David R. Henderson  

How the Free Market Breaks Down Discrimination

PRINT
The Pride of Homeschooling... Does AD influence AS?...

14612373_10153885469602155_4381198183935144962_o.jpg
In 1992, I went to San Francisco's Candlestick Park to see the Giants play the Cincinnati Reds. To get into the baseball spirit, I wore my blue L.A. Dodgers helmet. (I root for both the Giants and Dodgers, but I figured why buy a Giants' helmet when I already had a Dodgers' one?) I was sitting in the stands when a young man came by selling hot dogs. Because he was about 40 feet away, rather than try to shout above the din, I put up one finger for one hot dog. The young man looked at me, noticed my helmet, pointed to his own head symbolizing my helmeted head, and shook his head as if to say, "No, I won't sell you a hot dog because you're a Dodgers fan." Then he grinned and I grinned, and he passed the hot dog down the row. We both knew that he would sell me the hot dog. There was no way he was going to refuse to make money off me even if I was a Dodgers fan.

This story of how the free market broke down discrimination may sound trivial. If it just had to do with my hot dog, it would be. But the story illustrates a much wider and crucial point: Markets are especially good at breaking down discrimination when what is exchanged is goods rather than labor. Think about how little you know about the politics, race, gender, or even nationality of the person who makes the bread you buy. You don't know because you don't care. What you care about is getting the best deal on bread, and even if this means buying it from someone whom you would hate, you'll still buy the bread. That's why, for example, even book stores whose owners and employees detest Rush Limbaugh still displayed his books prominently. By trying to hide the books, which apparently some stores did for a short time, they would pass up precious sales.

One of my favorite lines in a movie is in the scene in The Magnificent Seven where Yul Brynner tries to persuade the local hearse driver to risk getting shot while taking a dead Indian to be buried in dignity in boot hill. When the driver declines, Brynner asks, "Are you prejudiced?" The driver answers, "When it comes to saving my life, I'm downright bigoted." The market illustrates the opposite point. When it comes to saving their economic lives, even otherwise prejudiced people are downright tolerant.

The above is a slightly edited excerpt from my book The Joy of Freedom: An Economist's Odyssey.


Comments and Sharing


CATEGORIES: Competition , Incentives




COMMENTS (17 to date)
john hare writes:

I have a kind of opposite story. In the early 90s there were a lot of us in the concrete trade that worked together even while competing. Being in the south, white, black and brown get different reactions from various potential customers. Three of us that worked the local system well together were a Black crew that Charles ran, a Hispanic crew that Tony had, and my white crew. On larger jobs we would sub between ourselves in whatever direction was convenient with the result that sometimes the guys that lost the bid were working on the job anyway.

Sometimes Charles or Tony would read a customer and know that he wasn't getting the job that I often didn't know about. He would call me with the numbers and I would go and bid it higher than his bid. Usually either the customer would go back to the lower bid, but often enough, I would get the job anyway even being higher. Result was the same people doing the same job with the customer paying more because I was white. The cut Charles or Tony got was normally comparable to what they would have gotten as primary contractor.

Times have changed and I haven't heard of similar deals lately.

john hare writes:

Allowing for cultural differences, very similar, thanks for that.

Benjamin R Kennedy writes:

Markets can squeeze out the "racial animus tax", but sometimes statistical discrimination is rational. Steve Sailer once cited an example from Ian Ayres’ book Pervasive Prejudice, where black used car buys were generally offered poorer deals - but by both black and white salespeople. This suggests rational optimization rather than animus.

Similarly, quoting David from his Forbes article on paid parental leave:

Think of how employers would react to such a mandate. They would realize that the main people who would take advantage of paid parental leave would be women of child-bearing age. This makes those women less valuable to them as employees. So their demand—the amount they are willing to pay—for women in that category would fall.

