David R. Henderson  

Obama on How Markets Reduce Racial Discrimination

Pays Cuts: Are They For Real?... On Being Certain...

University of Chicago economist Gary Becker, in his Ph.D. dissertation, later made into a book, The Economics of Discrimination, showed that free markets make racial discrimination costly. His basic argument is that discrimination is a self-imposed restriction on trade that causes the discriminator to do without a good employee, a good tenant, a good product, etc.

In his first book, Dreams from My Father, Barack Obama makes the same point. Discussing the black nationalist newspaper, The Final Call, Obama writes:

The paper also carried a health section, compete with Minister Farrakhan's pork-free recipes; advertisements for Minister Farrakhan's speeches on videocassette (VISA or MasterCard accepted); and promotions for a line of toiletries--toothpaste and the like--that the Nation had launched under the brand name POWER, part of a strategy to encourage blacks to keep their money within their own community.
After a time, the ads for POWER products grew less prominent in The Final Call; it seems that many who enjoyed Minister Farrakhan's speeches continued to brush their teeth with Crest.

I'm not claiming that Obama knew he was making the point that free markets break down discrimination. The very next sentence of the second paragraph in the quote is:

That the POWER campaign sputtered said something about the difficulty that faced any black business--the barriers to entry, the lack of finance, the leg up that your competitors possessed after having kept you out of the game for over three hundred years.

What he doesn't mention is the most likely explanation: most people don't want to discriminate on racial grounds when it comes to buying products.

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CATEGORIES: Political Economy

COMMENTS (17 to date)
Brocko writes:

I have always felt that the free market is the best path to reducing racial discrimination. I have no idea why anyone would say or think otherwise.

Paul Zrimsek writes:

Crest has been around for 300 years? Who knew?

Stewart writes:

Crest has been around for 300 years? Who knew?

Don't be silly. He meant that Minister Farrakhan was over 300 years old, and that the toothpaste industry had been excluding him for nearly the entire time.

zc writes:

And don't forget Aquafresh - with it's appealing red, green, and white colors, it is obviously pro Italian and anti-black.

Farrakhan is a hate-monger. Of course capitalism breaks down racial barriers. When I order something on Amazon, I don't know the color of the nationality of the producer/distributor/etc., and they don't know anything other than that my credit card is good for whatever I'm spending.

The Cupboard Is Bare writes:

"That the POWER campaign sputtered said something about the difficulty that faced any black business--the barriers to entry, the lack of finance, the leg up that your competitors possessed after having kept you out of the game for over three hundred years."

I sometimes wonder if Obama really believes that or if he simply counts on the fact that so many other people believe it that it might give him some political leverage to say it...

Rocky writes:

Quite a bummer that Obama doesn't explicitly come to the same conclusions as Becker.

Brocko: I believe you're absolutely right, but ending racial discrimination via free market seems to take longer than most are happy with. I'm not making a pro-policy argument, however, as I've seen that people who tend to discriminate based on race tend to continue to do so regardless or free market or policy pressures.

Eric H writes:

Thomas Sowell on discrimination in the marketplace:

"Even in South Africa during the era of apartheid, where racial discrimination against blacks was required by law, white employers in competitive industries often hired blacks and in higher occupations that they were permitted to do by the government, and were often fined when caught doing so. This was because it was in the employers' economic self-interest to hire blacks. Similarly, whites who wanted homes built in Johannesburg typically hired illegal black construction crews, often with a token white nominally in charge to meet the requirements of the apartheid laws, rather than pay the higher price of hiring a white construction crew as the government wanted them to do. White South African landlords likewise often rented to blacks in areas where only whites were legally allowed to live.

"The cost of discrimination to the discriminators is crucial for understanding such behavior. Employers who are spending other people's money--government agencies and non-profit organizations, for example--are much less affected by the cost of discrimination. In countries around the world, discrimination by government has been greater than discrimination by businesses operating in private, competitive markets..."

