David R. Henderson  

Murphy on Discrimination

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This month's Feature Article on Econlib, by economist Robert Murphy, is the nicest succinct article I've seen on how free markets make people pay a price for the kind of discrimination that most people abhor. He points out also that much of the discussion of discrimination in the South seemed fuzzy about whether it was the free market or government regulation in action. Great paragraph:

It's also important to mention that in the case of segregated lunch counters--the issue at the heart of the Rand Paul controversy--this was not a purely free-market outcome. Remember they weren't called Jim Crow "best practices," but were Jim Crow laws. We can never know for sure what the racial policies of Southern businesses would have been in the 1950s in a genuine laissez-faire environment. What we do know is that discriminatory business owners would have more acutely felt the costs of their policies without government mandates enforcing them on the whole industry.


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COMMENTS (12 to date)
Blackadder writes:

It's worth noting that Title II only applied to certain types of businesses. Under Title II of the Civil Rights Act, racial discrimination was prohibited for restaurants, but not grocery stores, for hotels, but not department stores, for movie theaters, but not book stores. Some gas stations were prohibited from declining service based on race (e.g. if the gas station served food), while others remained free to do so. Indeed, so far as I am aware, if Barnes and Noble or Wal-Mart were to announce tomorrow that they weren’t going to serve blacks, nothing in Title II would prevent them from doing so.

If market forces were insufficient to break down segregation and discrimination by private businesses, then we should have seen a divergence after the Civil Rights Act was passed in the level of discrimination in businesses that qualified as public accommodations as opposed to businesses where Title II did not apply. On the other hand, if market forces are sufficient to break down segregation in the absent of legal support, then we ought to expect discrimination to be reduced for both types of businesses at about the same rate.

As far as I am aware, racial discrimination lessened about as quickly for non-public accommodation as for public accommodations after the Civil Rights Act became law. If there was some divergence in the level of discrimination between Title II and non-Title II businesses such that, say, blacks could go to the movies freely but couldn’t buy a TV at the local department store, I’ve never heard of it.

TTE writes:

This was an excellently written article, strong yet easy to understand. I'm planning to print it out and give it to a friend who I've been trying to persuade (mostly unsuccessfully) on this issue.

I have two small complaints. The first, which is quite minor, is that the article didn't mention that even if consumers were willing to pay the cost of discrimination (not that it could last for very long because consumers that impoverish themselves would over time exert less influence on the market than consumers who refused to discriminate unjustly, just as racist businesses would yield to fair-minded ones) the effect would be relatively small, because most market exchanges are anonymous. Discrimination based on bigotry could only be felt by workers who deal directly with consumers, a minority group to be sure. The consumer model of discrimination is often held up as proof that discrimination can be profitable in a free market, but even at its strongest consumer discrimination would not have nearly as much of an impact as employer discrimination.

The second is that the treatment of government responses to discrimination is too brief. Since it is an article about discrimination, not anti-discrimination law, this is completely understandable (and so perhaps not too brief at all), but since the ongoing discussion I'm having with my friend is primarily about such matters I was particularly sensitive to this. The argument does an excellent job of showing that anti-discrimination law is either impossible or unnecessary, but just in case any skepticism remained a brief explanation of the unintended negative consequences imposed on the "protected" minorities by anti-discrimination law would have left the skeptic with no argument for government intervention.

However, let me emphasize that these are minor quibbles, and I thought the article was done superbly.

Mr. Econotarian writes:

The truth is that there were two major legal cases after the Civil Rights Act of 1964 that were explicitly "free maket" discimination.

Both Katzenbach v. McClung (Ollie's Barbecue) and Heart of Atlanta Motel v. United States claimed that the federal government had no right to impose any regulations on small, private businesses

On the same day, the Supreme Court heard both challenges to Title II, and found against both companies, holding (without dissent) that:

"Congress acted within its power to protect and foster commerce in extending coverage of Title II to restaurants serving food a substantial portion of which has moved in interstate commerce, since it had ample basis to conclude that racial discrimination by such restaurants burdened interstate trade"

and

"Title II of the Civil Rights Act of 1964 is a valid exercise of Congress' power under the Commerce Clause as applied to a place of public accommodation serving interstate travelers."

wlu2009 writes:

I think Murphy neglects the impact of networks in persistent free market discrimination. If there is an open position in a predominantly white firm an owner has two options. Post an opening publicly and interview candidates of all color, or ask a current employee to refer someone. The second option is far cheaper and will likely lead to a white employee being hired over an equally qualified black employee. The only way for the black employee to overcome this is to bid for the job at a lower wage, one that more than compensates for the cheaper process of hiring from within the network. I don't think this is an ideal outcome. Not saying there is an intervention out there to fix it, but this if often unaddressed in libertarian discrimination critiques.

david writes:

@Blackadder

It is also worth remembering that the post-reconstruction Supreme Court struck down laws that obliged unequal treatment; thus, Jim Crow laws typically permitted but did not require unequal treatment. e.g., they would allow restaurants to expel or reseat customers at will - how this would actually be done would be left to the restaurants.

