All Commentary
Thursday, March 19, 2015

Trading with “The Other”

Can mutual benefit overcome racism?

Just after my wife and I got married, a real estate agent showed us an apartment owned by “a woman of a certain age.” We loved it! We had been apartment hunting all over the city and were relieved to finally find a place that had everything we wanted at a reasonable rent. Imagine our shock when the agent told us the woman didn’t want to rent to us because of our race.

All three of us were upset and disappointed, but rather than raise a big fuss, my wife and I decided to look elsewhere.

Some weeks later, after we still hadn’t found anything we liked, the agent called and told us the landlady had changed her mind and that she would rent us the unit after all. My wife and I thought long and hard about whether to take it. Did we really want to rent from someone like that? In the end, we did, because we were so tired of looking.

We all managed to get along. In fact, by the time we bought a place of our own and moved out of that apartment four years later, we were on very friendly terms with her and had been invited into her home more than once for cookies, tea, and conversation.

There are important lessons in this story.

Controls on rent

First, beyond the basic lesson that a free exchange will take place only if both parties expect to benefit, there is the lesson that trade can bring together people whose differences might otherwise keep them apart. Profit-seeking gives us an incentive to overcome the worst of our prejudices. We can learn that the stranger with whom we trade shares with us a set of basic values, such as honesty and fair dealing. Fear and misunderstanding hinder trade, but trade can minimize fear and misunderstanding.

Our story illustrates a second lesson: if you want to indulge in racial discrimination in a free market, you’ll have to pay for it — literally. The same goes for discrimination based on gender, sexual orientation, religion, and so on. I can’t say for certain that our landlord’s inability to rent the apartment to anyone else after she turned us down was the only factor — I suspect the real-estate agent probably pestered her about it, too — but I’m pretty sure it was a big factor. The cost of her discriminating against us was the rent she didn’t get. Some people might be willing to pay for discriminating, but — other things equal — probably fewer than if discrimination were costless.

What if there had been a long line of people waiting to rent her apartment, if there had been more people willing and able to pay than there were apartments to rent — a shortage? Such shortages occur under rent control, when the legal maximum rent is set below the market rent. In that case, not only does the monetary cost of discrimination fall to zero — because rejecting us would simply mean renting to someone else eager to pay the below-market rent — but landlords can simply pick and choose who the lucky ones might be based merely on their personal preferences. Under rent control, there is no need to overcome significant prejudices.

Social psychologists have confirmed that we all have a strong bias toward “homophily,” or associating with people who are very much like us. Race is a strong factor here. Profit seeking in markets can offset that tendency, but by the same token, in the absence of freely adjusting prices to ration scarce resources, our biases are less constrained. While price ceilings on housing have a host of negative consequences, unleashing our prejudices is one of the uglier ones. And few realize it.

Controls on wages

A price ceiling, a maximum legal price, is one form of price control. Another is a price floor, such as a legal minimum wage, and it has the same negative consequence.

Many left-progressives support minimum wage laws because they want to help the poor and certain minority groups. Mayor Bill de Blasio of New York, for example, recently came out strongly in favor of a large raise in the local minimum wage. Employers can adjust to higher mandatory wages by cutting back on work hours or on worker benefits such as flexible schedules, food discounts, and the like. But one bad consequence that gets less attention, even from people who oppose raising the legal minimum wage, is how minimum wage laws enable discrimination of various kinds, including racial and ethnic discrimination, which modern progressives claim to abhor.

Similar to a free housing market, in a free job market, if you discriminate against someone, for any reason, who is capable of doing a good job for you, you’ll pay the price of losing that person’s competence and choosing someone less competent. If you don’t hire the most qualified applicant because she’s a woman, then the price you pay is higher, the better the job she could have done than the less-qualified man you hire instead. It’s the same with discriminating on the basis of race.

Again, if there were a large pool of unemployed people with different skill levels from which to choose, indulging in discrimination would be less costly. That’s precisely what tends to happen when government sets the legal minimum above the market wage rate. A chronic surplus of labor called “unemployment” ensues. Modern progressives claim to support minimum wage laws (as well as rent controls) to help the least well-off in society, who are disproportionately African American or Hispanic. But the effect of minimum wage laws is to make it easier for employers to indulge in racial discrimination, again because it costs less to do so.

And when the minimum wage is raised, employers have an incentive to hire only people with better job skills, who will be worth the higher wage, leaving unemployed or underemployed those whose skills would best be developed on the job. Many of the latter are young and from the racial minority groups modern progressives would most like to help.

The interventionist dynamic

An unintended consequence of this regulation is typically more government intervention. That is, in today’s ideological milieu, the political response to the housing shortages and discrimination that result from government intervention is to call for more intervention: well-meaning but more cumbersome regulations, costly subsidies, and high taxes that attempt to address the artificial shortage of opportunities in housing and employment for targeted minorities.

The solution begins with identifying what’s wrong and addressing the problem with good ideas, sound thinking, and rational action. An effective cure for the destructive ignorance my wife and I encountered is to preserve the freedom to associate, or not, with people of our choosing — as long as we aren’t shielded from the consequences of those choices by misguided public policy.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.