--Basic Economics, p 201

The free market is great at reducing discrimination because it makes discriminators bear the costs of their actions. Sowell offers other examples of market forces overcoming personal prejudices in other books, namely his Economic Facts and Fallacies and Applied Economics: Thinking Beyond Stage One. Farrakhan, because he's a racist and he isn't too bright, took advantage of the market to publicly proclaim his racism, and suffered the consequences. That's "funny ha-ha." The "scary funny" part is that we have a president who thinks Farrakhan's miscalculation is the result "barriers to entry" and a "lack of finance"; i.e. that "black-owned enterprises," and not enterprises in general, are virtuous. Should this surprise us, coming from a man who spent most of his productive adult life in the non-profit sector?

Sowell never pretends that market forces can actually make people like each other. Rather, his point is that market forces soften and divert personal prejudices. I think Sowell might believe that over time, the impersonal forces of market interaction may help us "evolve" past racism.

John Swanson writes:

True, but I reluctantly think that standard economic analysis fails here and overestimates the ability of free markets to reduce discrimination. There are two reasons for this that immediately come to mind.

First, racial discrimination can be a powerful signaling mechanism to show a community that its values are shared by a company. Just as Starbucks purchases more expensive "fair trade" coffee to show its customers that it shares their compassion for the poor, or other companies go "green" to show customers that they share their concern for the environment, companies in the past may have maximized profits by purchasing more expensive white labor to show their customers that they shared their deeply held racist values.

Second, cultural norms provide powerful emotional incentives that can push behavior away from rational profit-maximization. Don't cultural differences play a large role in, for example, CEO pay in Japan versus the United States? Doesn't a military culture of patriotism, self-sacrifice, and service play a huge role in the ability of the military to recruit soldiers--far more of a role than the fairly meager pay offered? I'd argue that models of simple profit-maximization tend to leave out the huge potential influences that culture and values can have on the market. Going against cultural norms can have high emotional costs. And outsiders with different norms will have a hard time entering the market, because both customers and potential employees will be reluctant to associate with a company that doesn't share their most deeply held values.

I think we should be fairly cautious when evaluating the ameliorative effects of markets on discrimination.

hacs writes:

I have doubts about how the markets purge discrimination of several types (not necessarily racism). I always thought the markets seek the most efficient manner to achieve some objectives (production, sale, trade, resource allocation in general), even that the best form could include practices socially immoral, but not illegal. For example, I have observed department of purchases of some firms (imported products or luxury products) nicknamed Elite Models because of the outward appearance of its purchasing agents. In particular, all of them were white women. In accordance with them, they were not responsible for the preferences of their suppliers, getting best offers with beautiful white women (an empirical fact verified by them). That is, they were more efficient acting as if they accept machismo and racism.

I imagine there are many others cases like that.

AB writes:

1.) If discrimination exists in a free market system, is it the fault of the free market, or of the individual discriminating?

2.) Does question 1 even matter? If free markets were to actually encourage discrimination (which doesn't appear to be the case most of the time) would certain policies actually be effective in reducing it? Would they remain effective over time? Could there be a shift from market discrimination to political discrimination if that was the case?

3.) If there is discrimination based on cultural norms (which is a good point), would it last in a free market system? Does that not fit directly into Beckers study as marketeers that place self-imposed restrictions on themselves?

Eric H writes:

John Swanson--

I think Sowell's example itself is a valid response to both your points.

In your first point you claim that a firm might use discrimination to signal that it is on the same cultural wavelength as the consumers of its products or society at large. If this were broadly true (and I wouldn't want to categorically deny the existence of firms that would do such a thing) then South Africa would be the last place we would expect to see firms hiring the intended victims of state-sponsored discrimination policies. If South African firms valued their racist signal emissions more than their bottom line, you would expect extra-vigorous compliance with those policies. Even if it were true, employers in a free market would have to compete with other firms that chose not to comply. The discriminators would place themselves at a cost disadvantage relative to non-complying firms.

Sowell's example refutes your second point in a round about way. One would assume South African culture was basically racist. Yet market forces, or rather the market inertia of two parties seeking mutually beneficial exchange (white firm owners and black laborers), made those cultural forces largely irrelevant, from the point of views of all the transacting parties, including the consumers who purchased commodities produced by the intended victims of state-sponsored racism.

I'm reminded of a funny story about Armen Alchian that Walter Williams told in his Econtalk interview. Williams was telling Alchian something about the differences between Williams and his wife when it came to identifying who was a friend and who was an enemy. Alchian responded: "But Walter, have you considered a third possibility, that people might not give a damn about you one way or the other?"

