Economics Of Discrimination

If we were rational logical people living in a neo-classical world there would be no discrimination. People would only be judged according to their productivity and nothing else. All races would receive equal pay and job opportunities. In fact Milton Friedman even developed a theory in which racist firms would be driven out of business by inclusive firms. Yet discrimination does exist. For generations many businesses would only hire white people. Even today ethnic minorities are paid less than white people and suffered from higher unemployment. The perfect neo-classical utopia does not exist. Social norms determine action just as much as pure economics. We need government to right the wrongs of the free market.

Neo-classical economics claims that all workers are paid according to their productivity, therefore no one is every under paid or exploited. There are numerous problems with this (such as where does profit come from). A simple look at history will easily debunk this theory. No one will deny that for generations blacks, Hispanics and women were underpaid despite doing the same work as white men. According to neo-classical economics this could not happen and if it did it could not last. But it lasted in America (particularly in the South) for generations without the free market solving the problem. In fact it was the government that ended most of the discrimination (though even today minorities and women earn less than white men).

Milton Friedman and Gary Becker (both Nobel Prize winners) have both absurdly argued that there is no discrimination in the free market and for some strange reason this is what is taught in textbooks (though it requires you to completely ignore history). Essentially they argue that racism is inefficient and therefore competition will drive it out of the market. If a firm hires only white workers then it will have to ignore well qualified minorities and accept whites even if they are not as well qualified. A business that hires its workers based solely on their skill will therefore be more efficient and drive the racist business out of the market. This means there will be no discriminatory firms in the market. However this theory is at a loss to explain the fact that discrimination has persisted. They cannot explain the “No Irish/Blacks/Mexicans etc Need Apply” signs that many employers attached to job notices. They cannot explain how having a “white” name significantly increases your chances of getting a job interview.

The theory does not address another common form of discrimination, namely the refusal of businesses to serve certain ethnic groups. Under Jim Crow many shops refused to serve blacks either officially or unofficially. Nowadays in Ireland many hotels and pubs refuse to serve Travellers. In theory this reduces their profit but it was still widespread. It was government intervention sparked by the lunch counter protests that ended this discrimination, not the invisible hand of the free market. As minorities are poorer they have less to spend in businesses so the expected loss may not occur.

Discrimination can persist if customers are discriminatory, for example imagine if customers of a restaurant wanted only white people to serve them. In this case the market would reward discrimination instead of punishing it. Likewise if the staff do not want to work alongside different ethnic groups then it is more profitable to discriminate.

Becker and Friedman assume that all races have equal opportunities. They ignore the fact that minorities suffered from poorer education facilities. They act as though the systemic discrimination in all walks of life has no effect. That living in poor housing and slums doesn’t hold anyone back.

Friedman and Becker don’t describe the real world, rather they describe their ideal utopia where the market runs wild and we all bask in harmony and prosperity. All this requires is an ignorance of history and to ignore Jim Crow. Pretend it was all the government, but you are only deluding yourself.

 

6 thoughts on “Economics Of Discrimination”

  1. Robert, I would like to apologize for the unproofread post that I published today….my intention was to give an intro to 3rd party candidates and it was put into draft before Isaac and not checked before the publish button was hit….it is not my take on the Greens but that of New American….

  2. My background in economic theory is a bit limited, but your take has touched on my strong connection to historical context. I believe that our world should be able to examine the economics of those before us and use the qualities that worked. For now, you have sparked an interest in me and I am learning quite a bit from these posts. thanks.

  3. Thanks for the interesting post. I had a few comments.

    Essentially they argue that racism is inefficient and therefore competition will drive it out of the market.

    To be fair, Friedman argued that competition “will tend to drive him out” (emphasis added). It means that racists will have to pay the full costs of their decisions; meanwhile, the role of economic and social entrepreneurs is to shift the supply and demand curves for discrimination, as has happened since forced segregation was rightfully abolished.

