Race & Economics by Walter E. Williams

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Intellectual Humiliation

Confront your own ignorance.

Race & Economics by Walter E. Williams

How much can be blamed on discrimination?

Racial issues often give rise to high emotions but little understanding of the black experience in America naturally creates a temptation to think of today’s black experience in terms of white racism and oppression. The purpose of this book for the author was to determine how much past discrimination can be blamed for the economic differences of black people today.

Blacks Today and Yesterday

Black Americans, compared with any other racial group, have come to the greatest distance, over some of the highest pet hurdles, in a shorter period. If one were to compare black earnings with most countries around the world, a black American-only country would come 16th, just behind Turkey and above Poland, Belgium, and Switzerland with a total income of $756 billion as of 2008.

In terms of “, power” one can point out to black Americans became chief executives of some of the world’s richest cities such as Chicago, Los Angeles, Philadelphia, and Washington D.C. The author also points out that it was a black American, Collin Powell who lead the mightiest army in the world in 1989 and eventually became U.S. Secretary of State. He was succeeded by Condoleezza Rice of the same race and national origin. 

It is indeed true that 30% of the black population in the U.S. are classified by the U.S. Census Bureau as poor, but the author argues that poverty today differs significantly from yesteryear poverty. 

There is a difference between material poverty and spiritual poverty. Material poverty, the author points out, is a money measure that the census bureau in 2006 defined as $20.444/year for an urban family of four. Spiritual poverty, on the other hand, refers to conduct and values that prevent the development of healthy families, a work ethic, and self-sufficiency. The absence of those values in the black community leads to a lifestyle that includes drug and alcohol addiction, crime, violence, incarceration, illegitimacy, single-parent households, dependency, and erosion of the work ethic.

The author argues that material poverty is no longer the problem it once was since poor Americans today are far better off than poor Americans in the past. In 1971 32% of all Americans enjoyed air conditioning in their homes; by 2001 76% of poor people had that comforting amenity. In 1971 43% of all American households owned a colored T.V.; by 2001 97% of poor households had a colored TV, and over half of those had more than one set. As of today 46% of poor households now own their home, and only 6% have more living space than the average non-poor individual living in Paris, London, Vienna, Athens, and other European cities. 

Money measures that most politicians, intellectuals, and black leaders use understate income in the black community because they omit in-kind transfers, such as food stamps and medical and housing assistance. They only take into account the amount of cash the family earns, and don’t take into account the amount of welfare this family might earn alongside that cash. 

As early as 1990, it was estimated that the poor were spending an average of $1.94 for every dollar in welfare income received. This additional income might have come from unreported employment or illegal activities. 

While material poverty in its historical or global form is nonexistent in the U.S., what the author calls behavioral poverty has skyrocketed. Female-led households increase from 18% of the black population in 1950 to over 68% by 2005. As of 2002, 53% of black children lived in single-parent households, compared to 20% of whites. As of 2006, roughly 45% of blacks fifteen or older had never been married, in addition to 17% who had been divorced or widowed; that contrast with only 27% of whites fifteen and older never married and 16% divorced or widowed. 

People argue that the legacy of slavery is what’s kept the black-family structure broken, but there’s strong evidence to argue the contrary. 

One study of the 19th country slave family found that in as many as 3/4 of slave families all the children had the same mother and father. In New York City, in 1925, 85% of kin-related black households were two-parent households. Five in six children under the age of six lived with both parents. 

The argument that slavery and discrimination destroyed the black family is decimated when one looks at the numbers: in 1880 percentages of nuclear families were: black 75.2%, Irish (82.2%), German (84.5%), and native white Americans (73.1%). Only 1/4 of black families were headed by females. 

The breakdown of the black family structure has experienced astonishing growth in just 20 years. In 1940 only 19% of black families were single parents, by 1975 it was 49%. As of 2000, black illegitimacy stood at 68%, and in some cities over 80%. High illegitimacy rates not only spell poverty and dependency but also contribute to the social pathology seen in many black communities: high incidences of adolescent violence and predatory sex. 

Studies on welfare programs as major contributors to several aspects of behavioral poverty cite that for each dollar increase in welfare payment, low-income persons reduce labor earnings by eighty cents. Using the 1979 National Longitudinal Survey of Youth data, Ann Hill and June O’Neil found that a 50% increase in the monthly value of welfare benefits lead to a 43% increase in the number of out-of-wedlock births. 

Despite the frequent assertions and data to the contrary, many of the seemingly intractable problems encountered by a significant number of black Americans do not result from racial discrimination. This is not to say discrimination does not exist. Nor is it to say discrimination has no adverse effects. The low achievement academic achievement of black youngsters poses serious handicaps, yet pursuing civil rights strategies has achieved little difference in the black community. 

The main argument is that the most difficult problems black Americans face, particularly those who are poor, cannot adequately be explained by current racial discrimination. Instead, most problems are self-inflicted or are a result of policies, regulations, and restrictions emanating from federal, state, and local governments. The author will argue in this book that free markets and the profit motive have not reduced opportunities. The drivers have instead been the power of vested interest groups to use, as a means to greater wealth, the coercive powers of government to stifle market competition. 

Free markets and the profit motive, far from being enemies to black are drivers. The reason is quite simple. Customers prefer lower prices too high prices and businesses prefer high profits to lower profits. The most effective tools for a seller to gain customers are to offer a lower price and better services than his competitor. Similarly, the most effective tool for a worker to get an employer to hire him is to offer to accept a lower wage. 

The ability to prevent a less-preferred worker from accepting a lower wage is one of the most effective tools in the arsenal of racists everywhere. Racial antipathy is not a necessary, nor even the primary, incentive for using government power to prevent others from offering a lower price. People simply want to earn a higher income and profits. The use of government restrictions, violence, or intimidation to prevent others from competing and offering prices below the “desired” price is consistent with that end. The fact that some blacks were able to earn a comfortable living and indeed become prosperous – in both the antebellum South, in the face of slavery and grossly discriminatory laws, and the North, where there was at best only weak enforcement of civil rights – gives strong testament to the power of the market as a friend to blacks. 

Further American of the green market as a friend is suggested by all the legislation and extra-legal measures taken to prevent free, peaceable, voluntary exchange between blacks and whites. 

Is Discrimination a Complete Barrier to Economic Mobility?

To observe racial discrimination is one thing. Quinte another is to ask whether it is the reason for barriers to socio-economic advancements. 

Racial and religious conflicts have existed in varying degrees since the founding of the United States, and throughout the world for centuries. Black Americans weren’t the only ones who experienced discrimination by one means or another, Puerto Ricans, Poles, Chinese, Japanese, Swedish, and other ethnic groups have experimented with being discriminated against. What the author points out is that the degrees of discrimination and the response of these groups to discrimination have varied between and even within them. 

Despite modern rhetoric, no race or ethnic group has a monopoly on racial oppression and discrimination. Colored people have racially discriminated against whites as well as other colored people, and the author gives the example of Uganda, where 50,000 Asians were expelled en masse. The same thing happened in Kenya. 

