The Economics and Politics of Discrimination; G. Leef

from being caused by capitalism, is in fact the result of governmental interferences with capitalism. We shall see that the proper response to the problems of blacks and other ethnic minorities in society is not more governmental coercion, but to eliminate that which we now have. Businessmen are in business to make money. They are engaged in a continuous struggle to increase rev enues and decrease costs. The first crucial point we must grasp is that racial discrimination imposes costs upon businessmen who practice it. For example, purchasing decisions are generally made upon the crite ria of least cost and best service. If a businessman refuses to deal with a black supplier who could offer the lowest price and/or best service, he has imposed additional costs upon himself. Similarly, to refuse to hire 118 THE ECONOMICS AND POLITICS OF DISCRIMINATION 119 qualified persons because of their skin color means that the business man must devote more time andre sources to searching for a person to fill the job, and perhaps having to settle for a less well qualified candi date.

The Price of Prejudice Not many businessmen prefer prejudice to profits. As economist Milton Friedman puts it, c~ busi nessman or an entrepreneur who expresses preferences in his busi ness activities that are not related to productive efficiency is at a dis advantage compared to other indi vidualswho do not. Such an individ ual is in effect imposing higher costs on himself than are other individu als who do not have such prefer ences. Hence, in a free market, they will tend to drive him out." (Capital ism and Freedom, pp. 109-110) In theory, therefore, we would ex pect to find little discrimination in a free market because of the' self-in terest of businessmen. This theory finds strong support from historical evidence. First, the Jim Crow laws of the states of the South specified that certain jobs in industry could be done only by white workers. But if the industrialists were intent upon discriminating, why did this prefer ence have to be enacted into law?

The answer is that to preserve the status of the white worker, there had to be a legal restraint upon employers. In the absence of the law, competition from nondiscriminat ing employers would have urged all to hire and promote blacks and whites on the basis of economic value, not race. A second piece of evidence comes to us from South Africa, and again shows the power of business compe tition to reduce racial discrimina tion. The reason for the adoption of the policy of Apartheid in the 1930s was that white workers were in censed that so many blacks were being hired and were competing with them in pay and promotions. There fore, they persuaded the .govern ment to restrict the better-paying jobs to whites only. Once more, we see that business was the enemy of discrimination, government the cause. Further evidence on the relation ship between capitalism and dis crimination is found in the consid erable affluence many cCfree persons of color" in the antebellum South were able to achieve. These were free blac.ks who had no political power at all, but could own property and do business as they wished. For example, in pre-Civil War New Or leans, free Negroes owned one-fifth of the total taxable property in the city. (Race and Economics by Thomas Sowell, p. 40) Thus, even while the government discriminated against these people, according them no po litical power, capitalism gave them 120 THE FREEMAN February economic power restricted only by their abilities to satisfy the wants of consumers.

Conditions Have Changed Next, let us examine the experi ence of other ethnic groups which have migrated to the urban centers of the United States in search of eco nomic progress. Jews, Italians, Chinese, Irish, Japanese, and many others settled here and were usually despised and subjected to legal ha rassment for decades after their ar rival. Nevertheless, members of these groups have been highly suc cessful in moving into the main stream, and frequently into the highest strata of American life. Dis crimination did not keep them de pressed. Why were they able to ad vance whereas today's bottom-of-the ladder minorities seem to be per manently stuck there? Have condi tions changed in some way which would explain the difference? The answer is yes. The great influx of blacks into the cities began after World War II. Prior to that time, most of the country's black population had lived on farms in the rural South. With the move ment to the cities, the process of eco nomic advancement began for the majority of the black population, just as it had for the Jews, Italians, Chinese and others in the previous century. What factors are militating against blacks now that did not hinder the progress of the earlier groups? A rather large number of such factors could be identified, but I wish to concentrate on three of the most significant.

Minimum Wage Laws The first difference to which we can point is the existence of mini mum wage laws. The minimum wage came into existence as a part of the Fair Labor Standards Act, passed during the New Deal. It sets a wage floor below which an employer may not pay. The stated reason for this law was to raise the income of poor workers. (The real reason was that labor union leaders hoped that it would stifle competition from lower wage areas, such as the South. For this reason, the minimum wage bears a kinship to the Jim Crow laws discussed above.) What the leg islators either did not see or chose to ignore is that the amount of one's pay depends upon his economic value to his employer. If the law says that you, the employer, cannot pay any~ one less than $2.00 per hour, you are not going to hire people who, be cause of lack of skills and work ex perience, cannot produce at least $2.00 worth of revenue per hour for you.

What the minimum wage does, then, is to prevent people from get tinga start. It prevents a person from going to an employer and say ing, ~~I know I don't have any job 1981 THE ECONOMICS AND POLI'rICS OF DISCRIMINATION 121 skills, and I don't have a work record to prove my reliability, but I'm will ing to start at a low wage. All I would like is a chance." That is ex actly how the earlier immigrant groups began their climb up the eco nomic ladder; but today that option is gone. Because they cannot find work, millions of young blacks, His panics, and others remain unem ployed and unemployable. Fre quently they turn to crime; if not, a life of indolence on welfare awaits them. It is not capitalism that caused this. It is the government. New Businesses Thwarted A second reason why economic ad vancement is more difficult today than it was for ethnic groups in the past is the obstacles which have been placed in the way of entrepreneurs who desire to open businesses. In the last century, one of the chief sources of employment for newly-ar rived Jews, Italians, Chinese, and others, was in small businesses started by other members of their own ethnic group. Opening a bak ery, tailor shop, or laundry was easy.