Employers statistically discriminate when it is rational to do so. I think it is more controversial to say that race-based discrimination can be rational - the reality is that animus probably has something to do with it, but explains only a part of the story

Rick Bohan writes:

This is the sort of thing that conservatives do that just drives me nuts. You, a well-to-do white guy, sitting in an expensive seat was sold a hot dog even though you had a Dodgers hat on...and that means that there's no prejudice or discrimination ever acting in any economic transaction. Got it.

David R. Henderson writes:

@Rick Bohan,
This is the sort of thing that conservatives do that just drives me nuts. You, a well-to-do white guy, sitting in an expensive seat was sold a hot dog even though you had a Dodgers hat on...and that means that there's no prejudice or discrimination ever acting in any economic transaction. Got it.
Wow! You managed to stick a lot of falsehoods into a short space.
Let’s count them.
“conservatives.” I’m not. I’m a libertarian.
"well-to-do white guy” Check.
“sitting in an expensive seat” Wrong. How do you think I got to be “well-to-do?” It’s, among other things, by sitting in the cheap seats. I thought my line "but I figured why buy a Giants' helmet when I already had a Dodgers' one?” would tip you off on this one, but apparently not.
"that means that there's no prejudice or discrimination ever acting in any economic transaction” Um, no. Not even close.
“just drives me nuts” Well, I’ll let you figure out whether that’s true. You should know.

Robert Schadler writes:

Disappointed at the overreach from what is admittedly a trivial example. Market exchanges encourage strangers, and even those with mutual hostility, to find areas of cooperation and agreement (i.e. exchanges that are mutually beneficial). Even charging extra based on a prejudice may have beneficial results.
But making 30 cents on a hot dog sale is radically different than, say, making $30,000 on a sale of explosives to somebody wearing some hideous symbol. It's a nice anecdote, but not a basis for a broader generalization.

Zeke5123 writes:

@Rick Bohan:

First, Prof. Henderson points out his example is trivial. Nor does he take the extreme position that zero market transactions are affected by bigotry. Instead, he is making the point that market transactions by-and-large reduce the harsh impact of bigotry, as a person who hates Group X may still sell to Group X, such that Group X is not overtly harmed by the seller's bigotry of Group X.

A better example is the Jim Crow South. I think most people believe the Jim Crow South to be a racist "place." Yet they had to pass laws forbidding hiring African-Americans. The market lessened the impact of bigotry on African-Americans (and the government re-imposed it).

Charley Hooper writes:

@Rick Bohan,

When engineers and physicists discuss air resistance, they aren't denying other phenomena and forces, such as gravity. One should clearly think about all forces, such as gravity and electromagnetism. A separate topic is the consider of all these forces in certain situations and how they play out.

The ways that markets break down discrimination is an important "force" in economics. Another topic to consider is whether other forces enhance discrimination or aid in its breakdown and whether there is a lot, a little, or no residual discrimination.

Rick Bohan writes:

Seems like I touched a nerve. It's just that listening to the well-to-do and comfortable "white-splaining" bigotry to the rest of us is tough to listen to. I would have bet that someone would have trotted out that old canard about Jim Crows laws being forced on Southerners that were actually eager to have black folk eat in their restaurants.

I am happy that a couple of other participants pointed to examples that undercut the shaky premise of the original post and did so with far less snark than I managed. We could, of course, come up with many hundreds of such examples from every facet of our economy. In the end, we'd be wondering if abject prejudice has *ever* been overcome by rational economic calculation without the intervention of law...except, perhaps, when selling hot dogs to wealthy white guys with the wrong hat on.

Benjamin R Kennedy writes:

I'll steel man Rick, for fun!

The premise of David's post is that profit motive overrides racial animus:

What you care about is getting the best deal on bread, and even if this means buying it from someone whom you would hate, you'll still buy the bread.

This is the central thesis of the "markets break down discrimination" argument. But is this assertion true? I grant that it is true for David and the hot dog. But I don't think this is globally true. It isn't even generally true for myself.