The author also points out that discrimination and conflict between people of identical racial stock but of different ethnic and religious groups are present event day. Large-scale murders have happened between Irish Catholics versus Irish Protestants; Igbo versus Hausa in Nigeria; Tutsis versus Hutus in Burundi; Kikuyus and Luos in Kenya. But this discrimination is not exclusive to Africa. In Lebanon, ethnic conflict can be found between Muslims and Christians, Belgium between the Fleming versus the Walloons; Sri Lanka, with the Singhalese versus the Tamils; Canada, with the English-speaking versus French-speaking populations. 

Chinese in Southeast Asia

The Chinese have historically constituted a racial minority in countries of Southeast Asia, numbering less than 3% in countries such as Indonesia and the Philippines. Yet the hostility of the indigenous population has historically manifested by the massacre or deportation of segments of the Chinese population. 

Despite this, the Chinese in Southeast Asia are considerable economic strength in the region, amounting to nearly 30% to 40% of Indonesia’s national product, for example, at least ten times as much as their share of the population. In Malaysia, for example, the Chinese constitute a much larger proportion of the population (37%), yet they own 4/5 of all retail establishments and 3/5 of all non-foreign owned, corporate-equity capital invested in the country. 

Different measures in various countries have been tried to prevent and reduce the economic predominance of the Chinese in Southeast Asia. Some measures range from affirmative actions and outright expropriation of property to job-reservation laws and harsh business-licensing requirements. Despite these measures, the Chinese enjoyed a higher standard of living than most of the native population. 

In many enterprises reserved for the indigenous population, what appears to be indigenous ownership and control is a front or a stand-in for a Chinese owner. Such enterprises are often referred to as “Ali Baba” companies, with Ali being the apparent indigenous owner and Baba being the Chinese real owner. 

Racial Malevolence and Economic Progress

The author argues that the fact that alien minorities sometimes make significant economic gains, goes against the modern narrative of benevolence on behalf of the larger society is neither a necessary nor sufficient condition for an ethnic minority to achieve economic predominance; and economic progress can occur in the absence of what is traditionally considered political power. 

The modern narrative argues that the elimination of racial discrimination will help economic progress and political power will too. But this narrative goes against the facts, not only in Southeast Asia with the Chinese population, but Indians in Africa, Armenians in post-Ottoman Empire, and Jews in America. 

The author gives the example of Japanese-Americans and Chinese-Americans who have historically and continue to be politically insignificant, yet they are today, by almost any measure, the most “successful” ethnic groups in America. This came to be despite The Chinese Exclusion Act of 1882 on the West Coast which proscribed citizenship and set the Japanese up for denial of land ownership. California, in 1913, enacted an anti-Japanese land law, and they were interned, and their property was virtually confiscated as soon as 1942. 

As early as 1972, Japanese-Americans had the following characteristics: 19.5% of those employed were professional workers compared to 15.6% of white workers (the Chinese had 25%); their unemployment rate was 2.4% versus 4.1% for whites; similarly, in terms of labor-force participation rates and years of education, the Japanese and Chinese surpassed that of the white population. 

The modern idea that minorities must acquire political power to “end racism” for socioeconomic growth to occur is not only a necessary intellectual exercise but also has practical importance because all activities require resource expenditures. If, for example, resources are spent for political organizations, they cannot be spent, perhaps more productively, elsewhere. 

Early Black Economic Achievement

Portraying blacks as helpless victims of slavery and later discrimination is the popular narrative, but the facts of the matter do not square with that portrayal. 

Many slaves didn’t permit the brutal nature of slavery. Many found ways to attain a measure of independent learning skills that would give them a measure of independence like servicing ships as rope makers, coopers, and shipwrights. Some entered more skilled trades, such as silversmithing, gold beating, and cabinetmaking. 

Usually, slaves turned over a portion of their earnings to their owners in exchange for freedom. Many slaves were entrepreneurs, renting themselves out to other owners at night and during the weekends. After a day’s work, some slaves were allowed to raise their crops and livestock. These effects allowed them to gain a presence in the cut of the marketing network on the streets and on the docks of port cities. 

Their presence was so critical to the markets, that North Carolina whites mounted a campaign to stop slave “dealing and trafficking” altogether. 

During the colonial period, some slaves bought their freedom and acquired property. In Virginia’s Northampton County, 44 of 100 blacks had gained their freedom by 1664, and some had become landowners. During the late 18th century, blacks could boast of owning land. James Pendarvis owned 3,250 acres in St. Paul’s Parish in the Charleston District of South Carolina.  

By the 18th and early 19th centuries, free blacks in Charleston had established themselves as relatively independent from an economic standpoint. As early as 1819, they comprised thirty types of workers, including ten tailors, eleven carpenters, twenty-two seamstresses, six shoemakers, and one hotel owner. 

New Orleans had the largest population of free blacks in the Deep South. Though they could not vote, they enjoyed more rights than blacks in other parts of the South – such as the right to travel freely and to testify in court against white people. New Orleans blacks also created privately supported benevolent societies, schools, and orphanages to assist their impoverished brethren. 

Black entrepreneurs in New Orleans owned small businesses like liquor, grocery, and general stores and capitalized with a few hundred dollars. 

One of the best-known black businesses was owned by Cece Macarty, who inherited $12,000 and parlayed it into a business worth $155,000 at the time of her death in 1845. Another was Thorny Larson, who started with a small dry-goods store and later became a real estate dealer, amassing a fortune valued at over $400,000 ($8 million today) by the time he died. 

Pierre A. D. Casenave, an immigrant from Santo Domingo, was among New Orleans’ more notable businessmen. Having inherited $10,000 as a result of being a confidential clerk of a white merchant-philanthropist, Casenave was in the “commission” business by 1853. By 1857, he was worth $30,000 to $40,000, and he had built an undertaking business, catering mostly to whites, that was worth $2 million in today’s dollars. 

Most free blacks in New Orleans were unskilled laborers, and some free blacks dominated certain skills and crafts like blacksmiths, butchers, cabinetmakers, cooks, overseers, ship carpenters, stewards, and upholsterers. 

By the end of the antebellum era, there was considerable property ownership among slaves in both the Upper and Lower South. Many amassed their resources through the hiring out system. In Richmond and Petersburg, Virginia, slaves worked in tobacco factories and earned $150 and $200 a year, plus all expenses. By 1850, slave hiring was common in hemp manufacturing and the textile and tobacco industries. 

Self-hiring was another practice with a long tradition. It benefited both the slave and slave owner since the latter didn’t have to pay for the slave’s lodging and clothing. 

Slaves, although obligated to pay their masters a monthly or yearly fee, could keep for themselves what they earned above that amount. 

Not every self-hire slave fared so well. Some were offered the prospect of buying themselves only to see the terms of the contract change. Slaves who earned larger sums than originally expected were required to pay the extra money to the master. Sometimes slaves who made agreements with their masters to pay a certain price for their freedom were sold short before the final payment was due. 

