightand Steven Karageorgis, “The Ethnic Economy,” in Neil J. Smelser and RichardSwedberg, editors, The Handbook of Economic Sociology (Princeton: PrincetonUniversity 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 informationthat a drug may be ineffective or harmful is found in Peter Juni, Anne W.S. Rutjes,and Paul A. Pieppe, “Are Selective COX 2 Inhibitors Superior to Traditional NonSteroidal Anti-Imflammatory Drugs,” BMJ 324 (2002): 1287–1288. Off-label(unapproved) use is widespread and widely encouraged and rarely policed as forexample in Anon, “Lilly Gets Subpoena Over Drug” New York Times 15 Aug2002 (www.nytimes.com/aponline/health/AP-Lilly-Subpoena.html).

16. An overview of the grassroots movement and political backlash is presentedin 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 websites for Business for Affordable Medicine (www.bamcoalition.org), Prescription

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Access Litigation (www.prescriptionaccesslitigation.org), Stop Patient AbuseNow (www.SPANcoalition.org), the Gray Panthers (www.graypanthers.org), theAlliance 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 (MiltonKeynes: Open University Press, 1989).

18. Susan Sachs, “Welcome to America, and to Stock Fraud,” New York Times 15May (2001): A1, B6; Diana B. Henriques, “Grupo Mexicano Chief and OthersAccused of Insider Trading,” New York Times 10 May (2001): D5.

19. Pierrette Hondagneu-Sotelo, Domestica: Immigrant Workers Cleaning and Car-ing 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 inChina (Ithaca: Cornell University Press, 1994); and Alena V. Ledeneva, Russia’sEconomy 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 HealthCare 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 Planningand Management 15 (2000): 159–187; A. Murthy and Elian Mossialos, “InformalPayments 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,” AdministrativeScience Quarterly 37 (1992): 1–27; Bryan Roberts, “Employment Structure, LifeCycle, and Life Chances: Formal and Informal Sectors in Guadelajara,” in Ale-jandro Portes, Manuel Castells, and Lauren A. Benton, editors, The InformalEconomy: Studies in Advanced and Less Developed Countries (Baltimore: JohnsHopkins University Press, 1989), 41–59; David Stark, “Rethinking Internal LaborMarkets: New Insights from a Comparative Perspective,” American SociologicalReview 51 (1986): 492–504; David Hughes, Jean V. McHale, and Lesley Grif-fiths, “Settling Contract Disputes in the National Health Service: Formal andInformal Pathways,” in R.G. Flynn and G. Williams, editors, Contracting forHealth: 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, Ethnicityand Entrepreneurship (New York: Russell Sage Foundation, 1995), 213–247.

24. Alejandro Portes and William Haller, “The Informal Economy,” in Neil Smelserand 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 Most Often Use Networks?” AmericanSociological Review 63 (1998): 619–637.

26. Hondagneu-Sotelo, Domestica. For personal instrumentalism, see Jennifer Bick-ham Mendez, “Of Mops and Maids: Contradictions and Continuities in Bureau-cratized Domestic Work,” Social Problems 45 (1998): 114–135.

27. In Beverly Lozano, The Invisible World: Transforming American Business withOutside and Home-Based Workers (New York: Free Press, 1989), 27.

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28. Lourdes Beneria and Martha Roldan, The Crossroads of Class and Gender(Chicago: University of Chicago Press, 1987), chapters 3–4.

29. Observed by Fernandez-Kelly, “Social and Cultural Capital in the Urban Ghetto,”and Mark Grannovetter, “The Economic Sociology of Firms and Entrepreneurs,”in Alejandro Portes, editor, The Economic Sociology of Immigration: Essays onNetworks, Ethnicity and Entrepreneurship (New York: Russell Sage Foundation,1995), 128–166.

30. 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 (Ams-terdam: Elsevier, 2001), Vol. 15, 9991–9994.

31. See Portes and Sesenbrenner, “Embeddedness and Immigration.”32. See Viviana Zelizer, The Social Meaning of Money; and Zelizer, “Sociology of

Money.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): 112–115.34. Details are documented in the Audit Commission report, The Doctors’ Tale: The

Work of Hospital Doctors in England and Wales (London: Her Majesty’s Station-ary Office, 1995); and John Yates, Private Eye, Heart and Hip: Surgical Con-sultants, the National Health Service and Private Medicine (London: ChurchillLivingstone, 1996). Continued evidence is provided in John Yates, An IndependentReport on the Trauma and Orthopaedic Service in South Warwickshire (Birming-ham, UK: Inter-Authority Comparisons and Consultancy, 2000).

