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Tuesday, April 1, 2008

How Free Markets Break Down Discrimination

Markets Make People Pay for Discrimination

One of my favorite lines in the classic movie The Magnificent Seven comes when a traveling salesman and his partner offer to pay the local undertaker to haul a dead Indian to boot hill. The undertaker refuses. He’d like to oblige, he explains, but the townsfolk are so prejudiced against burying Indians alongside whites that he can’t persuade his driver to haul the body. One of the salesmen says, “He’s prejudiced too, huh?” The undertaker replies, “Well, when it comes to a chance of getting his head blown off, he’s downright bigoted.”

Experience with economic freedom illustrates the opposite point: When it comes to saving their economic lives, even otherwise-prejudiced people are downright tolerant. The reason is that markets make people pay for discriminating unless they’re discriminating in favor of the productive. Moreover, governments and government officials rarely bear a cost for, and often benefit from, discriminating against unpopular people, which is why the greatest horror stories of discrimination are about governments.

The insight that markets break down discrimination is not new. Over 200 years ago Voltaire wrote: “Go into the London Stock Exchange. . . and you will see representatives of all nations gathered there for the service of mankind. There the Jew, the Mohammedan, and the Christian deal with each other as if they were of the same religion, and give the name of infidel only to those who go bankrupt.”

Voltaire was pointing out that people on the London Stock Exchange wanted so much to make money that they were willing to deal with others who had different religions and cultural backgrounds. This seems an obvious insight, but apparently it is not. How often have you heard people denounce businessmen for ruthlessly pursuing profits and, in the next breath, castigating those same businessmen for discriminating against a minority group simply because they’re a minority? Well, which is it? Are they trying to maximize profits or are they discriminating? It can’t be both.

Institutionalized Discrimination

Think about the most notorious examples of racism, and the odds are high that you will think of a government implementing it and private citizens, out of the profit motive, opposing it. Take South Africa’s apartheid. Please. The apartheid regime and the “colour bar” that preceded it illustrate both points. From the early 1920s to the early 1990s, the South African government put barriers in the way of employers’ hiring black people for the plum jobs, especially, early on, in mining. In other words, the government officially enforced discrimination. Among the strongest opponents of this discrimination and the strongest advocates of tolerance were white employers. They hated that the government prevented them from hiring qualified black people to work in mines and elsewhere. Interestingly also, among the strongest supporters of the colour bar and, later, apartheid were white labor unions.

Indeed, something happened under the colour bar in 1923 that is so striking that the story should be told by parents everywhere to their children and talked about incessantly in coffeehouses. It was a strike by members of the powerful white Mine Workers’ Union, who were protesting white mine owners’ plans to hire less-expensive black workers. The 12-word banner that they proudly carried through the streets read, “Workers of the world unite, and fight for a white South Africa.” This Karl-Marx-meets-David-Duke slogan is further evidence of the connection between government power (socialism is the ultimate in government power) and racial discrimination. Interestingly, the union received support for this strike from its allies in the South African Labour Party (SALP), formed in 1908 with the explicit goal of achieving privilege for white workers. The SALP was modeled intentionally on the British Labour Party, an avowedly socialist party.

And if you think something like that would never happen in the United States, then consider the origins of the minimum-wage law. The main proponents of the minimum wage were northern unions that wanted to harm their lower-wage southern competition, many of whom were black. This goal animated unions as recently as the 1950s. At a 1957 hearing on increasing the minimum wage, a northern U.S. Senator who favored the increase stated: “Of course, having on the market a rather large source of cheap labor depresses wages outside of that group, too—the wages of the white worker who has to compete. And when an employer can substitute a colored worker at a lower wage—and there are, as you pointed out, these hundreds of thousands looking for decent work—it affects the whole wage structure of an area, doesn’t it?”

Who was the senator? Here’s a hint: just four years later he was the President. His name: John F. Kennedy.

Paying for Discrimination

That markets break down discrimination is such an important finding that the economist who first showed it in a rigorous model, Gary Becker, earned the Nobel Prize, in part, for that work. In his book The Economics of Discrimination, Becker pointed out that free markets make discriminators pay for discriminating because they give up opportunities to work with productive people. That doesn’t mean, he noted, that people in a free market will never discriminate; the most extreme racists and bigots will often be willing to pay the price for discriminating. But pay they will.

Becker’s book pointed out that the wage differential between black and white workers of a given ability and experience level is a measure of the remaining discrimination against black workers; the larger the differential, other things equal, the more discrimination black workers face. This insight has been abused two ways in discrimination lawsuits in the United States. The statistical abuse is to assume that the whole wage differential between blacks and whites is due to discrimination rather than to other factors that the researcher has failed to measure. Yet, as virtually every economist who studies wage data will admit, you can never account for all factors, especially those that you can’t observe. You can’t know someone’s earnings simply by knowing that person’s age, experience, union affiliation, and education. Many people are the same age as Bill Gates and are similar in all other respects, but none of them has close to his level of wealth.

The second abuse of Becker’s insight is an even more fundamental breach of justice. Workers who feel discriminated against sometimes sue their employers, often seeking compensation. What they fail to recognize is that these employers, who actually hired blacks and other minorities, are helping to eliminate discrimination. To the extent that lower wages are due to discrimination, they are caused by those not hiring people in the discriminated-against group. But haven’t we all heard of the minister who blames those present for the low turnout?

It should be noted, though, that the U.S. economy is not free but hampered by many anticompetitive government interventions, such as licensing. Yet competition is the key to minimizing discrimination. Thus those who oppose bigotry could do no better than to work to eliminate all such interventions.

More fundamentally, though, people should be free to discriminate. Freedom includes freedom of association, the freedom to choose whom you work for and whom you hire. Employees are free to discriminate against employers for any reason they wish; employers should have the same freedom. Let’s have markets, not governments, punish those who exercise their prejudices.