To me, that quote sums up what the free market can do to racism. If we use racist signals less in the "market" portion of our lives, maybe the instinct to do so will wither away. I think Russ Roberts has elaborated on this point too: by freeing us from having to love or hate those with whom we transact, the market gives us all a chance to focus our emotional energies on the connections that matter, those with family, friends and colleagues.

John Fembup writes:

Most people may not even know whether they are "discriminating". Who, exactly is involved in producing the consumer goods we buy? Do we know? Can we know? Most times, does it even matter to us?

Milton Friedman, retelling the story of the pencil, observed that the people who contributed toward producing the pencil "live in many lands, speak different languages, practice different religions, may even hate one another - yet none of these differences prevented them from cooperating to produce a pencil. How did it happen? Adam Smith gave us the answer to hundred years ago."

If these conditions are present in the production of goods such as a pencil, how unlikely can it be that similar conditions are not also present in the consumption of such products? In other words, bias against racial discrimination would be a logical, unintended consequence of the actions of many people, each seeking his own interest - and effectively cooperating without regard to race or other non-economic factors - thru the means of voluntary exchange.

q writes:

in many situations, i agree with you. but how would free markets solve the following situations:

-- i am a realtor selling houses in a subdivision inhabited by white families and i believe that the current occupants of the subdivision are racist. due to this racism, if i sell a house to a black family, it would lower the perception of value for all houses in the subdivision. on one hand, since i am paid on commission, i want the value to remain high, so i decide not to show houses in this subdivision to blacks.

-- i need to hire someone as a salesman for product X, but i believe that my customers are racist and will not buy from a person with black skin.

John Fembup writes:

You assume a "free" market - which this country does not have. But here is how I think our system of largely voluntary exchange within the framework of law and public policy, works in the instances you cite:

1. Unless you are the only realtor working in that neighborhood, another will make the sale to a qualified buyer. That will cost you income.

2. Your condescending attitude toward your customers will eventually harm your business, and at the very least limits it.

So go ahead, sell to, or hire whomever you choose, based on any non-economic reason you like. When you fail to make a sale, or fail to hire the best people you can, someone else will, often a competitor. That weakens your business also.

These comments ignore the option of my complaining to the authorities about the suspicious excuses you gave me for the decisions you made. Although I don't believe that government rules effectively overcome racism I do think that a system of largely voluntary exchange flows around it and over it.

Joe writes:

Markets are the best way toward equality, if only the people that participated in those markets did not have any biases they brought with them. In production processes or impersonal transactions this is no big deal, we do not know whom we are transacting with so our biases cannot effect our decisions. In labor markets, our biases are VERY strong, so there is discrimination.

The most efficient and nondiscrimination labor markets are sports labor markets where ability and skill and their contribution to organizational success are of utmost importance;

But in most jobs, Candidate A,B,C,D....Z would be equally competent, so our minor bases play a large role in who gets interviewed, let alone who gets hired.

Mark writes:

Clearly, between the time he wrote that book and the time he ran for President, Obama learned a lot more about how to create a successful brand.

Bill writes:

I think this post far overreaches Becker's findings. Also, how does a consumer good like toothpaste being purchased indiscrimnately by a minority group lessen racial discrimination?

If discrimination does make economic sense, which it often does, then markets discriminate with gusto. The slave and cotton trade come to mind as a historic example of where markets made discrimination and its effects much worse.

This scenario persists today: Cracker Barrel's official policy until recently was convincinly shown to be one of not hiring gay employees because it thought (probably correctly) its other customers would not like it. Housing markets have historically been notorious (and to some extent remain) discriminatory, simply because it makes economic sense to discriminate against minorities if not doing so will drive away a larger number of majority consumers.

In the above two examples, legislation and activism, and not "markets" reduced the discrimination in the markets.

Yes, not hiring Jackie Robinson imposes a cost on the baseball team that won't make it to the world series and therefore will lose out on more ticket sales and promotion revenue. Even with this example of an objectively and easily observable superior employee, however, a civil war, a few constitutional amendments, civil rights legislation, and over 100 years were required before the market facilitated Jackie Robinson being hired. Granted, after he was hired, the market played a large part in decreasing racial discrimination by facilitating the broadcasting baseball games.

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