reddit user natefil dropped a bomb of win in Jill Stein’s interview AMA by providing a hypothetical scenario with 2 countries both trying to deal with the issue of racial discrimination, each using a different approach: 1 interventionist, 1 market-based libertarian.
I still like Jill Stein and her viewpoints and I think it’s so wonderful these conversations are happening. This intercourse is also a poignant reminder that “liberals” are libertarians who don’t understand economics and that economic and personal freedom go hand in hand, just as the obverse is true – countries with planned economies suffer immense civil liberty and human rights violations. Soviet Russia, North Korea, Khmer Rouge-ruled Kampuchea/Cambodia, Zimbabwe etc ad infinitum, ad nauseum.
Libertarian here and I can understand from where your perspective develops.
We are both very opinionated but I think we both agree on some of our fundamentals but disagree on how to best achieve those things. We both want a more just society. We both want to see discrimination fade and societal equality flourish. But before I begin I want to ask you to rethink “easy answers” for they may sound good but if they don’t work (or do the opposite of their intended consequence) then I think we can both agree that they are not valuable.
My field of study is economics so I’m going to be coming at this from a very “supply and demand” oriented perspective, please forgive me if I seem to simplify things too much or not enough.
Economics is centered around the idea (fundamentally) that people respond to incentives. From this we are able to develop other basics like the supply and demand curve (as price goes up people want to buy less but producers want to produce more). The trick here is to apply this to hiring people.
Imagine that we are watching two very different countries respond to the issue of racial discrimination. On one side we have the free market side that argues that nothing should be done. On the other side we have more of a interventionist policy of wage equality and anti-discrimination policy.
Before I go further I would like to ask you if you are okay to continue this discussion or if I’m wasting my time.
“We are both very opinionated but I think we both agree on some of our fundamentals but disagree on how to best achieve those things.”
Absolutely agreed here, 100%.
“Economics is centered around the idea (fundamentally) that people respond to incentives. From this we are able to develop other basics like the supply and demand curve (as price goes up people want to buy less but producers want to produce more). The trick here is to apply this to hiring people.”
Agreed here as well, maybe. Continue.
Awesome, so let’s go back to the two countries in our situation. Imagine that we’re looking at the interventionist country first. Now it is very clear that the black population is facing segregation (let’s assume that the government doesn’t actually encourage the segregation). Clearer minds in government decide that not only is segregation hurting the population but it’s damaging the black community. It’s keeping them from getting jobs in any market they want. Sure, there are some companies that hire black people but they aren’t enough of a majority (or even a strong minority) to make a dent in the problem.
So they come up with a multifaceted approach to solving the problem.
Step 1: Enact a minimum wage
They can clearly see that blacks that are hired are making less than whites and often aren’t making a living wage. With poor educational background the blacks are earning .50 cents on every dollar a white counterpart is making.
Step 2: Outlaw discrimination
Now, this one is more difficult to watch but it’s the principle that matters. We don’t want people to avoid hiring blacks simply because they’re black so we make it illegal. You have to hire or fire based on merit.
Step 3: Make sure that everyone has access to free education
It is clear that communities that are more educated are not only wealthier but also more egalitarian. In order to keep this up we have to make sure that every poor minority can get an education and not be discriminated from attending the best public schools.
Step 4: Equal pay for equal work
If you have a black employee and a white employee doing the same work you can’t give the black employee $.75 and the white employee $1 per unit created. They have to be equal.
Alright, so on the surface this all sounds good. Even I can see the merits in each one of these. They all seem to address a very real discrepancy and not a single one of these has a bad intention.
But remember how I mentioned that people respond to incentives? Well, we’ve unintentionally created some very real and dangerous incentives here.
Problem: Minimum wage law
On its merits this sounds excellent but imagine that you own a business. The business requires employees to produce small products. There are very low education requirements for this, you’re basically putting heads on dolls. Now, currently, you’re hiring people who have no schooling. In our situation that is a sizable black population because they are less educated in the current system than their white counterparts. You’re paying them $3 an hour and you employ about 50 of them to make dolls. Well, suddenly minimum wage is increased because the black population appears to be disenfranchised. You are now forced to pay a minimum of $5 per hour per employee. Well, your originally your costs were about $150 per hour but now if you wanted to keep all of those employees you would have to pay $250 per hour. So what happens is that you have to cut 20 of your employees. Suddenly, unemployment goes up in the uneducated sector because you cut the lowest intelligence members.
But the problem doesn’t stop there. Now you have to pay more for your labor so are you going to keep someone who is cheap and ineffective if you have to pay them a lot? I wouldn’t, I would look for someone who was more efficient. I’m going to hunt down people with a bit more schooling who can do the job quicker and produce more. So employment goes up for the educated population (people between the ages of 25-29 especially because they are best suited to the new wage) but all of the people who I had previously hired are now out of work.
Now someone with a very low skill set is going to have to job hunt in a market not conducive to his or her skills.
We have taken the first step to increasing poverty in the black population.
