All Commentary
Sunday, February 1, 1981

The Economics and Politics of Discrimination

Mr. Leef is the book review editor of The Freeman. When this article was originally published, he was a college teacher in Michigan.

It is widely believed that capitalism, to the extent that it is still allowed to function, is responsible for our problem of racial discrimination. Blacks, Hispanics, and other ethnic groups are seen to be “under-utilized” by business, and therefore many people conclude that the cause must be that businessmen are guilty of racial discrimination. Having arrived at this conclusion, the solution is simple and obvious: Merely compel businesses to hire more individuals from these groups. Mandate “affirmative action” programs, “goals” or quotas in hiring and promotion, enforce these with a federal bureaucracy and the courts, and everything will be fair and equal. A closer examination will show, however, that racial discrimination, far from being caused by capitalism, is in fact the result of governmental interferences with capitalism. We shall see that the proper response to the problems of blacks and other ethnic minorities in society is not more governmental coercion, but to eliminate that which we now have.

Businessmen are in business to make money. They are engaged in a continuous struggle to increase revenues and decrease costs. The first crucial point we must grasp is that racial discrimination imposes costs upon businessmen who practice it. For example, purchasing decisions are generally made upon the criteria of least cost and best service. If a businessman refuses to deal with a black supplier who could offer the lowest price and/or best service, he has imposed additional costs upon himself. Similarly, to refuse to hire qualified persons because of their skin color means that the businessman must devote more time and resources to searching for a person to fill the job, and perhaps having to settle for a less well qualified candidate.

The Price of Prejudice

Not many businessmen prefer prejudice to profits. As economist Milton Friedman puts it, “A businessman or an entrepreneur who expresses preferences in his business activities that are not related to productive efficiency is at a disadvantage compared to other individuals who do not. Such an individual is in effect imposing higher costs on himself than are other individuals who do not have such preferences. Hence, in a free market, they will tend to drive him out.” (Capitalism and Freedom, pp. 109-110)

In theory, therefore, we would expect to find little discrimination in a free market because of the’ self-interest of businessmen. This theory finds strong support from historical evidence. First, the Jim Crow laws of the states of the South specified that certain jobs in industry could be done only by white workers. But if the industrialists were intent upon discriminating, why did this preference have to be enacted into law? The answer is that to preserve the status of the white worker, there had to be a legal restraint upon employers. In the absence of the law, competition from nondiscriminating employers would have urged all to hire and promote blacks and whites on the basis of economic value, not race.

A second piece of evidence comes to us from South Africa, and again shows the power of business competition to reduce racial discrimination. The reason for the adoption of the policy of Apartheid in the 1930s was that white workers were incensed that so many blacks were being hired and were competing with them in pay and promotions. Therefore, they persuaded the government to restrict the better-paying jobs to whites only. Once more, we see that business was the enemy of discrimination, government the cause.

Further evidence on the relationship between capitalism and discrimination is found in the considerable affluence many “free persons of color” in the antebellum South were able to achieve. These were free blacks who had no political power at all, but could own property and do business as they wished. For example, in pre-Civil War New Orleans, free Negroes owned one- fifth of the total taxable property in the city. (Race and Economics by Thomas Sowell, p. 40) Thus, even while the government discriminated against these people, according them no political power, capitalism gave them economic power restricted only by their abilities to satisfy the wants of consumers.

Conditions Have Changed

Next, let us examine the experience of other ethnic groups which have migrated to the urban centers of the United States in search of economic progress. Jews, Italians, Chinese, Irish, Japanese, and many others settled here and were usually despised and subjected to legal harassment for decades after their arrival. Nevertheless, members of these groups have been highly successful in moving into the mainstream, and frequently into the highest strata of American life. Discrimination did not keep them depressed. Why were they able to advance whereas today’s bottom-of-the-ladder minorities seem to be permanently stuck there? Have conditions changed in some way which would explain the difference? The answer is yes.

The great influx of blacks into the cities began after World War II. Prior to that time, most of the country’s black population had lived on farms in the rural South. With the movement to the cities, the process of economic advancement began for the majority of the black population, just as it had for the Jews, Italians, Chinese and others in the previous century. What factors are militating against blacks now that did not hinder the progress of the earlier groups? A rather large number of such factors could be identified, but I wish to concentrate on three of the most significant.

Minimum Wage Laws

The first difference to which we can point is the existence of minimum wage laws. The minimum wage came into existence as a part of the Fair Labor Standards Act, passed during the New Deal. It sets a wage floor below which an employer may not pay. The stated reason for this law was to raise the income of poor workers. (The real reason was that labor union leaders hoped that it would stifle competition from lower-wage areas, such as the South. For this reason, the minimum wage bears a kinship to the Jim Crow laws discussed above.) What the legislators either did not see or chose to ignore is that the amount of one’s pay depends upon his economic value to his employer. If the law says that you, the employer, cannot pay anyone less than $2.00 per hour, you are not going to hire people who, because of lack of skills and work experience, cannot produce at least $2.00 worth of revenue per hour for you.

What the minimum wage does, then, is to prevent people from getting a start. It prevents a person from going to an employer and saying, “I know I don’t have any job skills, and I don’t have a work record to prove my reliability, but I’m willing to start at a low wage. All I would like is a chance.” That is exactly how the earlier immigrant groups began their climb up the economic ladder; but today that option is gone. Because they cannot find work, millions of young blacks, His-panics, and others remain unemployed and unemployable. Frequently they turn to crime; if not, a life of indolence on welfare awaits them. It is not capitalism that caused this. It is the government.