The practice of slaves entering the market and competing successfully with whites became so prevalent that a group the latter in New Hanover County, North Carolina, petitioned the stated legislature to ban the practice. But despite the statutes to the contrary, slave cronies work as mechanics, contracting on their own “sometimes less than one-half of the rate that regular bred white mechanic could afford to do it.” 

Women were also found among slave entrepreneurs. They installed stalls and small stores selling various products. They managed modest businesses as seamstresses, laundresses, and weavers. 

With the increasing number of self-hire and quasi-free blacks came many complaints and attempts at restricting their economic activities. In 1862, Georgia prohibited blacks from trading “any quantity or amount whatever of cotton, tobacco, wheat, rye, oats, corn, rice or poultry or any other articles, except such as are known t one usually manufacture or vended by slaves.” Ténsese applied similar restrictions to livestock. Virginia enacted legislation whereby an individual who bought or received any commodity from a slave would be given thirty-nine lashes “well laid on” or fined four times the value of the commodity. 

Much of the restrictive legislation was prompted or justified by the charge that some slaves were trafficking in stolen goods. But there was also concern that the self-hired and quasi-free would undermine the slave system itself by breeding discontent and rebelling among slaves in general. Despite all the legal prohibitions, the self-hire and quasi-free practices prospered and expanded. Some slaves owner who had sired children feel that, although they might not set those offspring free, they would allow them to be quasi-free and win the property. Other owners considered it simply sound policy to permit slaves a degree of freedom as a reward for good work. Even owners with a strong ideological commitment to the institution of slavery found it profitable to permit self-hire, particularly for their most talented and trusted bondsmen. 

Free Blacks in the North

Philadelphia was home to several very prosperous black businesses. Stephen Smith and William Whipper had one of the largest wood and coal yards in the city.

Another property enterprise among early Philadelphia blacks was sailmaking. Nineteen black sail-making businesses were recorded in the 1836 Register.

Black dominated Philadelphia’s catering business. Peter Augustine and Thomas Dorsey were the most pro mini tent among them. Both men earned worldwide fame for their art, with Augustine often sending his terracing as far away as Paris.  

Blacks made their business presence felt in other northern cities as well. In 1769, ex-salve Emmanuel established Providence, Rhodesia Island’s first oyster-and-ale house. In New York, Thomas Downing operated a successful restaurant to serve his Wall Street clients before facing competition from two theory blacks, George Bell and George Alexander, who opened similar establishments nearby. In 1865, Boston’s leading catering establishment was owned and operated by a black. Thomas Dalton, also of Boston, was the proprietor of a prosperous clothing store valued at half a million dollars at the time of his death. John Jones of Chicago, who owned one of the cities leading tailoring establishments, left a fortune of $100,000.

Racism and the fear of violence prompted New York City authorities to refuse licenses to black carmen and porters, warning, that “it would bring them into collision with white men of the same calling, and they would get their horses and carts “dumped” into the dock and themselves abused and beaten.” 

The growth of the black labor force, and arguments by emancipated and fugitive slaves, also contributed to white fears of black competition. 

The petitioners warned the legislature that if entry restrictions were not adopted, the (white) sons of Connecticut would be soon driven from the state by black porters, truck men, sawyers, mechanics, and laborers of every description. 

For their part, blacks soon faced increased competition from the nearly five million Irish, German, and Scandinavian immigrants who reached our shores between 1830 and 1860. Poverty-stricken Irish crowed into shantytowns and sought any kind of employment, regardless of pay and work conditions. 

Irish immigrants did not immediately replace black workers, because employers initially preferred black “humility” to Irish “turbulence.” “Help Wanted” ads often read like this one in the New York Herald of May 13, 1853: “A COOK, WASHER, AND IRONER: who perfectly understand her business, any color or country except Irish.” 

Licensing as a Strategy of Exclusion

As the Civil War approach approached, New Orleans’s attitude toward free blacks changed with restrictions on the kind of businesses they could enter, along with licensure laws and an increasingly hostile press. 

New Orleans was not the only city to enact licensure laws restricting the economic activity of free blacks. A Washington D.C. ordinance enacted in 1836 said:

“It shall not be lawful for the mayor to grant a license, for any purpose whatever, to any free negro or mulatto, except licenses to drive cars, drays hackney, carriages, or wagons.” 

The ordinance also prohibited licenses for blacks to operate taverns, restaurants, or any other eating establishments and from selling alcoholic beverages. 

During the early period, blacks came to dominate the very lucrative hackney business in the nation’s capital. In addition, there were black babes, restaurant owners, waiters, teachers, preachers, and skilled workers. Blacks became significant landowners in the district, paying taxes on over $600,000 worth of property on the eve of the Civil War. 

Race and Wage Regulation

The author demonstrates that back in the early 1900s the black unemployment rate for blacks was lower than that for whites. He gives the example that by 1919 71% of blacks over nine years old were employed, compared to 51% of whites.

Coal mining companies competed vigorously for black workers. Moreover, during this same period, agricultural employment was nearly identical to that of whites.

This fact cannot be explained away by the idea that during the earlier periods of the 20th century there was less racial discrimination. The author points out that back in the day there were just fewer government sanctions and subsidies for race discrimination, allowing the market to decide who was best for the job, even if it mean paying them less.

The Davis-Bacon Act

Kansas was the first state to establish a minimum wage law in 1819. New York followed in 1894 when Samuel Gompers President of the American Federation of Labor (AFL), led the political charge in both states and later the call for a federal minim wage law. 

The federal push began in 1927 when an Alabama contractor successfully won a bid on a government contract to build a Veterans Bureau Hopi stall on Long Island. Since he was employing mostly black labor from the south, he wasn’t contractually obligated to pay minimum wage and was able to underbid his competitors. In response, New York representative Robert Bacon submitted H.R. 17069 “A bill to require contractors and subcontractors engaged on public works of the United States to comply with state laws relating to hours of labor and wages of employees on state public works.” 

Between 1927 and 1930, Congress introduced at least fourteen bills to regulate wages on public work projects. By 1931, construction industry wages had fallen by one-half, and 700,000 construction workers became unemployed as construction projects fell by 70% between 1929 and 1933. Congress received numerous complaints that contractors were bidding wages down and employing itinerants to replace local workers. This gave strength to unions pressing for minimum wage laws on the federal level. 

Finally, on March 31, 1931, co-sponsored by Representative Bacon and Pennsylvania Senator James J. Davis, a mandate was passed that forced labor to be paid locally prevailing wages and benefits on all federally financed, or assisted, construction projects that exceed $5,000. This act, in essence, established federally mandated super-minimum wages in the construction industry. 

Despite blacks being excluded from construction unions, they represented more than 80% of the construction labor in six southern cities. They were also represented among skilled construction workers, like carpenters, comprising 17%. And during this period, migration to the north by blacks was changing the demographics of most northern states. 

The bill had the exclusive purpose to decouple black Americans from that foothold. 

In addition to black workers, those of non-European descent were targeted. Representative Bacon referenced the Johnson Act 1924, which established immigration quotas from countries of South and North America. They referenced how immigration favor “alien” labor over American citizens for their cheaper wages and worse working conditions which they weren’t mandated to follow. 

