All Commentary
Friday, February 5, 2010

Diversity and the Free Market

Guess what diversifies humanity.

One of the most championed causes in the world of higher education and elsewhere is “diversity.”  Diversifying the workforce, student body, or cabinet, it is said, will create better outcomes for all concerned.  Making such entities “look like America” goes almost unchallenged as a desirable goal.

I don’t wish to challenge it, nor do I wish to question whether the best or only measure of diversity is what people “look like” (as opposed to, say, what they “think like”).  Instead, I want to suggest that if the supporters of diversity really mean it, they should be much more supportive of markets than they generally are.

Markets both depend on preexisting human diversity and also lead to increased diversity as they work their magic.  The first point is basic economics.  Markets rely on exchange, and exchange requires private property.  What makes exchanging our private property, including our power over our labor, so productive is that we all have different skills and talents that enable us to specialize in producing some things but not others.  It is the diversity of those skills and talents that drive the productivity of the marketplace.

Even in early human history the possibility of trade assured that the people who were good at growing food benefited those who weren’t but who were good at doing something else.  The weaver who makes clothes benefits the community the same way.  But these mutually beneficial exchanges will be easiest in a world where private property is protected and money is used.  This process is what economists call specialization by  “comparative advantage.” It is just another word for “diversity.”

And, more powerfully, comparative advantage points out that even the person who is not as good as others at anything can still find the thing he or she is comparatively best at and contribute to an increase in social wealth by doing that.  The market can accommodate not only different kinds of skills but also different levels of skills.  In a truly free market, anyone who produces something of value to others can find a place.  Ludwig von Mises expanded this insight to all forms of human cooperation by terming it the “Law of Association”:  Where people specialize in production and exchange to get what they want, they will create interdependencies among themselves that are forms of association and cooperation which define what it means to be a “society.”  Specialization and exchange don’t isolate and atomize us;  they enable us to take advantage of our diversity to benefit us all.

This point was most pithily expressed by the British rabbi Jonathan Sachs, who wrote:  “It is through exchange that difference becomes a blessing, not a curse.”  Human diversity is what makes exchange “work” as a wealth-creating process.

Creating Diversity

But this is only half the story.  Markets don’t just take advantage of preexisting diversity; they are also essential in creating more diversity than would exist otherwise.  If one takes diversity to be about race and ethnicity alone, then it is worth noting that the wealth that markets have made possible has enabled human beings to interact, both in person and electronically, with a wider range of other humans than ever before.  The diversity of humanity that even the poorest, most geographically isolated Americans are exposed to both personally and electronically dwarfs the very small, homogeneous bubbles of their ancestors just a couple of generations back.  Cross-racial and cross-ethnic friendships and marriages, not to mention professional relationships, are all the more common thanks to the market’s having lowered the costs of meeting new people from all over the world.

As markets create more wealth, work gets increasingly specialized, which is another way in which markets lead to more diversity along other dimensions.  The range of jobs that people have now is much greater than a hundred years ago, making for not just more wealth but also more opportunities to encounter people who are “different” in some fundamental way.  Think of all the jobs that exist today that didn’t exist a century ago.  That number is much larger than the number of jobs that have disappeared in that time.  Increased specialization, of course, means increased reliance on exchange, which in turn makes us increasingly interdependent.

If those pushing for more diversity in the workplace, classroom, or cabinet are doing so because they think increased diversity is good, increased interdependence is good, and increased interaction with those who are different is good, they should be devoting at least as much attention to freeing up markets as to political or organizational policies.  Over human history nothing has done more to diversify humanity and capture diversity’s benefits than the market.

Find a Portuguese translation of this article here.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.