New Businesses Thwarted

A second reason why economic advancement is more difficult today than it was for ethnic groups in the past is the obstacles which have been placed in the way of entrepreneurs who desire to open businesses. In the last century, one of the chief sources of employment for newly-ar-rived Jews, Italians, Chinese, and others, was in small businesses started by other members of their own ethnic group. Opening a bakery, tailor shop, or laundry was easy. If you could come up with the monthly rent, you could get a store-front location; if you wanted to hire someone, you simply put him on the payroll. There were virtually no government regulations, licenses, taxes, or inspectors.

Things are vastly different today, of course. The would-be entrepreneur is now faced with a maze of costly paperwork, usually requiring the high-priced services of lawyers and accountants before he can even make his first sale. There are also numerous taxes which he must collect and pay, and volumes of regulations with which he must comply. No wonder that more than eighty per cent of new businesses fail every year, and that many who might have attempted to start new businesses are deterred by the slim prospects for success. So here is a second reason why economic advancement is more difficult today—the hindrance of small business. Is this the fault of capitalism? No. It is the fault of government.

Educational Shortcomings

Lastly, let us consider education. In the previous century, schools concentrated on the “3 R’s.” The student who completed work at even the junior high school level was equipped with the language and math skills he needed to function in the business world. Jewish immigrants made particularly good use of the educational opportunities available to them, quickly rising in such verbal-oriented professions as banking and the law. In contrast, what can we say about the possibilities of learning the language and math skills one needs to succeed in business today? It is close to impossible to learn them in the typical inner-city school. The environment in such schools is not conducive to learning, replete with disturbances and distractions from students who are there only because they are forced to attend.

Even without the problems of violence,’ unruliness, apathy,, and drugs, it would still be nearly impossible for today’s inner-city high school student to learn the skills needed in business, for the simple reason that those skills are not being taught. The public education bureaucracy no longer attaches much importance to such matters as precision in speech and writing. Rather than teach the mental discipline necessary for intelligible sentence structure and critical analysis of written passages, contemporary “English” courses usually revolve around getting the student to express how he “feels” about something he has attempted to read. Young people routinely graduate from such schools without even the reading and writing skills of the third grader of the nineteenth century. Is business to be blamed for not hiring as insurance adjustors people who have great trouble in reading and writing reports, or not hiring as cost accountants people who struggle with addition and subtraction? Clearly not. The blame is to be placed upon the government which runs the public education monopoly.

The foregoing analysis has discussed only a few of the important ways in which the government has made it difficult for blacks and other groups now attempting to improve their economic condition to do so. The elimination of these governmentally-erected barriers to progress is the only true solution. The minimum wage should be repealed. The plethora of taxes, regulations, and paperwork which now prevent the formation of small businesses should be swept away. The monopoly which public schools enjoy ought to be broken through the granting of tuition tax credits to parents who choose to send their children to private schools. Eventually, tax-supported schools should be phased out completely. This is the course of action which will enable minority group members to develop and sell the skills for which businesses compete.

Why Coercive Affirmative Action Programs Cannot Succeed

But what of the other “solution” to this problem, namely affirmative action programs to compel the hiring of minority group members? Should that policy not be used to speed the process? The answer is no, for three reasons.

First, to compel an employer to hire according to government dictates violates the employer’s freedom of contract and association. Good ends do not justify bad means.

Second, it is no favor to the unqualified individual to obtain a job in which he will be constantly pressured and frustrated by his lack of preparation for it.

Third, the history of governmental activism on behalf of specified minority groups leads one to conclude that this course makes matters worse rather than better. The economist Thomas Sowell has pointed out that economic advances for blacks have slowed or retrogressed during periods of greatest governmental efforts to assist them. (Race and Economics, pp. 51-55) Moreover, Sowell also finds that there is an inverse relationship between the extent of a group’s economic progress and the extent of its political power. Blacks, Irish, and American Indians, groups which have relied heavily upon political power to improve their conditions, have advanced the most slowly, while Jews and Orientals, who never had much political power and thus had to rely upon their individual abilities, have done by far the best. Therefore, either by diverting attention from the true solutions, arousing antagonism, or both, the current policy of governmental activism is likely to make matters worse.

Let Self-Interest Take Its Course in the Open Market

In this brief essay, I have argued that the belief that racial discrimination is the fault of prejudice-blinded businessmen who refuse to hire minority group members is entirely wrong. There is probably no institution in society where color is as irrelevant as in the free market. In the commercial world, making money is what counts, and discrimination gets in the way of doing that. Many ethnic groups have come to this country and met poverty and prejudice. In the past, such people were able to advance economically by acquiring the skills which made them valuable to businessmen. Unfortunately, conditions are different now. Due to a variety of governmental actions, those ethnic groups which are presently attempting to rise in the economy have had the deck stacked against them. Instead of following the foolish course of believing that the way to rectify the undesirable results of past governmental interferences with freedom is through yet more interferences with freedom, we must see that the only escape from our difficulties is to let freedom work. Do so, and a lot of self-interested businessmen will make short work of racial discrimination.

  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.