In agriculture, especially—and the South was largely agricultural at the time—there is an inherent urgency about getting the land plowed and the seeds planted in the spring, or else there will be no crop in the fall. Those white landowners who were the first to violate the terms to which other white landowners sought to limit the economic benefits to black workers and sharecroppers stood to be the first to assure themselves of a workforce sufficient in both quantity and quality to maximize the size of the crop that could be grown on a given piece of land.
Other white landowners, who stuck by the restrictions and/or who cheated the black workers and sharecroppers in various ways, tended to find themselves having to make do with whatever quantity and quality of black workers and sharecroppers remained, after other white landowners had skimmed the cream by paying higher wages and higher crop shares to improve their own prospects of a profitable crop.
It is hardly surprising that organized efforts at suppressing black workers’ pay and black sharecroppers’ shares of their crops often broke down under such economic pressures. “What emerges” in this case was that black incomes per capita in 1900 were, at a minimum, “almost half again” higher than they had been in 1867–68. This represented a rate of growth higher than that in the American economy as a whole during that period.19 Because they started from a far lower economic level, blacks were still poorer than whites. But Professor Higgs’ data indicated that “black incomes grew more rapidly than white incomes over the last third of the nineteenth century.”20 And about ninety percent of blacks lived in the South during that era.
Businesses in general, whether making decisions in a labor market or a product market, are not like professors voting at a faculty meeting, because those votes seldom have any costs for the professors themselves, despite whatever good or bad results such votes may have for students or for the academic institution. The difference is the difference between decisions made subject to consequential feedback in a competitive market and decisions made with insulation from such feedback in academia and other insulated venues.
South Africa Under Apartheid
To avoid endless and inconclusive debates about the presence or magnitude of racism, we can test our hypotheses about the costs of discrimination in a context where there is no ambiguity on the subject—namely, South Africa during the era of apartheid, ruled by a white minority government, elected with the black majority denied a vote, and openly promoting white supremacy.
Apartheid laws limited how many blacks could be employed in particular industries and occupations, and forbad their being hired for work above certain levels in those industries and occupations. Yet white South African employers in competitive industries often hired more blacks than they were allowed to under the apartheid laws, and in higher occupations than those laws permitted.
A government crackdown during the 1970s led to hundreds of firms in South Africa’s construction industry being fined for violating those laws. Nor was the construction industry the only one in which competitive businesses were fined for hiring more blacks, and in higher occupations than allowed under the law. In some other industries, blacks even outnumbered whites in some particular job categories where it was illegal for blacks to be hired at all.21
There is no compelling evidence that the white employers violating those laws had different racial views than the white legislators who passed such laws. What was different was that employers who failed to hire black workers whom it was profitable to hire paid a price for Discrimination II, in the form of lost opportunities to make money, while the legislators who passed laws imposing Discrimination II paid no price at all. Indeed, legislators who failed to pass such laws would pay a price politically, in a situation where only whites could vote, and where white workers wanted protection from the competition of black workers.
Both the employers and the legislators were rationally pursuing their own self-interests. It was just that the institutional incentives and constraints were different in a competitive market from the incentives and constraints in a political institution. Nor were labor markets the only markets affected by the costs confronting discriminators in South Africa.
Apartheid laws made it illegal for non-whites to live in certain areas set aside by law for whites only. Yet many non-whites in fact lived in those whites-only areas. These included black American economist Walter E. Williams during a three month stay in South Africa, doing research.22 There was at least one whites-only area in South Africa where non-whites were a majority of the residents.23
Here again, costs are the key. The costs to those owners of rental property in whites-only areas, who forfeited economic benefits available by refusing to rent to non-whites, competed with the costs of disobeying apartheid laws, and the latter did not always prevail.
While racists, by definition, prefer their own race to other races, individual racists, like other people, tend to prefer themselves most of all. That is what led to widespread violations of apartheid laws by white employers and landlords in competitive industries in South Africa. It cost nothing for white South Africans to vote for candidates promoting white supremacy. But the costs of refusing to hire black workers who would make their own business profitable could be considerable. Moreover, the cost of refusing to hire blacks when other businesses competing in the product market were hiring them, risked having competitors with lower prices be a threat to the survival of a business operating in a competitive market.
This is not to say that discriminatory laws and policies have no effect. There are costs to disobeying laws, as well as countervailing costs to following such laws, so outcomes depend on particular circumstances in particular times and places.