If you could come up with the monthly rent, you could get a store front location; if you wanted to hire someone, you simply put him on the payroll. There were virtually no government regulations, licenses, taxes, or inspectors. Things are vastly different today, of course. The would-be entrepreneur is now faced with a maze of costly paperwork, usually requiring the high-priced services of lawyers and accountants before he can ~ven make his first sale. There are also numerous taxes which he must col lect and pay, and volumes of regula tions with which he must comply. No wonder that more than eighty per cent of new businesses fail every year,and that many who might have attempted to start new businesses are deterred by the slim prospects for success. So here is a second rea son why economic advancement is more difficult today-the hindrance of small business. Is this the fault of capitalism? No. It is the fault of gov ernment.

Educational Shortcomings Lastly, let us consider education. In the previous century, schools con centrated on the ((3 R's." The student who completed work at even the ju nior high school level was ·equipped with the language and math skills he needed to function in the busi ness world. Jewish immigrants made particularly good use of the educa tional opportunities available to them, quickly rising in such verbal oriented professions as banking and the law. In contrast, what can we say about the possibilities of learn ing the language and math skills one needs to succeed in business to day? It is close to impossible to learn them in the typical inner-city school.

122 THE FREEMAN February The environment in such schools is not conducive to learning, replete with disturbances and distractions from students who are there only because they are forced to attend. Even without the problems of vi olence: unruliness, apathy, and drugs, it would still be nearly im possible for today's inner-city high school student to learn the skills needed in business, for the simple reason that those skills are not being taught. The public education bu reaucracy no longer attaches much importance to such matters as pre cision in speech and writing. Rather than teach the mental discipline necessary for intelligible sentence structure and critical analysis of written passages, contemporary ((English" courses usually revolve around getting the student to ex press how he «feels" about some thing he has attempted to read. Young people routinely graduate from such schools without even the reading and writing skills of the third grader of the nineteenth cen tury. Is business to be blamed for not hiring as insurance adjustors people who have great trouble in reading and writing reports, or not hiring as cost accountants people who struggle with addition and sub traction? Clearly not. The blame is to be placed upon the government which runs the public education monopoly.

The foregoing analysis has discussed only a few of the important ways in which the government has made it difficult for blacks and other groups now attempting to improve their economic condition to do so. The elimination of these govern mentally-erected barriers to progress is the only true solution. The minimum wage should be re pealed. The plethora of taxes, regu lations, and paperwork which now prevent the formation of small busi nesses should be swept away. The monopoly which public schools enjoy ought to be broken through the granting of tuition tax credits to parents who choose to send their children to private schools. Eventu ally, tax-supported schools should be phased out completely. This is the course of action which will enable minority group members to develop and sell the skills for which busi nesses compete. Why Coercive Affirmative Action Programs Cannot Succeed But what of the other ((solution"

to this problem, namely affirmative action programs to compel the hir ing of minority group members? Should that policy not be used to speed the process? The answer is no, for three reasons. First, .to compel an employer to hire according to governmen t dic tates violates the employer's free dom of contract and association.

1981 THE ECONOMICS AND POLl'rICS OF DISCRIMINATION 123 Good ends do not justify bad means. Second, it is no favor to the un qualified individual to obtain a job in which he will be constantly pres sured and frustrated by his lack of preparation for it. Third, the history of governmen tal activism on behalf of specified minority groups leads one to con clude that this course makes mat ters worse rather than better. The economist Thomas Sowell has pointed out that economic advances for blacks have slowed or retro gressed during periods of greatest governmental efforts to assist them. (Race and Economics, pp. 51-55) Moreover, Sowell also finds that there is an inverse relationship be tween the extent of a group's eco nomic progress and the extent of its political power. Blacks, Irish, and American Indians, groups which have relied heavily upon political power to improve their conditions, have advanced the most slowly, while Jews and Orientals, who never had much political power and thus had to rely upon their individual abili ties, have done by far the best.

Therefore, either by diverting at tention from the true solutions, arousing antagonism, or both, the current policy of governmental ac tivism is likely to make matters worse. Let self-InterestTakeIts Coursein the Open Market In this brief essay, I have argued that the belief that racial discrimi nation is the fault of prejudice blinded businessmen who refuse to hire minority group members is en tirely wrong. There is probably no institution in society where color is as irrelevant as in the free market. In the commercial world, making money is what counts, and discrim ination gets in the way of doing that. Many ethnic groups have come to this country and met poverty and prejudice. In the past, such people were able to advance economically by acquiring the skills which made them valuable to businessmen. Un fortunately, conditions are different now. Due to a variety of governmen tal actions, those ethnic groups which are presently attempting to rise in the economy have had the deck stacked against them. Instead of following the foolish course of be lieving that the way to rectify the undesirable results of past govern mental interferences with freedom is through yet more interferences with freedom, we must see that the only escape from our difficulties is to let freedom work. Do so, and a lot of self-interested businessmen will make short work of racial discrimination. , A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Wealth and Poverty THE Reagan triumph is the political culmination of a movement that has been thirty years in the making. But we are not yet home free. Washing ton, D.C., is riddled with a conflict of ((buts"even as the guard is changing.