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Wednesday, December 9, 2020

Why the NASDAQ’s Attempt to Advance Diversity Through Coercion Is the Wrong Way to Go

Our joint possibilities are expanded by voluntary diversity, but involuntary diversity can increase social balkanization.

Image Credit: victoriapeckham

The inherent benefits of diversity are a common article of faith in our democratic/populist times. Its “market share” of public discourse about universities, businesses, politics, entertainment, etc., has risen sharply. Anna Holmes wrote in the 2015 New York Times Magazine about “the recent ubiquity of the word,” and that trend has only accelerated since.

The most recent example is NASDAQ’s proposed requirement that boards must have at least one woman and one minority or LGBTQ director for companies to be listed. That follows on the heels of California’s new mandatory diversity standards for companies headquartered there. The justification, as Michael Hiltzik wrote about such requirements, is that “Those companies plainly recognized that diverse boards are good for their bottom line.” In fact, Hiltzik termed the NYSE’s less coercive approach—creating an advisory council aimed at “connecting diverse candidates with companies seeking new directors” as “pretty thin gruel,” clearly not up to snuff on the diversity bandwagon.

That comparison is bothersome for anyone who believes in liberty, however, because the NASDAQ rule (as well as California’s new requirement) would be coercive, while the NYSE approach would not be. That is, the former forces a form of diversity on firms who may not agree that it would be good for their bottom lines, given the circumstances they face, while the latter does not coerce those firms.

I would not advance the interests of ‘my group’ against those of others, because I believe in everyone’s self-ownership and the derived requirement for relationships to be voluntary.

The proposed NASDAQ rule and others that share its coercive nature reflects America’s often loud discussions that proceed as if diversity was the relevant end desired, period.

However, picking at least one member from each of particular designated groups is a weird form of diversity. The member chosen will almost certainly be a member of the elite, because they are closer to the skill and experience set a board is looking for. But choosing a “diversity” member who is from the elite does little to expand the diversity of views beyond that of the elite. And that does little to guarantee that the interests of others in those groups are incorporated or advanced, even though diversity rhetoric presumes that will be the case. I am an illustration. I am a white (actually formerly freckled now turning pinkish) male, but as a libertarian, I would not advance the interests of “my group” against those of others, because I believe in everyone’s self-ownership and the derived requirement for relationships to be voluntary.

When members of one group are pitted against those of other groups in a zero- or negative-sum “game,”  diversity can easily increase divisiveness.

There is also the all-but-ignored question of whether the form of diversity chosen (for others) expands our joint possibilities or contracts them. Our joint possibilities are expanded by voluntary diversity, but involuntary diversity can increase social balkanization, undermining the asserted goal. When members of one group are pitted against those of other groups in a zero- or negative-sum “game” (one more directorship for “us” is one less for “you”), as also illustrated by the current infighting of “diversity” groups over who should be given which places in the coming administration, diversity can easily increase divisiveness.

In fact, such divisive diversity tends to not only divert our focus away from the greatest engine humanity has discovered for turning diversity into mutual benefits–free markets—but to undermine it. Free markets, which depend on people’s freedom to make voluntary arrangements, turn diversity into widespread shared gains, facilitating social cooperation, while coerced diversity relies on imposing harms, crowding out social cooperation possibilities.

Individuals have diverse tastes, backgrounds, cultures, experiences, circumstances, etc., and all those differences can produce disagreements about the values of goods and services. Market exchange, however, allows all to benefit from those differences. The reason is that voluntary trade provides benefits that exceed costs to both parties. Thus, divergent values that arise from uncountable differences lead to exchanges that create wealth for all involved. Everyone gains from their diversity, with no one’s desires ignored or overridden simply because they are different in some way. In contrast, coercively imposed diversity benefits whichever groups can politically dominate by imposing burdens on others.

Places where different ideas and customs have come into voluntary contact have always been primary sources of new and better ways to do things.

Individuals have diverse skills, abilities, prior investments, traditions, climates, etc., that also lead to very different production costs across people and places. Consequently, specialization in production for exchange with others can dramatically lower costs and increase our capabilities to supply what people want, further expanding mutual gains from diversity. But coercive diversity (like mandating the growing of particular crops where the climatic conditions are unsuitable) undermines those gains.

Places where different ideas and customs have come into voluntary contact have always been primary sources of new and better ways to do things. “Could what they do work better for me than what I am doing now?” motivates communication, evaluation, application, imitation and modification that turn diversity into benefits for others.

That is why trade hubs, particularly ports, have always been centers of entrepreneurship and advance, and why cities have been the incubators for vast amounts of innovation, which no one could impose from without. Coercively increasing the separateness of groups and the distrust between them, however, undermines this highly productive, creative interaction.

Free market arrangements also produce mutual benefits from dynamic change. Our diversities of time, place and circumstance means that some of us learn new productive information that others do not yet know. When such discoverers act on that information in markets (e.g., buying more of a good discovered to soon be of greater value) they communicate the resulting changes in relative scarcities faster and more accurately than any other social communication mechanism. Consequently, fewer mistakes are made, benefitting all. However, anything that increases group separatism and distrust, rather than openness to peaceful relationships, depreciates incentives to seek out such information or productively communicate it to others.

Americans would do better by focusing instead on advancing voluntary arrangements which allow all to peacefully advance their ends, even when they differ.

Diversity among individuals is a fact. But whether it is a social benefit in fact depends on whether that fact is used to create excuses to fight each other for special treatment or offers members mutual benefits. Recent efforts have focused on “solutions” representing the former, overlooking that, as Dwight Lee put it, “politicizing our differences is far more likely to make diversity a source of conflict than a cause of celebration.”

Americans would do better by focusing instead on advancing voluntary arrangements which allow all to peacefully advance their ends, even when they differ.

At the end of Hiltzik’s article, he calls the NASDAQ proposal, “a step forward in a direction that American business has been moving toward on its own. But an extra push cannot hurt a good cause.” However, if businesses are in the process of adjusting in the desired direction without coercion, it is hard to see why coercion is necessary now.

And the second statement is false. The “extra push” he and many others endorse threatens to convert voluntary diversity into involuntary diversity, which would undermine the primary means we have to not just live with, but benefit greatly from, diversity.


  • Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network.

    In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).