Effects of the David-Bacon Act

Davis-Bacon exemplifies collusion between a seller (labor) and contractors (buyers) on federal construction projects to insure payment to workers of a minimum wage. One study found that over 90% of the determinations equaled the union rate in the area, although non-union work accounted for large fractions of construction workers. Another study showed that Davis-Bacon determinations are 4% higher than average wages in commercial construction and 9% higher in residential construction. It also found that Davis-Bacon wage determinations were 15% to 40% higher than market wages. For example, Davis-Bacon wages for a carpenter in New York ranged between $34 and $40, while the market wage was around $24. 

The act’s wage and work jurisdiction requirements make it consult for non-union shops to hire and train unskilled workers because they had to pay workers wages and benefits that exceed worker productivity. Initially, the act’s regulations did not make a diction between unskilled and skilled workers unless the forme were members of a union apprenticeship program. As a result, contractors were forced to pay a worker who was not a member of such a program the same wage as a skilled worker. 

What failed to be mentioned by this act is that the majority of skilled tradesmen were white, leaving behind all the black and other labor from the workforce. Before the enactment of the Davis-Bacon Act, black and white construction unemployment registered similar levels. after the enactment of the Davis-Bacon Act, black unemployment rose relative to that of whites. 

This period also saw an enactment of the gulf of legislation restraining the setting of private wages, such as the Fair Labor Standards Act, Davis-Bacon Act, Walsh-Healey Act, and National Labor Relations Act. The Social Security Act also played a role, forcing employers to pay for the newly imposed fringe benefits. 

Minimum Wage Effect

While legislative bodies have the power to order wage increases, they have not found a way to order commensurate increases in worker productivity that make the worker’s output worth the higher wage. Further, while Congress can legislate the wage at which labor transactions occur, it cannot require that the transaction be made. They haven’t mandated that the worker be hired. When the minimum wage laws raise a worker’s pay level that exceeds his productivity, employers will make adjustments in their use of labor. Such an adjustment will produce gains for some workers at the expense of other workers. Those workers who retain their jobs receive a higher wage gain. Most often adverse effects are borne by the workers who are most disadvantaged in terms of marketable skills. They will lose their jobs or not be hired in the first place. 

The effect of the minimum wage law is more clearly seen if we put ourselves in the pale of an employer and ask: if a wage of $7.25 per hour must be paid no matter how is hired, what kind of worker does it pay to hire? The answer in terms of profit and economic efficiency is to hire one whose productivity equals or exceeds $7.25 per hour. 

Who bears the burden of the minimum wage? It is the workers who are the most marginal, that is, those who employers perceive as being less productive, more costly, or otherwise less desirable to employ than other workers. In the United States, there are two segments of the labor force that share marginal worker characteristics. The first one is the youth in general. They are low-skilled or marginal because of their age, immaturity, and lack of work experience. The second group is racial minorities, such as blacks and Hispanics who, as a result of historical factors, are disproportionately represented among low-skilled workers. They are not only made less employable by minimum wages; opportunities to upgrade their skills through on-the-job training are also severely limited when they find it hard to get jobs. 

The minimum wage laws go against the law of demand: the higher the prices the less quantity of that good will be demanded. 

The substitution of automatic dishwashers for hand washing, and automatic tomato-picking machines for manual pickers, are samples of substitution of machines for labor in response to higher wages. And this is just one example of many given by the author.

Minimum Wage and Racial Discrimination 

The idea that it is sometimes necessary for some individuals to lower their prices to sell their services offends the sensibility of many people who support the minimum wage law as a matter of moral conviction motivated by concern for equity in the distribution of income. However, whites racist unions in South Africa, with different motivations, have also been supporters of mining wage laws and equal-pay-for-equal-work laws for blacks. 

This came about when after World War II the was a building boom in the country, and black construction workers were willing to accept wages 80% lower than those paid to whites. Such differential made racial discrimination in hiring a costly proposition. These firms would pay $0.39 per hour to blacks as opposed to $1.91 per hour to whites. White racist unionism recognized that equal-pay-for-equal-work laws (a variation of minimum wage laws) would lower the cost of racial discrimination and thus improve their competitive positions in the labor market. 

Intentions Versus Effects

The minimum wage law gives firms comic incentives to seek to hire only the most productive employees, meaning the firms are less willing to hire and/or train less productive employees, a group that includes teenagers, particularly ministry teenagers. But ignoring productive differences between black and white workers, the laws provides an incentive to discriminate racially in hiring. The reason is that the minimum wage law lowers the private cost of discriminating against the racially less-preferred person. 

The author gives the example of filet mignonette and chuck steak. Assume that consumers prefer the former. So the question becomes: why is it, despite consumer preferences, that chuck steak sells at all? The fact is that chuck steak outsells filet minion. How does something less preferred compete with something more preferred? It does so by offering what economics calls “compensating differences.” In other words, the product that sells for less will automatically sell more despite it not being the preference. 

In the case of minimum wage laws, a mandated minimum lowers the cost of the indulgence of racial preferences in the labor market. 

To understand how the minimum wage can raise the probability of employer “presences indulgence” and racial discrimination, we must simply recognize that money income is not the only form of compensation businessmen earn. Their compensation consists of non-money income as well. An employer prefers what he considers to be desirable, or more desirable, working conditions. They might include finer furniture, plus her carpets, prettier secretaries, and more likable employees. The quantity of these more desirable working conditions chosen depends on their cost in terms of foregone profits. 

American Union Support for Minimum Wage Laws

One must always remember that the effects of a policy are by no means necessarily determined by its intentions. But a good case can be made that the effects of the minimum wage law are its intentions. This can be readily understood if we consider that in some o productive activities, low-skilled workers are substitutes for higher-skilled workers. And if the use of the government’s coercing powers, can reduce or eliminate the employment of low-skilled workers, they can achieve monopoly power and command higher wages. 

The highly skilled worker might recognize that one of the ways to increase his bargaining power would be to advocate a minimum wage of $50 per day in the fencing industry. The arguments that the highly skilled workers would use to gain political support would be those given by our political and union leaders: “to raise this standard of living,” “prevent worker exploitation,” “provide a living wage,” “insure worker equality,” and so forth. 

The effect of the minus wage is to price that worker’s competition out of the market. 

The effects of actions do not depend on intentions. Whatever the intentions, the effect is to price their competitors out of the market. 

The restrictive activities promoted by unions do reduce employment opportunities and the income of those priced out of the market. This suggests that union strategies to raise their members’ wages must be accompanied by lobbying for government welfare programs. Why? Because if unemployment meant starting action, there might be considerable political resistance to higher mandated wages. Unions, therefore, have incentives to support subsidy programs for those denied access to jobs. 

The resulting redistribution of income constitutes a subsidy from society at large – that is, from those who pay taxes to those who have used the powers of government to restrict or eliminate job opportunities. Income-subsidy programs disguise the true effects of labor market restrictions created by a union and other economic agents by casting a few crumbs to those denied jobs to keep them quiet, thereby contributing to the creation of a permanent welfare class. 

