Nobody likes racism. At least, nobody whose opinion we should take seriously likes racism. Many argue that private racism provides a justification for state intervention to ensure everyone is treated fairly. When we carefully look at basic economic theory and the historical record, though, it becomes clear that government is much more likely to produce racism than to prevent it.
The most thorough investigation of the influence of market forces on discriminatory preferences comes from Gary Becker. In his 1957 book The Economics of Discrimination, he argues that employers with taste-based discriminatory preferences put themselves at a cost disadvantage and will normally be forced out of business by competition.
A sensible business owner will hire the best candidate for the job, regardless of their skin color. Unless two job candidates are equally qualified in every respect except race, discriminatory hiring practices makes the firm employ inferior workers for inflated prices. If many businesses engage in racist hiring practices, there will be many talented members of the ostracized race unemployed or working for lower wages than their abilities justify. This creates huge profit opportunities for anyone without bigoted preferences, and those willing to overcome their biases and deal with those they don’t like.
Sufficiently bigoted business owners will continue to discriminate, of course, but will earn lower profits than they otherwise would. This means that competition from other firms may well send them to the poorhouse, or encourage the non-bigoted – who can expect to earn higher profits and will therefore offer a higher price – to buy the business.
A similar dynamic exists when it comes to buying goods and services produced by those you are prejudiced against. You can try to stick to products only white hands have touched, but you’ll soon find that doing so is more expensive than buying the best products at the best price. The market constantly forces us to check our perceptions against the real world, thereby encouraging truth to win out.
Compare the situation of the business-owner or consumer to that of the voter. When we vote, we do not pay for the costs of our decisions and have no reason to carefully think about the effects. Since our vote has no substantive effect on the eventual policy outcome, it is rational to vote for whatever we feel like voting for, without regard to the consequences for ourselves and others.
The general upshot is that a taste for discrimination which can be indulged cheaply through politics will prove costly in markets. When people pay the cost of enforcing their preferences, discrimination becomes much less likely.
A very clear historical example of the tendency for politics to produce racist discrimination where the market does not comes courtesy of Jennifer Roback (now conservative culture-warrior Jennifer Roback-Morse, but we shouldn’t let her current views get in the way of the excellent work she’s done in the past). Roback shows [gated, sorry] that the segregation of streetcars in the American South around the turn of the twentieth century was brought about by legislation, whereas streetcar companies did not find it profitable to enforce a segregation policy voluntarily.
A few racist whites expressed a desire to travel in separate cars from blacks, but evidently not enough to compensate for the cost of extra cars and the lost custom of blacks and non-racist whites. There was insufficient consumer demand – taste for discrimination – for segregation to emerge in the market: people simply weren’t racist enough to make segregation financially worthwhile for streetcar operators.
In the voting booth, though, people were unencumbered by the cost of their preferences and those with even the slightest preference for segregation would have voted for it. It is clear that the black public were offended by segregation and that the white public were not terribly enthusiastic. While no public opinion data exist, it seems likely that a majority of whites (i.e. voters) weakly favoured segregation as long as they did not personally bear the costs. This gave politicians the incentive to mandate racially-segregated streetcars, which is exactly what they did.
Roback’s account is a nice example of Becker’s logic. Discriminatory preferences were enforceable through democracy but not markets, because the marginal cost of expressing discriminatory preferences is nonexistent in the former and high in the latter. Markets create incentives for people to behave decently; politics brings out the worst in people.
Brad Taylor is a graduate student in Political Science at the University of Canterbury in Christchurch, New Zealand. He blogs at 
The reason that society is incapable of addressing the racial issue is because we view it from the wrong perspective. We talk all around the fundamental, underlying reasons for racism, and make it an emotional issue. How does one expect to cure the cancer without focusing on the cancerous cells? Focusing on the symptoms is an ineffective mechanism to employ. Consider this: http://www.tinyurl.com/aq4cdb
“Unless two job candidates are equally qualified in every respect except race, discriminatory hiring practices makes the firm employ inferior workers for inflated prices.”
Where’s the logic in that statement?
You initially limit your premise to two job applicants “equally qualified in every respect but race” but then you claim discriminatory practices constrain the firm to hiring inferior workers at inflated wages. This implies a larger hiring pool.
You completely ignore the notion that the discriminatory employer may have a solid reputation as a “premium” business in his field
and market himself accordingly.
You also ignore the very real possibility that in hiring the equally-qualified minority, the “non-bigoted” employer may have to deal with legal problems the “bigoted” employer won’t (or shouldn’t) have to deal with, such as failure to promote the minority to a level that “better reflects the demographics of the community” or some other politically-correct ideal.
It could be argued that such a legal wrangling could threaten to put the “non-bigoted” business owner, as you say, “in the poorhouse”.
I’ve been a successful siding and roofing contractor for almost 28 years and while I have had several non-White employees over the years that did an acceptable job, (and I have pictures of them in my company’s uniform for proof, should anyone claim that I never hire them) the White fellows always stood out as being particularly concerned with their craft; ensuring that the fit and finish of the job was superior.
With that level of conscientiousness in my employees, I can afford to pay them more than the going rate; most of my competitors use illegal aliens in order to raise their bottom line and personally make a quick buck but I stick to legal, White men and I can assure you: I am in NO WAY headed for the poorhouse!
I suspect you’re trolling, but I’ll reword:
IF it’s NOT true that two candidates are equally qualified in every respect except race THEN discriminatory hiring practices will force firms to pay a premium.
As for your own discrimination, I was talking about taste-based discrimination. If there really were race-based differences in competence, statistical discrimination will not be punished by the market. If the “White fellows” really are better on average, you’re engaging in statistical rather than taste-based discrimination.
If it is taste-based discrimination but you’re only mildly racist, you could well survive (note I said competition “may well send them to the poorhouse”). The point is that you’re paying a price for your bigotry, and people willing to hire illegal aliens are able, as you admit, to raise their bottom line. Other things equal, they’re going to be more likely to survive and prosper (though the legal risks of hiring illegal workers complicates things somewhat).
If by “premium” you mean “white only” and customers care about the race of workers, then yes: bigots could be successful. But customers have to pay for their bigotry, making it less likely than in the voting booth.
If there are regulations regarding promotion of minorities, then that could act as a disincentive to employing minorities. That’s a completely different issue.
That phrase turned me on a little bit. Thank you.