Problem: Outlaw discrimination
On the surface this also sounds great. We don’t want people to spread their ideas, we want to show men and women that there is a standard for how we treat our fellow men.
I love the idea. But I hate the outcome.
So previously that little shop on the corner is stating, outright, that they will not serve a single black person because of their color. They will not hire a black person, they will not serve a black person. Well, immediately we can see that if there are two restaurants (one catering to only whites, one catering to both) the one that has the largest customer base is going to win out. So there is an incentive for both to cater to as many people as possible. But maybe that’s not enough for the racist business owner. Maybe he doesn’t mind losing profits. Well, now he not only loses the black population as customers but he has to pay more in wages for the same amount of work. If he was picking between a sample of whites he may have 3 good candidates for a role. But if he has added blacks to that perhaps he’ll have 5 good candidates. Now he might be able to bid one down to a slightly lower wage in which both are happy but he will have less negotiation room with 3 than he will with 5. So now his labor costs are higher than his competitor. But it doesn’t stop there. So he won’t work with blacks but that also means black distributors. People who hire blacks and act as restaurant or store stock companies. Maybe they won’t be associated with a racist organization or maybe he won’t be associated with them but there is a loss of business either way and that means that now his labor costs are higher, his product costs are higher, and his customer base is smaller.
All three of those give him one giant incentive: drop the racism! You can be racist but you’re going to have to serve and hire blacks.
But what happens if we outlaw discrimination? Well, he can still avoid hiring blacks but now he isn’t allowed to tell them that. So he can say that the black person isn’t qualified or not worth the minimum wage because of his lack of skills but one thing is clear: the notion that this man is a racist is not as blatant so businesses and individuals can’t avoid him as much and his labor costs are not quite as high (perhaps exactly the same if minimum wage is enforced in the industry), his product costs are identitcal, and his customer base is similar even though he still is racist.
See the problem? The incentives to change his path is greatly diminished.
We have now allowed blacks to be discriminated against more by trying to protect them.
Problem: Free education
(I’m going to stop here for a second and take a break, lots of typing is going into this)
Problem: Free education
This one is very difficult to understand because we see what we believe is a causal relationship (though I disagree with that assumption) between education and wage earnings.
We’re going to go back to incentives again. Imagine that school isn’t free. The schools are good, not bad in price, but just out of reach for a family with four kids.
Now the kids have to make a decision: work and help the family out or go to school. If school is free the decision is easy, if child labor is banned…doubly so. But if it’s not free then they may decide that education doesn’t help them too much now. Perhaps the best option is to wait a little bit, raise some money for the family, then go to school in a few years when they’re in a better situation.
But laws changed those incentives. Suddenly school is the only choice. So all of these black kids have to go to school and they are forceably entered into previously segregated schools. Now the racist white parents (of educated and wealthy backgrounds) decide that the influx of poorer black students is not conducive to their child’s education so they move their kids to private schools that they can afford. Suddenly, the educated, wealthy base for the school is taken out. Previously, these schools you had to pay for were good but not free, now they are free but not good. The education quality suffers and the poor black families can’t get their kids out of the trap because they have to attend a school but they can’t afford any alternatives.
We have taken the next step to destroying the chances of the black population.
Problem: Equal pay for equal work
Another fantastic answer on the surface. If you are doing as good of a job as me you should make as much as me. Our boss should not be able to discriminate just because he doesn’t like the way you work. But this too has a terrible unintended consequence.
Imagine that a company owner is racist. He has hired a black person for a lower wage than a white person simply based on skin color. Well, the government enters the picture and informs him that he can’t pay the other guy less. What do you think will happen? The truth is that the black person’s job is on the line. Why keep a black person who you don’t like when you could hire a white person for the same pay and say that it was due to skill set issues or education backgrounds.
I’m searching for a talk by Thomas Sowell about when he was in the army and I’m having a hell of a time finding it. Basically, he talks about how how there were those who discriminated against him and it was allowed but when they found out how good he was at repairing radios (I think) everyone went to him from the nicest guy to the biggest redneck racist. He proved he was useful. But by disallowing wage discrimination we ensure that the racist never has to try out the black man’s product or services because it’s guaranteed that there is someone else doing it for the same price.
Suddenly, the black employee loses all bargaining power. He can’t say “Hire me for $4 an hour and I’ll prove to you that I’m worth the white guy who makes $8.” He can only say “Please hire me for $8 an hour.”
We have taken another step to disenfranchising the black population.
The simple fact is this, by trying to impact the black population for good we have inadvertently taken away their bargaining power, given power to the racists, and made the blacks dependent on the government.
This is what happened following the late 1960s and continues to happen today.
Now I can tell you how the free market would handle this situation if you are still interested.
I’m incredibly skeptical about Libertarian ideals, but I’ve read this far, so I for one one like to see how you think a Libertarian solution would unfold.