U.S. Business Support for Minimum Wage Laws

Businessmen have also used the minus wage law as a means to protect themselves from the competition. When John F. Kennedy was a senator, he supported increases in the law as a way of protecting New England’s industry from competitors in the South. Farmers have supported agricultural versions of the law to reduce competition. 

There are other instances of the business interest that are served by minimum wage requirements in U.S. territories and Puerto Rico – and more recently in Mexico, under the North American Free Trade Agreement. In those cases, the businessman’s underlying desire is to reduce competition from lower-wage areas. Historically, for example, the minimum wage law got very little political support from low-wage states, especially those in the South. 

Labor Market Myths

1. If teenagers are allowed to work at sub-minimum wages, they will be employed while their parents go unemployed. This statement assumes that there are a finite number of jobs available, i.e. that the acquisition of a job by one person necessarily means the loss of a job by another. There is no evidence to support the notion of a finite job total. As long as human wants remain limitless, so will the number of potential jobs. 

2. The employment problem faced by youths and others is that there are simply no jobs available. If this myth is accepted at face value, it is the same as saying that all human wants have been satisfied. It asserts that no one anywhere wishes to have more of some goods and services that would create employment opportunities for young people. There is no evidence to support such an assertion. What people mean when they say no jobs are available is that none are at a “desirable” or mandated wage rate. 

3. Many people are unemployed because they have few skills and other qualifications. Low skills can explain low wages but not unemployment. A person is qualified or unqualified only in a relative sense – that is, relative to some wage. To speak of qualifications or skills in an absolute sense has little meaning. For example, a carpenter who is qualified, and hence employable, at a wage of $20 per hour, maybe unqualified, and hence unemployable at $35 per hour. 

This kind of artificial qualification applies directly to the problems minorities face in the labor market. It is frequently said that they have a high unemployment rate because of their lower skills. In earlier times, however, minorities had much lower unemployment rates. 

4. Widespread automation causes high unemployment rates among a large sector of the labor force. First, an increase in relative wages is a proximate cause of automation: when wages rise relative to capital costs, firms have incentives to substitute capital for labor. After farm workers were brought under the minus wage, we saw greater farm mechanization. The very reason nations raise their higher standards of living is a result of capital being used to replace labor, thereby freeing up that labor to undertake other tasks. 

5. Higher minus wages give workers increased purchasing power that in turn sustains high employment. This myth assumes that workers keep their jobs and work the same number of hours as before. Some workers will and some will not. Those who lose their jobs as a result of a hypothetical right to earn $5.85 an hour will find that the hypothetical right will not buy groceries and housing. Furthermore, higher wages are not the same thing as more purchasing power when the artificial wage increases give rise to political forces to create inflation. 

6. The minimum wage law is an anti-poverty weapon. If this were true would have an instant solution to the world’s poverty and underdeveloped problems. We should just advise countries to raise their minimum wage. The sad fact of life is that low-skilled workers are not so much underpaid as they under-skilled. The way to help them is to make them more productive. 

7. The poor benefit most from minim wage increases. The hard truths about the types of workers most likely to be employed at the minimum wage raise a question about the effect of the minimum wage law as an anti-poverty tool. Eighty percent of all minimum wage workers live in a non-poor household with almost 20% in households earning annual incomes above $50.000.

The Minimum Wage Vision

Various people have the same intentions but differ in the way those intentions and visions should be implemented. But how can those people arrive at polar-opposite policy conclusions? The answer is that conclusions often depend on one’s vision of how the world operates. For example, if one’s initial premise, stated or not, is that an employer must hire a certain number of workers to do a particular job, the logic behind increasing the minus wage law as a means to raise the incomes of low-skilled workers is impeccable. According to that vision, the minimum wage’s only effect is higher wages for workers and lower profits for employers. 

That is a particularly optimistic vision of minimum wage laws. A higher minimum wage implies higher costs, but higher costs affect employment per se as well as wages and profits. They also affect the attitude of the firm’s investors, who worry about a return to equity. And if product prices increase, the attitudes of both investors and customers may well turn negative. In other words, the vision falsely assumes that customers will not seek cheaper substitutes and will purchase the same quantities after the price increase as before, resulting in no negative impact on employment. 

By contrast, other people start with the premise that employers are responsive to changes in the price of labor, stockholders are responsive to changes in equity value, and customers are responding to product prices. These people may have just as much concern for the welfare of the low-skilled but argue against increases in the minimum wage law. They see that employer responses to higher wages include: substitution of capital for labor (automation); employment of self-service techniques; relocation to a part of the country or the world that offers lower labor costs; and other measures that economize on the use of labor. 

Occupational and Business Licensing

For many businesses and occupations, federal, state, and local governments regulate the conditions by which individuals may enter and conduct themselves. The most often-stated justifications are to protect public health, safety, and morals, provide for orderly markets and a fair rate of return, and eliminate unscrupulous practitioners. Those are the intentions of regulations. Quite apart from them are the effects, which can be analyzed through economic analysis. 

Control by the government over the entry into an occupation is typically done through licensure laws. Some 800 occupations are licensed in at least one state. They include such “learned” professions as medicine and law, plus others requiring considerably less training time – for example, barbers, cosmetologists, and plumbers. 

Licensure laws have a variety of legal minimum requirements that must be satisfactorily met as a condition of entry. They can include minimum schooling; citizenship; written, oral or practical competency testing; attendance at government-approved schools or apprenticeship programs; prior occupations experience; and minim age requirements. 

The laws involved are usually administered by people who are selected from, or elected to, a board of commissioners by those who are already practicing the occupation or trade. These commissioners change and modify licensure requirements. They have state police powers at their disposal to enforce concurrence and compliance among practitioners. 

The most immediate effect of licensing is to restrict the number of practices because of the higher entry costs involved in meeting the qualifications of the activity. Some licenses require many months of schooling, such as barbers and cosmeticians. Others require the installation of costly health and safety equipment. Still, others demand the purchase of the licenses or “certificate of authorization” from an incumbent practitioner which can cost millions of dollars, as was the case when interstate trucking was highly regulated. 

Restricting the number is only the initial effect of licensing. A secondary effect is that the price of the good or service offered is higher than it would otherwise be. Evidence supports this self-interested behavior: (1) most licensure laws are the rest of intense lobbying in incumbents, not of consumers demanding more protections from incompetent or unscrupulous practitioners; (2) when incumbents in an unlicensed trade lobby for licensing they virtually always seek a “grandfather” clause that exempts them from meeting the new requirements, leaving the burden of the higher entry costs to be borne mainly by new entrants; (3) practitioner violations of the licensing codes, as a price-cutting and extra hours, are nearly always reported to the licensing board by the incumbents rather than by customer. 

The severest form of occupational licensing is the kind that imposes a fixed number of licensed practitioners in addition to education, age, citizenship, and apprenticeship requirements. Numerical limits tend to produce the highest economic rewards for those already in the trade. Legal restrictions on the number of practitioners in occupations are generally not set by state statute. The right to set and modify the number of practitioners is done by unions, trade associations, and examining boards. 