35. Donald W. Light, “Betrayal by the Surgeons,” The Lancet 347 (1996): 812–813.36. 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 RoyalCollege of Surgeons, 18 May 2000). An overview can be found in Donald W.Light, “How Waiting Lists Work and their Hidden Agenda,” Consumer PolicyReview (UK) 10/4 (2000): 126–132; and Light, “The Two-Tier Syndrome BehindWaiting Lists,” BMJ 320 (2000): 1349.

37. Discussed in Alejandro Portes and Saskia Sassen-Koob, “Making It Under-ground.”

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, “Making It Underground,” 55.40. On informalization now, see, Saskia Sessen, “The Demise of Pax Americana

and the Emergence of Informalization as a Systemic Trend,” in Frank Tabakand Michaeline A. Crichlow, editors, Informalizataion: Process and Structure(Baltimore: The Johns Hopkins University Press, 1999), 91–115. On then, seeLarissa Adler Lomnitz, “Informal Exchange Networks in Formal Systems: ATheoretical Model,” American Anthropologist 90 (1988): 42–55. Quote from 54.

41. Frank Tabak and Michaeline A. Crichlow, editors, Informalizataion: Process andStructure (Baltimore: The Johns Hopkins University Press, 1999). Quotes from1, 6.

42. Anna Lee Saxenian, Regional Advantage: Culture and Competition in SiliconValley and Route 128 (Cambridge: Harvard University Press, 1994), chapter 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.

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45. Page 298 in Alejandro Portes, Manuel Castess, and Lauren A Benton, “Con-clusion: The Policy Implications of Informality,” in Alejandro Portes, ManuelCastells, and Lauren A. Benton, editors, The Informal Economy: Studies in Ad-vanced and Less Developed Countries (Baltimore: Johns Hopkins UniversityPress, 1989), 298–311.

46. David Stark, “Recombinant Property in East European Capitalism,” AmericanJournal of Sociology 101 (1996): 993–1027; David Stark, “Heterarchy: Distribut-ing Authority and Organizing Diversity,” in John Henry Clippinger III, editor, TheBiology of Business: Decoding the Natural Laws of Enterprise (San Francisco:Jossey-Bass, 1999), 153–180.

47. See, David Stark, “Rethinking Internal Labor Markets”; David Stark, “CoexistingOrganizational Forms in Hungary’s Emerging Mixed Economy,” in Victor Nee andDavid Stark, editors, Remaking the Economic Institutions of Socialism: China andEastern Europe (Stanford: Stanford University Press, 1989), 137–168; CharlesSabel and David Stark, “Planning, Politics and Shop-Floor Power: Hidden Formsof Bargaining in Soviet-Imposed State-Socialist Societies,” Politics and Society 11(1982): 439–475; and Ivan Szelenyi, Socialist Entrepreneurs (Madison: Universityof Wisconsin Press, 1988).

48. Page 995 in Stark, “Recombinant Property in East European Capitalism.”49. See Stark, ibid.; Gary Gereffi, “The Organization of Buyer-Driven Global Com-

modity Chains: How U.S. Retailers Shape Overseas Production Networks,” inGary Gereffi and Miguel Kornzeniewicz, editors, Commodity Chains and GlobalCapitalism (Westport, Conn: Praeger, 1994), 95–122; Gary G. Hamilton, WilliamZeile, and Wan-Jin Kim, “The Network Structure of East Asian Economies,” inS.R. Clegg and S.G. Redding, editors, Capitalism in Contrasting Cultures (Berlin:Walter de Gruyter, 1990).

50. Page 1016 in Stark, “Recombinant Property in East European Capitalism.”51. See, Steven Levy, “The Noisy War over Napster.” Newsweek 5 June (2000): 46–48.52. Regarding the infinite scalability of Napster, see Stephanie Stahl, “Peer-to-Peer

Computing—Napster’s Legacy?” Information Week 28 August (2000).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 Amy 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 responses see Amy Harmon and John Schwartz,“Despite Suits, Musing File Sharers Shrug Off Guild and Keep Sharing,” NewYork Times 19 September (2003): A1, C2.

58. Adam Liptak, “The Music Industry Reveals its Carrots and Sticks,” New YorkTimes 14 September (2003): wk5.

59. See two articles by John Schwartz, “In Survey, Fewer are Sharing Files (or ad-mitting it),” New York Times 5 January (2004): C1; and “For the Ex-Buccaneer, aPillage-Free Playlist,” 1 January (2004): E1.

60. See, Jack Ewing, “A New Net Powerhouse?” Business Week November 13 (2000):46; Chris Sherman, “Napster: Copyright Killer or Distribution Hero?” Online

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Magazine November (2000): Parts 1 and 2; Amy Harmon, “Music Industry inGlobal Fight on Web Copies,” New York Times 7 October (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 industry using informal networking to see products, see Lynette Holloway,“Declining CD Sales Spur Labels to Use Street Marketing Teams,” New YorkTimes 30 September (2002): C1, C8. For the industry’s paradigm shift, see theseminar overview by Kevin Kelly, “Where Music Will be Coming From,” NewYork 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 (author), “DVD Jon unlocks iTunes,” San Francisco Chronicle27 November (2003): C1, C4.