But I should place one caveat that may make it futile for you to continue: I believe that the invisible hand has been made ineffective by scale and globalization. So any answer along the lines of “voting with your wallet” carries no weight with me. People are short-sighted, can often be manipulated, and more often than not will sell out their values and their neighbours to save a buck.
“But I should place one caveat that may make it futile for you to continue: I believe that the invisible hand has been made ineffective by scale and globalization. So any answer along the lines of “voting with your wallet” carries no weight with me. People are short-sighted, can often be manipulated, and more often than not will sell out their values and their neighbours to save a buck.”
I think you’re on to something but we may disagree about what your perspective demonstrates. I think you would be shocked to discover that I think big business is not necessarily a good thing and that in a more free market situations big businesses would have a much harder time growing to the scale that they currently have.
For instance, in the United States we talk a lot about Walmart because it crowds out small businesses but why is that? I grew up in a third world country and one of my favorite things was walking down to the store about two houses down to get sodas or candy (I blew all my allowance on the first day I got it). If the store near me was closed for whatever reason I would go a couple more houses down where another family had a shop. If that one didn’t have what I wanted I’d go down to the bigger family shop on the street corner to get coke. It was nice, I never had to get in the car, I never had to wait and do one big shopping trip. But what has happened in the US is that we have zoning laws. You can’t have shops in residential areas due to some government restrictions now these are just a few of the laws but ask yourself: who do these hurt? If I can’t have a shop on my street corner and serve the neighborhood then everyone has to get in their car and drive anyway so they are going to consolidate their trips and get everything in one go. Suddenly, Walmart seems like a great option but only because government has hurt small competitors.
Did you know that the government also props up certain businesses? Many states and local governments give money to Cabellas and Bass Pro Shop under the guise that they help tourism. Well, does that help or hurt the neighborhood competitor?
Let’s just ignore the invisible hand for a second and talk about property rights. Imagine that there’s a village out in the woods. A power company moves in and decides to build a coal plant right next to all these houses. Currently, such a venture would be regulated by the EPA and other government agencies and all complaints would have to be done through that avenue. But what if we just ignored the EPA and took the coal company to court because they were dumping (smoke) into our private property. They’re violating our property rights. Now I don’t think it’s a hard sell to say that most people would agree that the coal company is doing something wrong. So what can the coal company do to rectify the situation. As I see it they have three options: 1) They can pay every house that demonstrates that smoke is going through their property. 2) They can invest in cleaner technology so that there is no pollution. 3) They can move.
Now, all three of these situations benefit the homeowners in the area. But if the EPA says that the coal company is allowed to pollute up to a limit what recourse does the private property owner have? The government has already said that the pollution is legal, what can be done?
That’s why we end up talking about the invisible hand. Not because we think markets are magic but because people simply respond to incentives. If we respect property rights more and don’t allow government to crowd out private concerns then I believe we can achieve a more advantageous situation for all parties.
Brilliant. Smoking ordinances are another one that come to mind. Let’s say I own a bar. I recognize a health trend where people are smoking less and less and decide to prohibit smoking in my bar (I do, after all, own it) to attract a more informed clientele, reasoning that they will probably have more money to spend anyway. Besides, I don’t smoke myself, it stinks up my bar and I have the additional hassle and expense of ashtrays and cleaning them. Also, my bar stools, tables and chairs get burn holes in them constantly.
My business does considerably better and I am rewarded for my foresight and judgment. The bar down the street decides, hey, all you smokers come on down here, screw that stuffy Veritaze Bar! He spends a bit of cash on larger signs to advertise exactly this and lo and behold, even his business picks up!
Meanwhile, some busybody bureaucrat, envious of all this fun and profit, decides he needs to institute a city-wide smoking ban in all bars. While it slightly benefits my business, I protest on ideological grounds. The city decides to send out a health inspector for a random visit and finds a cricket in my bar’s kitchen and fines me, ostensibly for public safety but in reality for retaliation at my protestation.
Smokey’s Bar suffers greatly and cannot compete and goes out of business, removing jobs from the city and perhaps even some nostalgia since it had been there for 47 years – Stevie Ray Nelson got noticed by a record label there and became a star.
Some of the patrons of Smokey’s Bar start coming to mine since there’s really no other alternative due to the difficulty in starting new businesses in the city because of excessive regulations and an exorbitant annual licensing fee. Naturally after a couple of beers, they get the urge to smoke so they stand outside the doorway and do so. This bothers my non-smoking patrons because the smoke easily enters the bar when people come and go. Busybody bureaucrat catches wind of this and decides since the smoking ban is not fully effective for non-smokers, to modify the ordinance so that no one can smoke within 15 feet of a bar.
The old Smokey’s Bar patrons decide this is too much hassle just to have a few beers in a nice bar so they don’t bother coming in any more. They decide to have their own parties at their own houses rather than spend their money in city bars and other businesses they inevitably patronize such as food carts and live music venues.
This is the kind of thing happening here in Austin. If the city keeps it up, people are just going to stop going out altogether and the more their communist buddies in the federal government trash the economy, the more that will exacerbate the situation.