The reason why licensing statutes typically restrict entry by raising entry costs, and not by imposing limits on the number of practitioners, appears to be mostly political. Strategically, it is far more politically plausible, and publicly acceptable, for practitioners of trade to justify higher entry requirements because they raise stands and protect consumers against quacks than to base restrictions on the number of practitioners. 

Taxicab Licensure

New York City taxicabs require a medallion for each operating cab given by the municipal government. The medallion system stemmed from the Haas Act of 1937. Under the act, the city sold medallions for $10 to all persons and then operated taxis, about 13,566. Since 1937, now new medallions have been issued, except a recent 54 awarded for the operation of wheelchair-accessible vehicles. The number of medallions sets the upper limit on the number of taxis that may operate within the city. The owner of a medallion pays a small annual fee, but the medallion itself and the rights it confers on the owner construe valuable private property. As such, the transferable medallion commands a market price, and that price has risen inexorably and sharply: 

$10 in 1937
$2,500 in 1947
$28,000 in 1960
$60,000 in 1970
$200,000 in 1998
$600,000 in 2010

In other words, the value of the medallion shows that the buyer is willing to pay for the government protection from free-market competition. 

The Entrepreneurial Responses to the Taxi Monopoly 

Several communities have responded to the medallion-taxicab monopoly and inferior transportation services. In New York, this response has in part taken the form of illegal or “gypsy” cabs. Neighborhoods such as Harlem, Bedford-Stuyvesant, Brownsville, and the South Bronx, have consistently received poor taxi service from the medallion industry. May residents in these communities simply installed meters, painted signs, put lights on their private cars, declared their taxis, and cruised their neighborhoods, providing transportation for hire. 

The high risk of robberies and other violence are some of the reasons the medallion-taxi industry gives for not provisions services in these communities. In addition, operators perceive these areas as being economically unprofitable compared to the central business district and other parts of the city. 

Such large illegal operation is possible for two reasons: (1) poor services by the medallion industry; (2) failure of the authorities to rigorously enforce the law against gay pay drivers as long as their operations are limited to New York’s poor, high-crime neighborhoods. However, when the gypsy drivers operated in the more lucrative central business district, other higher-income areas, and at the airports, they encountered greater resistance. 

Racial Effects of Occupation and Business Licensing 

Occupational licensing raises entry costs through various requirements: age, minimum secondary-school education, special schooling, citizenship, and license fees. The requirements are more problematic for some demographic groups than others. For example, the posesión of a high school diploma will impose a greater burden on those groups with higher high-school dropout rates. 

Some licensing examinations consist of both written and “performance” parts. This introduces considerable bias, particularly when the written proton is of little significance in predicting the presence or absence of practical, performance talents. Applicants with better or more education have greater facility with written expression. Others who have a limited reading ability, or whose native language is not English, suffer a disadvantage even if they perform well on the performance part. 

Licensing requirements often specify a minimum number of hours of specialized education at “approved” schools. In addition, schooling requirements involve tuition and other costs, which exclude based on available financial resources. 

Licensing of Cosmetologist

Cosmetology is the art or profession of applying cosmetics. Most practitioners perform operations that a woman might do herself at home. Nonetheless, the practice of cosmetology for me only is licensed in all states. 

Stuart Dorsey studied the distributional effects of occupational licensing of cosmetologists in Missouri and Illinois. He found that, in both states, the black failure rates were two or three times what would be expected if race and failure were unrelated. In Missouri, only 3% of successful applicants were black. Illinois, on the other hand, accounted for 38% of failures but only 11% of successes. The report also found that black examination scores averaged more than 10 points lower than whites when years of education and training were held constant.

Other Adverse Effects of Licensing

Restricted entry through licensing palaces disadvantaged people at a server handicap without necessarily improving the quality of services received by the consumer. 

Occupation licensing also produces what authors Sidney Carroll and Robert Gaston call the “Cadillac effect.” By insisting on the stiff requirements for entry, licensing provides high-quality services for high-income people. But people with low incomes, who cannot afford to pay the higher prices, are forced to do without the service, do the work themselves, or rely on low-priced, unlicensed charlatans.

Excluding Blacks from Trades

The question the author answers in this chapter is whether racism, in the sense of antipathy toward or personal preferences against blacks, by itself constitutes an insurmountable barrier to upward economic mobility. Considerable evidence suggests that racism by itself does not. 

Using Licensing to Exclude Blacks

As discussed previously, occupational incensing can reduce employment opportunities by creating artificial or unrealistic standards. It can occur without apparent racial motivation, as has been shown in the case of a cosmetologist. Occupation licensing has also been used as a tool to achieve racist goals, such as the elimination of blacks from a craft. Historically, the tat it, when coupled with white-dominated craft unions, has been a particularly effective means of reducing black employment. Plumbers’ and electricians’ craft unions explicitly advocate licensure laws as means to eliminate black competition. 

Proposals for licensing as a means of eliminating black tradesmen were not restricted to the South. In Kansas City, black was denied entry into several trades, including plumbing and electricity. In New Jersey, it was reported to be impossible for a black to become a licensed plumber or steamfitter. In Chicago, blacks failed to gain advances after years of effort. 

Another method used to exclude, especially effective against blacks, involved apprenticeship examinations. 

Union Growth and Exclusion of Blacks from the Craft 

In Philadelphia in 1836, the Society of Friends had compiled a directory of occupations in which blacks were employed. Significantly included were such skilled jobs as cabinetmakers, printers, plumbers, sailmakers, ship carpenters, and stonecutters. By the end of the 1890s, black had been forced out of most of these and other craft occupations. 

It does not take much to conclude that the decline in black employment in the crafts, including electricians and plumbers, stemmed from a tradition of radical exclusion policies by labor unions. The International Brotherhood of Electric Workers and the United Association of Plumbers and Steamfitters unions long excluded blacks from membership by tactics agreed upon among their members. 

Some scholars have made the baseless argument that blacks earned the hostility of labor unions by their willingness to work for lower wages. A union could have easily fought this tendency by admitting blacks as members. 

New Deal and Black Workers

While white unions could deny blacks memberships, they were not as effective in denying them employment. Like any other seller of goods or services, black would-be workers found that why could appeal to employers’ desire for higher profits by offering to work at lower prices. 

During the New Deal, the power of workers to offer that “compensating difference” began to erode. The National Recovery Act (NRA), which became law in 1933, established codes that required the payment of set wages for certain industries. Those codes were established generally by exclusionary union-business panels. The NRA also provided for minimum wages based on what certain classes of workers received in the past. Since the act created set wages, it reduced employer incentives to hire blacks; because such hiring provided no economic advantages, there was no reason for employers to put up with white workers’ hostility and conflict that might result. Some employers hired only whites. Others eliminated menial jobs held by blacks because they could not pay the mandated wage. 

The Wagner Act, which was later named, was thought to be unconstitutional; however, the “new” Supreme Court, having abandoned judicial review of economic legislation, upheld its constitutionality. This translated to unequal treatment of backs by unions in a loss of previously available employment opportunities. 

