How Legal Activism Stopped the Market from Abolishing Segregation – Foundation for Economic Education – Working for a free and prosperous world

Source: How Legal Activism Stopped the Market from Abolishing Segregation – Foundation for Economic Education – Working for a free and prosperous world

The Untold Story

What is often lost in the short history-class-version of this case is the effort by the company to comply and remove the segregation law. This may appear counterintuitive to some, but the market reality made segregation expensive. Looking at the requirements of the law (see above) makes it clear why securing separate accommodations, either by car or partition, is costly, and when you are in the business of selling seats, increasing the likelihood of empty seats works against that interest.

In the 1950’s the economist Gary Becker at the University of Chicago began to write about the economics of discrimination. His writing was contemporaneous to the Brown case which was decided in 1954. Becker’s book, titled The Economics of Discrimination and released in 1957, began a discussion on discrimination in the market which has yielded counterintuitive results in many instances.

Using economic assumptions to describe discriminatory behavior, Becker observed two basic features of discrimination. First, that discrimination may depress the wages and employment opportunities of those discriminated against and conversely that the discriminator may pay higher wages to avoid hiring a minority.

If for example, a white worker gets paid $2 more an hour than an African American worker, the employer is paying a $2 an hour penalty to maintain his discriminatory preferences. Over time, this is a difficult practice to maintain in a competitive environment. The result is parity when comparing equal, similarly situated people. Most employers or businesses are not willing to pay that penalty in the long run.

Since Becker’s book, others have also observed the impact of discrimination in markets and the tendency to move away from discrimination unless the base is sufficiently broad and the taste for discrimination is rather strong. However, in this scenario discrimination is highly likely to arise via democratic mechanisms as well, as it did in the South unless there is a constitutional constraint to prevent discriminatory democratic results.

Additionally, when faced with strong preferences for discrimination those discriminated against are likely to move to geographic areas with more equal outcomes, much like the movement to the north of about six million African-Americans during The Great Migration, which was certainly exacerbated by Jim Crow.

The Free Market Is the Great Equalizer

What Plessy illustrates is that even in a place willing to legalize discrimination (meaning the democratic taste for it was sufficient to be legislated, even if it failed to reach a true majority due to potential disenfranchisement), the market was pushing toward more equal market outcomes and had to be artificially constrained. Essentially, the Plessy verdict granted a special interest group their preference and arrested the development of the market preventing it from moving away from discriminatory practices.

With the hindsight of Becker and others like him, we see how Plessy set the stage for years of subsidized discriminatory behavior. In practice, the schools and other segregated venues behaved as cartels with the ability to impose costs on an industry and essentially remove it as a matter of competition for certain services. If all market actors faced the same imposed costs, there is no incentive to compete to remove that cost.

The Plessy verdict prevented the market from removing discriminatory behavior and it also created a rent-seeking incentive. With the Plessy verdict, racists and segregationists learned they could implement their preference of a segregated society by diffusing the costs among the population at large. Until Brown, these rent-seekers were able to implement their market preferences and it is no surprise that after Plessy Jim Crow continued to grow throughout the South.

There is also a political reason why markets should be preferred over legislation to remove discrimination. Markets tend to work quietly in the background; there is no grand political movement, no sweeping legislation, and very little reactive backlash against those politics that ingrain, often unintentionally, discriminatory views.

In contrast, the doux commerce thesis suggests markets are institutions that bring about desired social change, peace and cordiality, and anti-discrimination becomes a byproduct of this thesis. Two of the most recent advocates of this view have been Deirdre McCloskey in her Bourgeoise trilogy, and Nathan Oman in his book, The Dignity of Commerce. Markets create more peaceful, less discriminatory communities simply because they penalize discrimination and introduce personal interactions within the market.

The lessons of Plessy, often overlooked, are two-fold. The market removes discrimination in a more peaceful manner if we allow it to do so but the desire to intervene on behalf of one group or another is very alluring (an argument to restrict, maybe chain, democratic governments may be merited to some degree based on this observation).

When we take the stance that intervention is necessary we increase the risk of a less peaceful outcome and increase the incentive for rent-seeking behavior, even when discrimination is not the underlying impetus. Understanding the history of this pivotal Supreme Court case teaches how markets provide more favorable outcomes and dispels the myth that free markets are tools of oppression.

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