For example, a few months ago I was at a mall store selling toys and games. I was looking for some fun family games. I found one I liked, and it was even on sale. When continuing to browse, I stumbled upon a section of "adult" party games. This was concerning to me, as I had my children with me. One game on display even had a certain vulgar term prominently displayed with an asterisk replacing one of the vowels. I had a short conversation with the clerk to register my displeasure, and left buying nothing.

These were not people I hated. I didn't even dislike them. It was certainly nothing close racial animus. I simply disapproved of them having the outward appearance of a family toy store, and inside having extremely inappropriate and visible merchandise inside. I told them why I wasn't buying anything, and left.

Furthermore, consider the defense of the Christian cake bakers. Libertarians argue (rightly, I think) that Christian bakers should not be compelled to make cakes that violate their conscience, because this is a violation of their freedom to associate, or not associate. The Christian cake baker is voluntarily hurting their bottom line to take a religious stand. This is, again, contrary to the premise that profit motive will override an impulse to discrimination.

Now, I think you can argue that over time, market forces will cause non-discriminatory bakers will out-compete the Christian bakers and put them out of business - but this is a different argument than the one initially advanced. And it could take generations for all we know.

David R. Henderson writes:

@Rich Bohan,
Seems like I touched a nerve.
I can’t vouch for other people’s nerves, but you didn’t touch mine. It’s simply that I tend to answer people who make false charges.
In fact the excerpt from my book The Joy of Freedom: An Economist’s Odyssey is part of a chapter in which I do indeed show how free markets undercut racism. You can find it cheap on Amazon. Or you can just read this from The Concise Encyclopedia of Economics. Make sure you read to the end and catch the part about streetcars.
Or read this piece on Apartheid from The Concise Encyclopedia of Economics.
@Benjamin R. Kennedy,
The premise of David's post is that profit motive overrides racial animus.
Not that it overrides it--that’s too strong--but that it undercuts it. I recommend that you read the pieces I noted to Rick Bohan above.

Floccina writes:

I think David is right that markets break down discrimination. Marge Schott was a great example of a person who like money more that she liked to discriminate even though she did not like blacks she hired blacks.

Is it a related thing that some Walmart haters shop there?

Benjamin R Kennedy writes:
Not that it overrides it--that’s too strong--but that it undercuts it. I recommend that you read the pieces I noted to Rick Bohan above.

They are unrelated axes. Why couldn't I just as well say "racial animus undercuts the profit motive"? I don't think there is any necessarily correlation between self-interest and racism.

The first article actually makes a point that furthers my case. The bigoted hot-dog vendor will be penalized in the market because (emphasis mine):

Unless customers are willing to pay more for a hot dog delivered by a man than by a woman, higher costs mean smaller profits.

So the question is, why were the hot-dog vendors like this in the first place? Since the entire premise here is that firms are profit-maximizers, we must conclude because it was rational and profit-maximizing strategy. Customers were willing to pay more!

But now, the customers have changed their minds. This is a great thing, but really has nothing to do with markets. The market is responding to social change, not creating it. Saying markets "break down discrimination" is giving way too much credit. That should be given to the force that changed customers' minds.

It is simply tough to argue that all of a sudden, firms started applying profit-maximization at a time when you see a desirable social change. It's way too cute a story. With a racist and bigoted population, markets may just as easily create firms that maximize racist and bigoted behavior. Would you claim at that point that markets could just as easily "build up discrimination"?

Thomas Sewell writes:

Rick,

Want a larger example, with big money and more prejudice at stake?

Donald Sterling had the power and money to hire anyone he wanted as basketball players for his team.

Given his reputed biases, why did he hire mostly blacks to play on his teams? Why did he "help" blacks to the point where the local NAACP gave him awards?

Please give us your analysis.

Benjamin R Kennedy writes:
Given his reputed biases, why did he hire mostly blacks to play on his teams?
Great question, if the market squeezes out discrimination, why does he hire mostly black people?
David R. Henderson writes:

@Thomas Sewell,
Excellent example.
BTW, I posted on this at the time. See here.

Comments for this entry have been closed
Return to top