New Deal legislation was devastating for the black workers. In 1930, the national total unemployment rate was 6.13%. However, in that year, unemployment for blacks stood at 5.17%. 

The Wagner Act not only conferred monopoly power on labor unions but also made it illegal for employers to use blacks as strikebreakers. The higher, union-mandated wages led to mechanization and elimination of some low-skilled jobs performed by blacks. The Agricultural Adjustment Act accelerated the mechanization of farms and displaced many black workers. In addition, the Fair Labor Standards act, enacting minimum wages, began the elimination of many jobs and contributed to radical discrimination. 

There is no question about racist union exclusionary policy and practices of the past. But what can be said about today? There is little evidence of continued flagrant racial exclusion. However, in some craft unions, blacks are virtually absent. That can be explained in several interacted ways. One is that black workers may not be seen to join the union because, seeing the relatively few black members, they view their chances of admission as slim. Second, entry requirements may have been raised to discourage black membership. That, related to a third possible reason, is the entire package of entry conditions, which includes long apprenticeship periods and restrictions on the number of apprentices, seniority rules, artificially high wages, and licensure. 

Racial Discrimination in the Trucking Industry

The discrimination practices of the International Brotherhood of Teamsters, the dominant union in trucking, have been an important impediment to black opportunities in the industry. Unions played a major role in excluding blacks from trucking, particularly in the South. As wages in the industry began to rise, however, the job became attractive to whites. And as the trucking industry became more unionized, union work rules penalized blacks trying to advance to the more lucrative position of the over-the-road driver. 

The International Brotherhood of Teamsters negotiated seniority rules that were part of its National Master Freight Agreement. Although there were blacks in the section of the Teamsters Union that dealt with over-the-road labor, those drivers were on a separate seniority list. The significance of that: if a dock man or local driver sought to move to the over-the-road list, he had to give up all the seniority list. Such a rule, because of the risks of unemployment and layoffs, acted as a powerful inducement not to transfer. 

The economic impact of seniority rules struck through collective bargaining agreements was critical: they reduced minority opportunities to gain over-the-road trucking skills. They also perpetuated the effects of past discrimination, because many trucking companies did not hire black road drivers until more recent times. 

Another significant factor in the problem that blacks faced in getting over-the-road truck driving positions was the refusal of white truck drivers to ride with them. 

Seniority rules, the refusal of white drivers to ride with black drivers, and the Teamsters’ highly discriminatory job-referral practices contributed to reducing black opportunities for jobs in the trucking industry. 

Deregulation and Black Opportunities

Traditionally, blacks have had few opportunities in the trucking industry, working either as for-hire drivers or owner-operators. There is little evidence that discrimination in the trucking industry came to an end after the passage of the Civil Rights Act of 1964, with its Title VII making employment discrimination illegal. 

Deregulating the industry opened up opportunities for black owner-operators. During the regulated period, only 9.4% of the Current Population Survey sample were owner-operators; after deregulation, blacks accounted for 26.4% of that category. By comparison, blacks were three times more likely after deregulation to be owner-operators than they were before it. 

Another result of the Motor Carrier Act of 1980, which deregulated the interstate trucking industry, was a near-doubling of the number of authorized ICC carriers: they rose from 18,000 to 33,548 in 1984. During the first year of deregulation, the commission granted authorization for 27,960 additional routes to new and existing carriers. Freight rates fell between 5% and 20% during 1980 and 1981. By 1986, revenue per truckload fell by 22%. The reason: greater competition brought more schedule reliability and more specialization of services. Failure rates were greater after deregulation, but truck efficiency and accident rates improved. 

Racial Terminology and Confusion

Part of the confusion in understanding racial issues lies in the imprecise and ambiguous language used by scholars and intellectuals alike in discussing race. Words can, and usually do, have more than one meaning, and therefore can be used ambiguously. 

An example of ambigús language is found in the use of the phrase “racial segregation.” Consider the following observations. Blacks represent about 65% of the Washington, D.C., population. Reagan National Airport serves the Washington area, and like every such facility, it has water fountains. At no time has the writer observed anything close to blacks being 65% of water fountain users; a wild ugliness would place the usage at 5% to 10% at most. To the extent that this observation approximates reality, would anyone move to declare that Reagan airport water fountains are racially segregated? 

Just because blacks are not proportionally represented in some activities, according to their numbers in the general population, how analytically useful is it to assert that the activity is racially segregated? A more useful test is whether, for example, a black person at Reagan airport is free to drink from any water fountain he chooses. If the answer is in the affirmative, then the water fountains are not racially segregated, and that would be true even if no black person ever uses the water fountains. 

When an activity is not racially mixed today, a better word is racially homogenous, which does not mean that it is racially segregated, at least in the historic usage of the term. Why blacks are “underrepresented” in some activities and, “overrepresented” in others may reflect personal preference,s history, cultural influences, income differences, and discrimination. 

Those who advocate and litigate for school desegregation today are not fighting against state and local laws that mandate racial separation. Their argument rests solely on the fact that black attendance at some schools is not proportional to or representative of the number of blacks in the population. The fact that many of today’s large-city school systems are predominantly black is mostly a result of residential housing patterns and snot legislated school-segregation policy. That fact makes racial heterogeneity virtually impossible. 

Discrimination Operationally Defined

More generally, and inclusive of legal attempts to define the term, discrimination might be operationally defined as the act of choice or selection. All selection necessarily and simultaneously requires non-selection. Choice requires discrimination. When the term discrimination is modified with the nouns race and sex, we merely septic it the criterion upon which the choice is made. 

Our lives are largely spent discriminating for or against prospective selected activities, objects, and people. Some of us discriminate against those who have criminal records, who bathe infrequently, who use vulgar speech, and have improper social graces. 

Furthermore, discrimination is not consistent. Sometimes people discriminate against theater entertainment in favor of parties or against women in favor of men, and at other times and circumstances, the same people do the opposite. 

It would appear that the term discrimination, defined simply as the act of choice, is morally neutral in the sense that there are no unambiguous standards that permit us to argue that the choice to a tent the University of Chicago or to purchase a Bordeaux wine is more righteous that the choice to attend Harvard University and purchase a Burgundy wine. More important, no argument can be made for the government forcing a person to select one university or wine over another. 

Refusal to deal can apply to any setting, including activities like marriage, friendship, invitations to social gatherings, and golf games, all of which might affect one’s “life chances.” If refusal to deal is permitted in one activity, for any arbitrary resacón, what case can be made for not permitting it in others? The practical answer to this question has more to do with the threat of government violence against people who refuse to deal with prohibited ways than with any kind of internally consistent logic. 


In much of the racial literature, prejudice is usually seen as suspicion, intolerance, or irrational hatred of other races. Sometimes it is seen as oppression, as suggested by law professor Khiara M. Bridges. Other times, prejudice is understood to mean racial preferences as implied by Justice Sandra Day O’Connor. 