63. Mark Landler, “For Music Industry, U.S. is Only the Tip of a Piracy Iceberg,” NewYork Times 26 September (2003): A1, C4.

64. Nicholas Thomson, “Sir, to Whom May I Direct Your Free Call?” New York Times12 October (2003): BU1, 10.

65. Kevin Kelley, “Where Music Will be Coming From,” New York Times Magazine17 March (2002): 30.

66. See David Stark, “Heterarchy: Distributing Authority and Organizing Diversity.”67. Amir Hartman and John Sifonis, Net Ready (New York: McGraw-Hill, 2000), xix.68. For ways to create new markets and suggestive ideas about rule shakers and

makers, see Hartmann and Sifonis, ibid.69. Anna Lee Saxenian, Regional Advantage: Culture and Competition in Silicon

Valley and Route 128.70. 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,” inAlejandro Portes, editor, The Economic Sociology of Immigration: Essays onNetworks, Ethnicity and Entrepreneurship (New York: Russell Sage Foundation,1995), 128–166.

71. In a range of contexts, see Alena V. Ledneva, Russia’s Economy of Favours: Blat,Networking and Informal Exchange (Cambridge: Cambridge University Press,1998); Anna Lee Saxenian, Regional Advantage; and David Stark, “Coexist-ing Organizational Forms in Hungary’s Emerging Mixed Economy,” in VictorNee and David Stark, editors, Remaking the Economic Institutions of Socialism:China and Eastern Europe (Stanford, CA: Stanford University Press, 1989), 137–168.

72. In different contexts, see, Pierrette Hondegneu-Sotelo, Domestica: ImmigrantWorkers Cleaning and Caring in the Shadows of Affluence (Berkeley: Universityof California Press, 2001); and A. Saxenian, Regional Advantage.

73. See Hartman and Sifonis, Net Ready.74. Lourdes Beneria and Martha Roldan, The Crossroads of Class and Gender

(Chicago: University of Chicago Press, 1987), 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 SageFoundation, 1995), 279–297.

76. For an interesting study, see Vicki Smith, Crossing the Great Divide: Workers Riskand Opportunity in the New Economy (Ithaca: ILR Press, 2001).

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77. See Hartman and Sifonis, Net Ready; and Philip Anderson, “Seven Levers forGuiding the Evolving Enterprise,” in John Henry Clippinger III, editor, The Bi-ology 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: JohnWiley & Sons, 2001); Anthony G. Perkins and Michael C. Perkins, The InternetBubble (New York: HarperCollins, 2002); John Cassidy, Dot.Con: The GreatestStory Ever Sold (New York: HarperCollins, 2002).

79. See, for example, G. Nigel Gilbert and Michael Mulkay, Opening Pandora’s Box:A Sociological Analysis of Scientists’ Discourse (Cambridge, UK: CambridgeUniversity Press, 1984).

80. A. Saxenian, Regional Advantage.81. Page xxv in Hartman and Sifonis, Net Ready.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 BiotechnologyIndustry,” Journal of Institutional and Theoretical Economics 152 (1996): 197–225.

83. See Stark, “Heterarchy,” 1999.84. See the landmark book by Tom Rice, Health Economics Reconsidered, 2nd edition

(Chicago: Health Administration Press, 2002); and Donald W. Light, “The Socio-logical Character of Markets in Health Care,” in G.L. Albrecht, R. Fitpatrick andS.C. Scrimshaw, editors, Social Studies in Health and Medicine (London: Sage,2000).

85. Portes and Haller, “The Informal Economy.”86. Miquel Angel Centeno and Alejandro Portes, “The Informal Economy in the

Shadow of the State,” in Patricia Fernandez-Kelly and Jon Shefner, editors, Out ofthe Shadows: The Informal Economy and Political Movements in Latin America(Princeton: Princeton University Press, 2004).

87. For possibilities, see Robert Kloosterman and Jan Rath, Immigrant Entrepreneurs:Venturing Abroad in the Age of Globalization (New York: New York UniversityPress, 2003).

88. See, Hartman and Sifonis, Net Ready, 25.89. See P. Anderson, “Seven Levers for Guiding the Evolving Enterprise,” 126.90. See, J. Clippinger, The Biology of Business, 51, 130.91. Page 50 in A. Clark, “Leadership and Influence.”92. See P. Anderson, “Seven Levers for Guiding the Evolving Enterprise.”