Legal Commentary

Competitive Markets and Discrimination Against Minorities-Becker

By becker

An eye-opening article in the New York Times on August 29th discusses the effects of India's economic reforms and subsequent economic growth on the poverty and progress of the untouchables. This is India's lowest and poorest caste whose members have been shunned by the other castes for centuries. They have been confined to the dirtiest and least desirables jobs. The article is built around the views of a successful untouchable, Chandra Bhan Prasad, a former Maoist revolutionary who is married to another untouchable. His observations and interpretation of the effects of India's economic liberalization that started in 1991 on progress of some untouchables converted him to the belief that competitive and open markets is the only hope for his caste.

The Indian government early after it became independent in 1947 officially abolished the caste system, and especially the horrible position of the 160 million untouchables. Nevertheless, this caste experienced limited progress during the 40 years of socialism and slow economic growth that followed independence. Prasad became an economic liberal after seeing what he interpreted as the dramatic effects of 15 years of economic reform on the economic opportunities of the untouchables.

The economic theory of discrimination adds analytical support to Prasad's observations (see my The Economics of Discrimination, 2nd. ed., 1973). An employer discriminates against untouchables, women, or other minority members when he refuses to hire them even though they are cheaper relative to their productivity than the persons he does hire. Discrimination in this way raises his costs and lowers his profits. This puts him at a competitive disadvantage relative to employers who maximize their profits, and hire only on the basis of productivity per dollar of cost. Strongly discriminating employers, therefore, tend to lose out to other employers in competitive industries that have easy entry of new firms.

This is why minorities typically do better in new industries with young and initially smaller firms. Both Jews and American blacks were accepted more readily in Hollywood in its early days than in other established industries, like steel making and banking, although blacks were limited primarily to entertainment roles. Contrast this with American baseball, where the major league owners had a virtual monopoly of the industry. They did not accept any black players until Branch Rickey broke the color bar in 1947 by promoting Jackie Robinson from the minor leagues to the Brooklyn Dodgers. This long delay in accepting blacks by the baseball monopoly occurred despite the fact that for decades many outstanding black players could be observed playing in segregated Negro leagues.

Employee discrimination against minority fellow workers-such as a male worker who does not want to work for a female boss- cannot be so easily competed away by non-discriminating employers. For they have to pay discriminating employees more, perhaps a lot more, to work with minority members. A similar argument applies to consumers who do not want to be served by particular minorities. Yet in these cases too, competition can blunt the impact of prejudice. For profit-maximizing employers will attempt to avoid the cost of discriminating employers by segregating minorities into separate companies. For example, women bosses may have mainly women employees, or untouchable foremen will supervise untouchable workers.

Segregated minority workers in competitive markets may get paid just as much relative to their productivity as do majority workers in these markets. In a fundamental way, segregation can serve as a way to bypass the prejudices of other workers, consumers, and employers. When Jews could not get work in the banking industry at the turn of 20th century, they began to open their own banks that hired mainly other Jews. African -American doctors and dentists in the old South catered to other blacks as their patients.

Globalization and the growth of world trade have added another competitive force against discrimination, one that is surely helping Indian untouchables and other minorities. As I mentioned earlier, costs of production are raised when employers discriminate against various minorities in their country. Employers in other countries not burdened with costs of discrimination will be able to undersell discriminating employers in the international market for goods. This too acts as a force lowering the impact of discriminating employers, and reduces the international competitiveness of countries where discrimination in employment is dominant.

The slow growth of the old American South is a good illustration of the effects of international and interregional competition. Discrimination against former slaves was rampant in most parts of the South. Private desires to discriminate were supported and often enforced by discrimination by state and local governments. Blacks were denied access to schools of equal quality, and local governments sometimes retaliated against local companies that promoted blacks to higher-level positions. As a result, Southern manufacturing companies were at a disadvantage relative to companies from the North and West, and also to those from other countries. In good measure because of this systematic government discrimination, and private discrimination enforced often by government pressures, the South performed poorly for a century after the end of the Civil War.

The rapid growth of world trade during the past several decades, and the increasing market orientation of different economies, sometimes raise rather than lower income inequality, as least for a while. However, trade and competition has made this inequality more dependent on differences in human and other capital, and less directly on skin color, gender, religion, caste, and other roots of discrimination. This is an unsung but major consequence of greater trade and globalization.

Full post as published by Becker-Posner Blog on September 07, 2008 (boomark / email).