These visions of prejudice expose analysts to the pitfalls of making ambiguous statements and advancing faulty arguments. A useful operational definition of prejudice can be found by examining its Latin roots – praejudicium, meaning “to judge before the facts are known.” Thus, it can be defined prejudicial acts as decision-making based on incomplete information. 

That kind of decision-making, before facts are known, is necessary and to be expected in a world of scarcity, uncertainty, complexity, costly information – and often erroneous interpretations of that information. Furthermore, different individuals might arrive at different interpretations even if confronted with the same information. Also, different people reach different decisions on just what constitutes the optimal quantity of information to gather before making decisions. 

Sometimes when people use the terms prejudice and stereotype, they are used pejoratively to refer to those whose chosen quantity of information for decision-making the observer deems too small. However, what constitutes the optimal quantity of intonation collected before decisions are made is subjectively determined by the individual’s calculation of his costs and benefits. 

The information does not cost less. To acquire an additional unit of it requires a sacrifice of time, effort, or other resources. People, therefore, seek to economize on information costs. In doing so, they tend to substitute less expensive forms of information for more expensive forms. Physical attributes are “cheap” to observe. If a particular physical attribute is perceived as correlated with a more costly-to-observe one, the observer might use that attribute as an estimator or proxy for the costly-to-observe attribute. 

Hiring and Employment Discrimination

May recruitment and hiring practices are often said to reflect racial preferences, but an alternative explanation might be drawn from the previous sections about seeking information. When a company sets out to hire workers, it might discover how productive those seeking jobs are and whether they are suitable for training. Since this process costs money, an employer has no incentive to select a recruitment strategy with a high probability of success. For example, if there’s thought to be a correlation between the candidate’s performance and the quality of the high school he attended, some recruitment costs can be reduced just by knowing that simple detail. Research by Professor Abigail Thernstrom found that:

In 1990, the average 17-year-old black American could only read as well as the typical white child who had not yet reached the age of 13. In 1992, just 18% of black students in 12th grade were rated “proficient” or “advanced” in reading, as compared with 47% of whites. As of 1998, those numbers were unchanged. 

Given those statistics, race might be a fairly good, though not perfect, indicator of expected worker productivity. One should therefore not be surprised that empires take race into account when assessing worker productivity. 

Objective qualifications are only part of fate information an employer or landlord wants to know before deciding whether to employ or rent to an individual. An employer or landlord might deem other information – such as trustworthiness, promptness, congeniality, respect for property, and other personal attributes – an important part of the decision. Whether a person is black or white, objective qualifications do not adequately convey information about those attributes. 

One example is the auto insurance industry which provides a nonracial example of the use of physical attributes. Drivers under twenty-five years of age are charged routinely higher premiums. But one doubts that the auto insurance companies can be charged for disliking young people. Life insurance companies charge women lower premiums. Can we reasonably assert that life insurance company like women and dislike men? 

Suppose an employer has racially neutral preferences and is uncertain about average black worker productivity relative to whites. What would encourage or discourage him from seeking more information and experimenting with and perhaps revising his beliefs? Laws or practices that require him to pay all workers identical wages and laws that make it very costly to fire a worker reduces employer incentive to experiment. 


 The underlying premise of this book is that racial discriminatory preferences do not explain all they are purported to explain. This is not to say that racial discrimination does not exist and has no effects. The policy-relevance question is how much of what we see can be explained by discrimination alone and how much by other phenomena. 

Elementary economic theory amply demonstrates there are differences between what people would like to do, what they can do, and what they will find in their interest to do. Simply the knowledge that a person prefers Rolls-Royces to Fords, or twenty-five-point diamonds to two-point diamonds, does not tell us much about what he will in fact purchase. To understand more fully what people will do, one must also know the restraints they face and what must be sacrificed. In other words, we must acknowledge the role of income and prices pay in human behavior. 

Differences between what people want to do and what they can do, or find it in their self-interest to do, apply to matters of race as well. Efforts to form discriminatory collusions against blacks encounter problems akin to efforts to form other kinds of collusive agreements. The major problem is that what is optimal for an individual member most likely will not be optimal for the group as a whole. For example, when a seller’s conclusion is organized, it pays an in-visual member to heat by charging lower prices while other members honor the one agreed upon. By shading their prices, the members who cheat can sell more of their products and earn greater profits at the expense of faithful members. 

There is symmetry in buyer collusions. It pays an individual member to offer a higher price while other members honor the agreement to offer the lower one. Because of differences between what is optimal for the individual and what is optimal for the group, voluntary collisions (those not legally enforced) tend to break down. 

One example of racially discriminatory collusion breaking down can be found in Major League Baseball and professional football. In baseball, a large pool of talented players in the black leagues, and the fact that such talent could not be ignored and denied indefensible, made it only a matter of time before racial collusion in professional sports would break down. In 1947, when the Brooklyn Dodgers signed Jackie Robinson to a contract, and two years later hired two other black players, the rest of the league teams decided they could not continue to suffer the competitive disadvantage of discriminating against the large pool of available, highly qualified blacks.

Today, black athletes dominate areas of sport where they were once excluded. As of 1985, over 75% of American professional basketball players, 54% of professional football players, and 20% of professional baseball players were black. In professional basketball, 21% of the twenty-six times the Most Valuable Player award was won, between 1955 and 1981, it was won by a black. Black players tend to be the highest paid. As early as 1970, four of the six baseball players in the $125,0000 and higher salary bracket were black. As the twenty-first century begins, black dominate professional sports, except for baseball even more so.  

There have been many successful collisions, and they have worked against the best interest of blacks. The reason is simply that the conditions for their breakdown have not been present. Effective collisions require an enforcement mechanism that may include, inter Alia, the following: penalties for noncompliance with the term of the collusion, state-enforced laws or standards, and no complying members denied the right do business; and licenses or special privileges revoked for “unethical” behavior. The ultimate enforcement mechanism is the threat of violence, usually at the hands of the government. When there is government enforcement of collusive action, paying a higher price or charging a lower price becomes more than a matter of failing to honor a gentlemen’s agreement; it becomes a criminal act subject to fines and/or imprisonment. 

As has been discussed throughout, numerous laws, regulations, and ordinances have reduced or eliminated avenues of upward mobility for many blacks. The most common feature of these barriers is that they prevent people from making voluntary transactions that are deemed mutually advantageous by the transactions themselves. While there is a long history of licensing laws written with the express purpose of restricting opportunities for blacks, it is misleading to see those laws as necessarily anti-black.  

Recognizing that laws creating economic barriers are anti-people is important, not for analytical clarity alone but for making policy recommendations as well. 

Economically, the solution to some of the problems of upward mobility that many blacks face is relatively simple. The more difficult problem lies in the political arena: how to reduce or eliminate the power of interest groups that use government to exclude? 

My rating:

This book in 3 key points

  1. Blacks Americans, even in the face of slavery have always had the entrepreneurial spirit that allowed them to buy their economic freedom.
  2. The unions and whites racists have always collided with the state to prevent black competition.
  3. It is in the face of governmental collusion and regulation that black Americans struggle, not under the free market. 

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