Discrimination is Costly. Is it Costly Enough?

As capitalism falls in popularity among the younger generations, the opinion that free markets incentivize discrimination has become more common. Issues such as the racial and gender earnings gap and callback discrimination against black Americans are highlighted as proof of this conclusion. So, is American capitalism moral? Do markets encourage or punish discrimination? What is the government’s historical record of racial discrimination? Bryan Caplan joined EconTalk host Russ Roberts in this early episode to discuss the degree to which the market solves discrimination, the misconception about European labor markets, and how American economic values support human happiness and ambition. Caplan is a professor of economics at George Mason University, research fellow at the Mercatus Center, adjunct scholar at the Cato Institute, and publishes his own substack, Bet on It. Caplan is also the author of four books, and was a regular blogger at EconLog from 2005 until 2022.

The most important topic Caplan and Roberts explore  is debunking the view that markets incentivize discrimination, which non-economists tend to hold. The main evidence for this argument is the earnings gaps along lines of sex, race, sexual orientation, and gender identity. Caplan and Roberts argue that this belief is misguided, as if this was true and employers could get away with paying oppressed groups less, then why aren’t these groups over-represented in firms?

Most economists, including Caplan tend to believe that, generally, the market will eventually exterminate discrimination due to its costly nature. This added cost of discrimination will eventually cause the firms that are focused exclusively on profit instead of race to be more successful than those that care about profits and race. 

The evidence for the market punishing discrimination isn’t just theoretical, as the economic data of residual wage differences shows a decline in discrimination, and even an elimination of the black-white income gap if certain factors are controlled for. Says Caplan, 

But, as with many topics in economics, it’s not that simple. As Caplan states, “If you look at the debates between economists themselves, there you’ll have a discussion about how much the market limits discrimination.” The conditions of environmental discrimination are very consequential, as if every employer or consumer were equally discriminatory then the market would punish discrimination significantly less.

There’s even more reason to trust the market to solve discrimination over time, as the government’s record in fighting discrimination is quite poor, and has caused a regression in racial equality that the market was working towards. Caplan cites Jennifer Roback’s work on labor restrictions in the south, specifically  Jim Crow Laws, that made it illegal to entice an employed laborer to switch firms in order to temper competition between black and white workers. These laws went as far to outlaw recruiting a laborer to leave the state or even the county, vagrancy laws and laws against unemployment added to the inability of black workers to change jobs for higher wages. All these laws reduced the attractiveness of black labor which the market, specifically in the less discriminatory north, wanted to jump on.

Another example of government abetted discrimination was the Davis-Bacon Act, which set a minimum wage. According to Caplan, this made it easier for white employers to act on their ingroup racial bias.

When the ethics of markets are often called into question, often by those on the left wing, Europe is mentioned as a successful model of  market restrictions, and is viewed as a more prosperous and humane social democracy. However, Caplan disagrees. He believes that Americans have a higher standard of living, and this is precisely due to the free market, rugged individualism, and more relaxed enforcement of regulations that those who question the ethics of the free market rail against. Caplan uses the example of labor regulation enforcement as reasoning for the lower unemployment rate.

This prompts Roberts to ask an excellent question: What if Europeans just value security and stability over economic change and rugged individualism? But Caplan pushes back.

What can be taken from Caplan’s arguments in this episode? First, the free market punishes discrimination due to the large added cost and the reality of human difference. This will eventually lead to market discrimination to go extinct as discriminatory firms have less of an ability to compete with the lower prices and higher quality products and service of non-discriminatory ones. The market can create a positive feedback loop where previously discriminatory people begin to question their own discrimination because of the success of non-discriminatory individuals. There’s even more reason to believe that the market has this ability due to the historical evidence of government intervention attempting to stop the non-discriminatory effects of the market, such as minimum wage laws, and vagrancy and enticement bans in the Jim Crow South. The ethical nature of the market extends to debates over the European and American economic systems. The American focus on individualism, less strictly enforced restrictions, and a generally freer market has not only led to a lower unemployment rate, higher standard of living, and more robust job growth, but also leads to more human happiness.

While listening to this episode I had a few questions. We hope you’ll take a few moments to share your thoughts as well.

1- While free markets tend to reduce dissemination, are the cases in which it won’t? For example, what if discrimination is culturally enforced to the point where employers and consumers value discrimination over profit? Could this cause discrimination to escalate to the point where the market causes it to grow? Caplan states that the success of less discriminatory people could convince discriminatory people to question their own views. Couldn’t the economic success of less discriminatory people have the opposite effect? could this lead to stereotyping and social stratification leading discriminatory people to fall deeper into discriminatory views? What if the population being discriminated against is small enough to the point where the costs of discrimination are significantly less? How long will it take for discrimination to disappear in this environment?

2- When market discrimination in the context of racial and gender-based disparities is discussed it’s often explored in the context of individual racism or sexism as opposed to systemic discrimination and cultural factors. The problem with this is the misunderstanding of institutional or cultural discrimination; black Americans earn less than white Americans on net due to the concentration of poverty, crime, and poor education due to the historical effects of slavery, urban renewal, and housing discrimination. That being said, there is some evidence for individual racism such as the Emily and Greg vs Lakisha and Jamal callbacks study, if a minor factor behind the racial mobility gap. Why is individual discrimination so often highlighted as the reason behind socioeconomic racial gaps in discrimination as opposed to institutional discrimination? Can a spread of this view lead to an inability to solve the problem of limited economic opportunity and mobility among black Americans?

3- The government policy failures in “solving” discrimination that Roberts and Caplan referenced seem conclusive, but are there alternatives that might be more effective? For example, how might more government involvement fare in solving institutional racism, such as expanding SNAP benefits, baby bonds or public option healthcare, childcare, and paid family leave? How about more classically liberal solutions such as removing zoning laws, increasing competition among schools, or reforming welfare programs to encourage savings? Explain.

4- It’s a common argument among libertarians that discrimination shouldn’t be outlawed due to freedom of association. Why should discriminated against groups be forced to wait for the market to reduce discrimination enough to where they can participate in society at the level of those discriminating against them? Why does the freedom of association for discriminatory people outweigh the rights of discriminated against people?

Kevin Lavery is a student at Western Carolina University studying economic analysis and political science and was a 2023 Summer Scholar at Liberty Fund.