The costs of Discrimination II can be far lower, or even non-existent, in situations where free market competition does not exist, such as in (1) public utility monopolies whose prices and profit rates are directly controlled by government, (2) non-profit organizations, and of course (3) government employment. In all these particular situations, Discrimination II has tended to be far more common than in competitive markets, not only in South Africa under apartheid, but also in other countries around the world.24
Unless one believes that decision-makers in these particular institutions have different racial or other views than decision-makers in competitive markets, and that such differences persist over time, as new generations of decision-makers come and go, the reasons for such institutional differences must be sought in particular incentives and constraints growing out of differences in the circumstances of those institutions.
Institutional Incentives and Constraints
One of the landmark struggles in the civil rights movement in mid-twentieth-century America was a campaign against laws in most Southern states mandating that black passengers sit or stand only in the back of buses, with the seats up front being reserved for whites. Although many people on both sides of this struggle regarded those laws as though they had existed from time immemorial, they had not. The history of such laws illustrates again the different roles of economic incentives and constraints versus political incentives and constraints.
Three decades after the end of slavery, laws mandating racially segregated seating in municipal transit vehicles began to be passed in many Southern communities, toward the end of the nineteenth century. The political situation had changed from that in the period immediately after the Civil War, when U.S. troops were stationed in Southern states, and Southern governments were subject to federal policies granting blacks the right to vote during what was called the Reconstruction era.
With the end of Reconstruction, and the return of local self-government in the South, blacks often lost the right to vote, by methods ranging from laws to organized terrorism. Racially segregated seating on municipal transit vehicles was just one of the political consequences. Before these laws were passed, it was common for blacks and whites to sit wherever they felt like sitting on public transportation vehicles in the South.
Many, if not most,
of the bus and trolley companies during that era were privately owned, and their profits depended on how many people—whether black or white—chose to ride in their vehicles.
The decision-makers in these privately owned companies understood that they could lose profits if offending black customers by making them sit in the back, or to stand when all the back seats were taken, even if there were vacant seats in the front section that was reserved for whites. Indeed, racially segregated seating could even offend some whites, when all the white section seats were filled but there were vacant seats in the section set aside for blacks.
In short, racially segregated seating in municipal transit vehicles was seen, by those who owned or managed such companies, as something that reduced profits. Not surprisingly, municipal transit companies in the South fought against the passage of laws requiring racially segregated seating in buses and trolleys. After losing politically in the legislatures, municipal transit companies then took the issue into the courts, where they lost again. And, after the laws went into effect legally, many Southern municipal transit companies simply did nothing to enforce racially segregated seating. In many places, both black and white passengers continued for years to sit wherever they felt like sitting.25
Eventually, however, Southern government authorities cracked down. They began charging municipal transit company employees with violations of the law for not enforcing racially segregated seating, and in some cases the owners of those companies were threatened with prosecution if those transit lines did not enforce the racial segregation laws. Only then did the laws that had been passed, in some cases years earlier, finally get enforced.26
Railroads were also affected economically by racial segregation laws. When black and white passengers had to be carried in separate coaches, this imposed the considerable cost of buying additional coaches for their passenger trains, as well as the further additional costs of more fuel to move the now heavier trains.
This was especially costly where there were insufficient passengers to fill one coach. If there were only enough black and white passengers for the total to fill two-thirds of the seats in a coach, racial segregation laws could create a situation where there were now two coaches required, each with only one-third of the seats occupied.
Like municipal transit companies, railroad managements in the South opposed the racial segregation laws, in their own self-interest, even if their racial views might not have been any different from those of the politicians who passed such laws. But the incentives to which the politicians responded were votes—that is, white votes—while the incentives to which railroad owners and managers responded were financial, and money was the same, regardless of the racial source.
The famous Supreme Court case of Plessy v. Ferguson in 1896 arose from the cooperation of the railroads with Homer Plessy, who was challenging these racial segregation laws, in order to create a test case.
Although Plessy was part of the black community, he was genetically far more Caucasian than African, and was physically indistinguishable from white men. Had he simply gotten on a train and ridden to his destination, there was little likelihood that he would have been questioned about being seated in a railroad car set aside for whites only. But the attorneys for the railroad and the attorneys for Plessy cooperated in arranging a legal confrontation, so that there would be a case to take into the courts.27 Unfortunately for both, and for the cause of equal rights in general, the Supreme Court majority ruled against them.
There is no predestined outcome of the conflict between economic and political forces. What is important is to recognize the implications of that conflict when crafting or changing laws and policies.
