Do Free Markets Fight Discrimination?

By Robert VerBruggen

There's a popular theory in libertarian circles, most famously articulated by the economist Gary Becker, that free markets fight racial discrimination. The argument goes that since discrimination is irrational, businesses that practice it will tend to lose ground to those that don't. For example, if some businesses refuse to hire blacks, other businesses will hire the passed-over workers at a discount -- and use the savings to put the discriminators out of business.

Unsurprisingly, some have jumped to connect this theory to the Donald Sterling fiasco. David Henderson points out that the racist Sterling hired blacks and paid them well to play on his basketball team. And Reason highlighted the protests that took place when Sterling's comments came to light.

These are perfectly fine points. But we can't forget that Sterling was also accused of discrimination in his real-estate business, in terms of both employee hiring and tenant selection. A court ordered him to stop using the word "Korean" in the names of his buildings, because it was clear this practice was part of a bigger strategy to keep blacks and Mexicans out and encourage Koreans to rent. This discrimination could stem from any or all of three major holes in the "markets fight discrimination" hypothesis.

The first point is obvious but worth spelling out: Markets do not force businesses to be as efficient as humanly possible; they merely exert pressure in that direction. Every business has productivity issues -- employees who spend too much time on Facebook, etc. Some businesses survive for years despite having more than their share of these problems. Most likely, some businesses just live with the inefficiencies of discrimination.

And sometimes discrimination isn't inefficient. The second problem with the hypothesis is that customers can be racist too. Sterling's comments sparked protests, but they would have been celebrated at other times and in other places. And less blatant forms of racism are probably still rewarded; perhaps visitors to Sterling's housing complexes would have seen black residents as an issue, whether consciously or unconsciously.

The third problem is that race can be a genuine, if imprecise, indicator of various qualities. Racial gaps in school performance and crime rates are well known, and, trading precision for convenience, a lazy business owner might use race as a proxy for these attributes rather than measure them directly. There's evidence of this in Sterling's housing-discrimination case: One witness testified that he said, "I don't have to spend any more money on [Koreans], they will take whatever conditions I give them and still pay the rent ... so I'm going to keep buying in Koreatown." Further, in customer service, sometimes race is one of very few pieces of information available with any predictive power; Ian Ayres, for instance, has found that black taxi customers tip less.

Even more problematic, sometimes racial gaps persist after attempts have been made to measure a trait directly. For example, black college students get lower grades than white students with the same standardized-test scores. So, even if a businessperson has a process for measuring the qualities he's looking for, he might be rewarded for discriminating racially above and beyond that. If the only purpose of college admissions were to admit the students who'd get the highest grades, blackness would be counted against applicants.

Whatever the reason, discrimination persists, and not just in flagrant racists like Sterling. Studies using resumes and in-person job applications find that otherwise similar whites and blacks are treated differently in the marketplace. Just last week I wrote up a study about how college professors respond to e-mails from students with different racially stereotypical names.

The free market punishes discrimination sometimes. Other times it doesn't. I'm not sure it should be all that comforting to libertarians that the market got blacks onto Sterling's basketball team when it failed to give them access to his housing.

Robert VerBruggen is editor of RealClearPolicy. Twitter: @RAVerBruggen

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