If the market were truly effective at punishing discrimination, we should have observed unequal treatment only very rarely, in the instances where laws obliged separation and economic conditions contrived to ensure that smaller groups are uneconomical to serve. Of course, this is hardly what happened.

Also remember that businesses in the North, like theaters, also often segregated - despite the absence of Jim Crow laws at all.

shecky writes:

I don't think it's particularly controversial to claim that free markets make people pay a price for the kind of discrimination. What is missing in this equation is that local and State majorities were perfectly willing to tolerate or even actively champion discriminatory laws, despite the cost to their own economic prosperity. Perhaps it was viewed as a kind of "Defend Our Sense Of Order Tax", which seems rather charitable.

It's smart to point out the contradiction in relying on majoritarian government to fix the problem, when majoritarian rule was required to ensconce discriminatory laws. But was it really necessary to exclude the fact that appeals for nullifying discriminatory practices laws and had to be answered by federal powers, where larger majorities rightly found such laws to be unfair? If victims of discriminatory laws shouldn't have appealed to the larger majority, who should they have appealed to?

While it's true that most shocking abuses of minorities and women in history occurred under the regimes of tyrannical governments, that point is oddly out of place here, where it might be argued that government action may have been the tipping point in eliminating the odious practice and the mindset that allowed it to flourish. I can understand the libertarian sensibility to declare that government can't really do good. But if the argument here is that governmental action in this case was tyranny for the worse, then the point has yet to be successfully made.

Blackadder writes:

David,

I think you are mistaken about how Jim Crow worked. Here, for example, is a portion of a Georgia law:

"All persons licensed to conduct a restaurant, shall serve either white people exclusively or colored people exclusively and shall not sell to the two races within the same room or serve the two races anywhere under the same license."

So it wasn't simply that businesses were permitted to discriminate on the basis of race. In many cases they were required to.

david writes:

@Blackadder

Please see my second paragraph.

Liam writes:

I liked this article very much however there were some areas where there was no consideration.

The first would be discrimination in Corporations. If you have ever worked for a large multi-national you will see a vast sea of different nationalities, religions, colour and race however discrimination, in my opinion, has almost no penalty. Take for instance the example of the owner hiring a chef. He suffered an economic consequence by hiring someone who was not best qualified. But in large corporations the cost penalty of 1 employee’s actions is spread among the entire corporation and negligible but has a major impact on the 1 person singled out for discrimination. And though it does not represent the opinion of the company itself, it does permeate the work environment. I have seen this first hand as colleagues who are clearly qualified and top producers are overlooked due to discrimination. Without Government oversight corporations would have no incentive to weed out people who have a negative impact on their revenue and Human Resource Departments would have a much diminished impact.

Another type of discrimination is one I see everyday living here in Singapore. As a white male the Asian business owners (and so far I have not come across any business that has not done this) assume that I have a high paying job and so increase the cost of the product or service. As a minority, my cost of business to them represents a chance to increase revenue and should I take my business elsewhere (which I often try to do) then they have lost almost nothing since again the cost of lost business is spread among a multitude of consumers who do not incur a penalty and in some case further offset by the fact that I am ignorant of the true cost and so pay or do not have the time to compare the cost and pay. I have seen this personally in everything from taxi drivers to repairmen to restaurants to retailers. Worse is that even if it were widely advertised that a certain business discriminates against whites in Singapore there would be almost zero affect on their business as most Singaporeans here feel it is perfectly acceptable

While I do not favour Government regulation, there are times when I see no other recourse to ensure fair play for women and minorities.

Blackadder writes:

David,

Your second paragraph is based on the false premise that Jim Crow permitted discrimination but didn't require it.

rpl writes:

wlu2009,

How is your scenario any worse for black people who are not part of the network than it is for white people who are also not part of the network? It seems like you are falling into the trap of assuming that if you are white, then you must perforce be part of "the network". Of course, that's not true. It is true that there are probably more and more valuable networks that include mainly white people, but this is just another example of the lingering impacts of slavery and Jim Crow, which people certainly do address. I don't see why the network effects need to be addressed separately.

wlu2009 writes:

@rpl,
It may not be worse for "a" black person vs an out of netwerok white person, but this scenario I describe still implies that network effects mean equally qualified blacks are less likely to be awarded the job. The network imposes a cost on considering the black candidate because it is inconvenient. Sure it imposes a cost on considering the non-network white, but you are much more likely to be out network, through no fault of your own, if you black than if you are white. I think this should be addressed separately because Murphy's agrument is essentially "The free market punishes firms who refuse to consider equally qualified black candidates, and customers who insist on discrimination pay a premium for it". I suggest that that is not enough, and that in many cases, the free market rewards in-network, predominantly white hiring, which we can expect to persist.

Of course, this may be mitigated over time as values and norms change such that people use race less as an identifier and therefore less as a network criterion. But I think networks are fairly rigid and progress would be slow. Again, I'm not suggesting there is a government intervention that would solve more problems than it causes, but it still seems to me to be an under-addressed topic.

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