It is not only in political institutions, but also in some economic institutions, that decision-makers are insulated from having to pay the costs of Discrimination II.
Public utility monopolies, whose prices and profit rates are directly controlled by government regulatory agencies, are among the institutions insulated from paying the economic costs which a competitive market imposes on discriminatory behavior, whether directed against ethnic minorities, women or others.
Although engaging in Discrimination II when hiring employees could mean lower profits for a firm operating in competitive markets, a government-regulated public utility that has a monopoly in its market would not be allowed to earn a higher profit rate than the government agency deemed proper in any case. So a regulated public utility company is not forfeiting any additional profit that it would be allowed to keep, if it hired without regard to the group from which job applicants came.
Discrimination II might require the regulated public utility company to pay additional labor costs, because of having to offer higher salaries, in order to attract a larger pool of qualified applicants, from which only applicants from groups that the decision-makers preferred would be hired.* But, for a government-regulated monopoly, such costs can be passed on to customers who have little choice but to pay those costs.
The history of the telephone industry, back when telephones meant land lines, and all the major phone companies in the United States were subsidiaries of the American Telephone and Telegraph Company (A.T.&T.), illustrates this pattern.
As of 1930, there were only 331 black women in the entire country working as telephone operators, out of more than 230,000 women in that occupation. As late as 1950, black women were still only one percent of all women working for phone companies.28
However, after creation of “fair employment practices” laws in some Northern states in the 1950s and then federal civil rights laws and policies in the 1960s, many telephone companies reversed their policies, and blacks began to be hired disproportionately.
Prior to the 1960s, however, the state “fair employment practices” laws existed solely outside the South. Although a national sample of employment in the telephone industry showed that the employment of black telephone operators increased more than three-fold between 1950 and 1960,29 it was 1964 before the first black telephone operator was hired by phone companies in such Southern places as New Orleans, South Carolina or Florida.30
Meanwhile, data from a national sample of telephone companies showed that blacks accounted for one-third of the total growth in these companies’ employees from 1966 to 1968—a trend that had begun in the 1950s and was concentrated mainly in Northeastern and Midwestern companies.31 But, in the South during the 1950s, in all 11 states that had once formed the Confederate States of America, the share of blacks among male employees of telecommunications companies actually declined.32
Since all these phone companies were owned and controlled by A.T.& T., such sharp regional disparities in individual phone company policies were far more consistent with regional differences between Southern and non-Southern state governments that regulated these companies than with policies handed down from A.T.&T.’s national management.
What was consistent in all these various regions was that additional costs entailed by either preferential or discriminatory treatment of black job applicants were costs that phone companies could pass on to customers who had little choice but to pay them, since there were only land lines at the time, and each phone company was a monopoly in its own area.
It was much the same story in the government-regulated oil and gas public utilities at that time, where that regulation was also by state agencies, and increased hiring of blacks was confined to states outside the South during that era.33 These companies too paid no cost for discriminating against blacks before, nor any cost for preferential hiring of blacks afterwards. The same was true of decision-makers who ran non-profit organizations or officials in charge of government hiring policies.
Similar incentives produced similar outcomes in non-profit organizations such as academic institutions, hospitals and foundations—and different outcomes in profit-based businesses operating in competitive markets. Like decision-makers in regulated public utilities, those in non-profit organizations were able to go along with whatever the prevailing opin
ions and pressures of the time might be, without having to worry about the costs created by Discrimination II against minorities, which their institutions would have to pay.
Against this background, it is hardly surprising that employment discrimination against blacks and Jews was especially widespread among colleges, universities, hospitals and foundations until after World War II, when a revulsion against Nazi racism set in. Before that happened, however, there were 300 black research chemists employed in private businesses in the earlier era, but only three black Ph.D.s in any field employed by white universities.34
As for Jews, they were seldom found on American college and university faculties before World War II. Although Milton Friedman had a temporary academic appointment before the war, it lasted only one year, despite high praise for his work by students and colleagues alike, and he spent the war years working as a statistician before eventually becoming a regular, tenured professor of economics at the University of Chicago after the war.35
At about the same time, the University of Chicago had its first black tenured professor.36 The University of Chicago was exceptional only in doing such things before most of the rest of the academic world.*
Decades later, after the political climate had changed considerably, colleges and universities engaged in preferential hiring of black faculty, as well as preferential admissions of black students—again, without the academic decision-makers paying any price for their decisions, just as they paid no price for opposite policies earlier. “Affirmative action” in academia was sooner and more sweepingly adopted than in private industries operating in competitive markets.
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