March 03, 2021

The Myths Behind the “Capitalism Is Racist” Claim

Jan 21, 2021 |

by Lipton Matthews | Mises.org

Both theory and the empirical research shows a competitive marketplace is incongruous with racism, but the Left insists capitalism is “inherently” racist

Though numerous studies prove the contrary, it is still widely assumed that capitalism perpetuates racism.

Celebrities and academics incessantly broadcast the message that capitalism engenders racism. For example, recently on Twitter, superstar athlete Andre Iguodala informed his followers that capitalism cannot be divorced from racism: “Capitalism and racism go hand in hand. And you can’t have one without the other.”

Equally scathing is the blistering declaration of sociologist Edna Bonacich in an academic review: “Capitalism and racism are closely connected….The huge wealth of America’s white-owned corporations rests on the backs of the hard labor of workers, many of whom are people of color.”

Despite the popularity of anticapitalist rhetoric, it is woefully mistaken. Some entrepreneurs will express racist tendencies, but if they are determined to succeed in business, they have no alternative but to jettison such beliefs. Gary Becker pointed this out years ago in his frequently cited book The Economics of Discrimination. Becker posited that competition in the free market made it costly for companies to discriminate against individuals due to group identity.

By refusing to hire qualified applicants because of race or sex, businesses would lose market share. Racists may object to employing people outside of their race, however, the crux of the matter is that self-interest trumps the collectivism of racism. Although racists may abhor minorities, the urge to accumulate wealth is far more potent than the desire to discriminate.

Similarly, recent research corroborates Becker’s thesis that firms engaging in discrimination are less likely to remain competitive. Devah Pager in an innovative 2016 study testing the relationship between observed discrimination and firm longevity concludes that these firms show a greater propensity to fail:

This study builds on the findings of an experimental audit study of racial discrimination in employment conducted in New York City in 2004….We see that 17 percent of nondiscriminatory establishments had failed by 2010, relative to 36 percent of those that did discriminate. The likelihood of going out of business for an employer who discriminated thus appears more than twice that of its nondiscriminating counterpart.

Under capitalism the allure of profit serves as a deterrent to discrimination. For instance, the strident resistance of streetcar companies in the Jim Crow South to laws mandating them to segregate black customers poignantly demonstrates the market’s hostility to unjust discrimination. Economist Jennifer Roback in an article titled “Racism as Rent-Seeking” lucidly illustrates that these laws were a result of political entrepreneurship:

Race relations in the U.S. South were in a state of flux in the period immediately after the Civil War and remained so until the turn of the century, when the “Jim Crow” system of rigid segregation was put into place….Municipal streetcars were segregated by law in many Southern cities….Prior to legislation, streetcar passengers in many cities sat wherever they wished, and next to anyone they wished. There is little to indicate that segregation was introduced in response to the demands of passengers, and in some cases, passengers of both races were dissatisfied with the new rule. Moreover, some of the streetcar companies themselves actively resisted segregation, on the grounds that segregation would be too expensive….White passengers seemed to be indifferent about segregation; streetcar companies resisted segregation; certainly, black passengers resisted segregation. Who then wanted it badly enough to work for its introduction? The most likely candidates are politicians who believed that there existed latent sentiment in favor of segregation among whites. Political entrepreneurs could offer white voters something they valued enough to vote for, but not enough to bear the costs privately. Through collective action, the costs of segregation could be imposed on the (disenfranchised) black passengers and the (regulated) streetcar companies.

Roback refers to such tactics as “psychic rent seeking,’’ indicating that people leverage the force of government to acquire psychological benefits for themselves, despite incurring expenses for others.

Notwithstanding the propaganda of leftists, rhetoric is no substitute for facts. History reveals that discrimination is primarily inspired by the corrupt agenda of rent seekers in cahoots with the government. South African leading economist Thomas Hazlett notes that this is usually the case:

The South African gold rush made the natural synergy between white-owned capital and abundant black labor overpowering….White workers feared the large supply of African labor as the low-priced competition that it was. Hence, white tradesmen and government officials, including police, regularly harassed African workers to discourage them from traveling to the mines and competing for permanent positions. Beginning in the 1890s, the Chamber of Mines, a group of employers, complained regularly of this systematic discrimination and attempted to secure better treatment of black workers. Their gesture was not altruistic, nor founded on liberal beliefs….But here they had a clear economic incentive: labor costs were minimized where rules were color-blind. This self-interest was so powerful that it led the chamber to finance the first lawsuits and political campaigns against segregationist legislation.

Likewise, South Africa during Apartheid is an excellent case study of the power of the market to eviscerate racism. To protect whites from competition, blacks were prevented by law from taking white-collar jobs. This not only limited their productivity, but also reduced the number of black employees able to take industrial jobs, thus creating artificial manpower shortages. As such the South African Employers Consultative Committee on Labour Affairs in 1977 lobbied for the elimination of discrimination based on race or color from all aspects of employment practices. Therefore, motivated by the goal to gain wealth, even vile racists will eschew racist policies.

Certainly, some owners and entrepreneurs will find niches in which they can cater to racist clients. But for those who wish to attain high levels of growth and success, the data is clear that serving all customers and workers indiscriminately is the way to wealth. Essentially, the power of the free market is the best antidote to racism. Entrepreneurs seek to win in business, and engaging in discrimination hinged on race is the surest way to lose. Of note is also the fact that people who migrate from other countries irrespective of race become wealthier after relocating to America. Yet, ironically, many who lament the racist nature of American capitalism also insist that immigrants improve their lives by immigrating to the United States.

Both theory and the empirical research show that a truly competitive marketplace is incongruous with racism, but, clearly, saying otherwise confers leftists with the benefits of expressing the “luxury beliefs” of elites.

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