    Though not perfect, I would argue that a decentralized organizing is a more reliable approach to solving social problems that lobbying for the good favors of “the executive committee of the ruling class,” as Marx called it.

    It was government intervention sparked by the lunch counter protests that ended this discrimination, not the invisible hand of the free market.

    I must be missing something. Protests and demonstrations, consumer and labor organizing, and competition are part of a market process that represents the nexus of our consensual private decisions.

    Well, considering the city permits and zoning hurdles in place, I can only imagine how supportive racist local governments would have been of the freedom of local businesses to integrate. Though, it was not just government. Systematic private violence was also prevalent.

    Even in the face of that, by the time Title II was enacted, the Greensboro Woolworth had already been desegregated four years earlier. The heavy lifting had been done when racists like LBJ co-opted the movement’s progress to tame it. If you recall, demands for reparations were all-but squashed for political expediency. Tragically, reactionary racists eventually ratcheted up the drug war under the same legal pretense used to justify Title II.

    However this theory is at a loss to explain the fact that discrimination has persisted.

    Sure it does. Racists find the cost of discrimination subjectively worth it.

    Discrimination can persist if customers are discriminatory, for example imagine if customers of a restaurant wanted only white people to serve them.

    Perhaps so, but civil rights legislation does not address consumer decisions. Should we therefore conclude that consumers are just as bigoted as they were in 1964?

    Likewise if the staff do not want to work alongside different ethnic groups then it is more profitable to discriminate.

    Depends; it might be more profitable to fire the racists.

    Becker and Friedman assume that all races have equal opportunities.

    What am I missing? I don’t see why that has to be assumed in their argument.

  4. I think you nailed the problem when you said that “minorities suffered from poorer education facilities.” That’s a bigger problem than the notion that business owners are racist and discriminate. I understand racism still exist and there are probably some racist business owners but I don’t think it’s a widespread problem. If a business owner is stupid enough to ignore or discriminate based on skin color, then they will be punished in the market by missing out on the discriminated persons productivity or losing them to a competitor.

    You failed to mention that Jim Crow laws were put in place to stop businesses from serving minorities to enforce segregation. Which means that businesses before Jim Crow had a desire to serve minorities. Obviously to make a profit. With that said I have a slightly controversial take on this.

    I think it’s perfectly fine for the government to impose equality and fairness within the government and on government property but not on private business owners. As I said above, Jim Crow laws infringed on property rights by stopping businesses from serving minorities. I’m a firm believer in property rights, so on the flip side, if a business owner is stupid enough to exclude a certain portion of the population, because of something so hideous as racism, let them do it. I wouldn’t do it, nor would I patronize an establishment that did it, but they should have the right to be stupid. The market would punish these businesses harshly because a lot of people wouldn’t stand for it. I would say let property owners do what they will with their properties.

    I do take umbrage with what you said about the underpaid minority. You said “No one will deny that for generations blacks, Hispanics and women were underpaid despite doing the same work as white men.” You say same work, that doesn’t mean same productivity. Let’s say you and I work at a widget making factory. You crank out 20 widgets an hour and I can only do 15. Shouldn’t you make more than me, considering your more productive? Wouldn’t you be considered a more valuable asset to the company?

    Aside from the blatantly racist people who discriminate, the government is somewhat culpable in this situation. I mean they’re called Jim Crow laws, not Jim Crow free market principles. The laws were first imposed by the government. Giving the government credit for doing away with Jim Crow would be like me letting the air out of the tires on your car, coming back the next day and filling them up, then demanding credit for helping you out. It doesn’t make sense.

    We needn’t go into the mockery that the government has made of the public school system. Causing the poor education of minorities. It’s a sad state of affairs and we need competition in the school system badly.

    On a side note: As I said above, I’m a firm believer in property rights, so I don’t see Jim Crow as a states rights issue like others have said before. I don’t think states should have the right to infringe on the ownership of your property. Unless by using your property your infringing on someone else. example could be me burning tires and the smoke is rolling into your house.

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