(Bloomberg Businessweek) -- The economics profession has had a hard time getting a fix on racial discrimination. Quite apart from its cruelty, it seems … illogical.
One of the first lessons in microeconomics is that workers are paid a sum equaling the marginal product of their labor—their to the enterprise. Any employer who tried to pay them less would lose them to a competitor. Clearly that doesn’t always happen in the real world. For more than half a century, some of the biggest names in economics have wrestled with why, including Nobel laureates Gary Becker, Edmund Phelps, Kenneth Arrow, Joseph Stiglitz, George Akerlof, and Michael Spence. All white men, by the way.
The question is urgent because racial discrimination is the fuel of the anger and discontent that have spilled onto the streets. The trigger was the asphyxiation death of George Floyd in Minneapolis under the knee of police officer Derek Chauvin, who’s been fired and charged with second-degree murder. Can economists help us find a way out of the chaos?
In 1957, Becker published the first economic theory of racial discrimination, which until then had been the domain of sociologists and lawyers. He likened it to an employer’s taste, like the preference for a certain food or beverage, except with evil consequences. “Becker’s economic model reduced a charged social issue to an economic fundamental, supply and demand,” his University of Chicago colleague Kevin Murphy recalled in a retrospective in 2015, the year after Becker died. “It is only through widening of the usual assumptions that it is possible to begin to understand the obstacles to advancement encountered by minorities,” Becker said in his Nobel lecture in 1992. Becker believed that competition for talent among employers would reduce, but not completely end, discrimination.
Later scholars speculated that discrimination was perhaps not a taste but a statistical phenomenon—with employers basing hiring decisions on their (perhaps false) impressions of a group rather than individual characteristics. They said employers’ stereotypical thinking, otherwise known as prejudice, could become a self-fulfilling prophecy if it led minorities to lose hope and underinvest in schooling and work skills.
White scholars, however smart and well-intentioned, can never know how discrimination is experienced and understood by its victims. Some of their theories feel too slight to explain a society that’s torn apart by race and remains damaged by the legacy of slavery, America’s original sin. Any modern analysis of race relations has to be grounded in the fact that the U.S. was built on the backs of enslaved Africans—and that leading thinkers of the day defended slavery on economic grounds. If not slaves, who would harvest the cotton, rice, and tobacco?
Darrick Hamilton, a black economist at Ohio State University’s John Glenn School of Public Affairs, is among the scholars elaborating the new field of “stratification economics,” which places race at its center. He cites Stiglitz and others, but says his biggest inspiration is the late Nobelist Arthur Lewis, born in St. Lucia, then a British colony, who studied how developing countries get stuck in a “middle-income trap.”
Hamilton, who advised the 2020 presidential campaign of Bernie Sanders, argues that racial discrimination is a feature of the white-dominated economic system, not a bug, or a taste, or a statistical error. In other words, stratification economics treats racism as rational, albeit reprehensible. That places it more in the mainstream of economic thought, oddly enough, than explanations that lean on emotions or mistakes. The irony isn’t lost on Hamilton.
The reviewers who serve as gatekeepers for academic journals in economics seem to believe that the African-American experience is sui generis, “a special case from which we cannot generalize,” says Lisa Cook, a black economist at Michigan State University. It took her 10 years to find a publisher for a paper showing that patenting by African Americans declined during historical periods of lynching and white race riots. Economists from other countries—including China, Israel, and Russia—immediately saw the wide applicability of the research, she says.
The Emancipation Proclamation ended slavery but not the maltreatment of blacks. To this day, testers have found that résumés with black-sounding names are less likely to earn interviews than ones with white-sounding names. Black Americans are steered into costlier home and auto loans. They get worse health care than whites and suffer worse outcomes, especially from Covid-19. They have chronically higher unemployment rates—although ironically the gap has narrowed during the pandemic because more black than white employees have kept working under risky conditions, because their jobs are deemed essential.
More than 60 years after the U.S. Supreme Court’s Brown v. Board of Education desegregation decision, black students continue to attend inferior public schools on average and are less likely to attend college. Black college graduates have less wealth on average than white high school dropouts, calling into question the idea that they can pull themselves up by the bootstraps through more schooling.
Far more than other wealthy nations, the U.S. solves its social problems with prisons, and black people and other minorities are disproportionately affected. At the time of the last decennial census in 2010, census takers recorded that 44% of black men from the poorest families in the Watts neighborhood of Los Angeles were incarcerated.
The greatest frustration is that nothing ever seems to change. In 99% of counties, boys from black families will earn less as adults than boys from white families who come from the same neighborhoods and have the same parental incomes, according to a 2018 study by Raj Chetty—then at Stanford—and Nathaniel Hendren of Harvard, and Maggie Jones and Sonya Porter of the U.S. Census Bureau.
The idea that racial discrimination is alive and well is hard to absorb for people in the majority—economists or otherwise—who prefer to think that society is meritocratic, says Julia Coronado, president and founder of the economic consulting firm Macropolicy Perspectives. The textbook principle that workers earn the marginal product of their labor tells them “they’re there because they deserve it,” Coronado says. “So of course they want to believe it.”
The same goes for corporate America, which is as invested in the principles of the free market as the economics profession is. When stocks rose on June 1 after a weekend of historic turmoil, it seemed like some kind of secret had been inadvertently revealed—that the optimism reflected the color of the stakeholders. If the companies in the S&P 500 can be worth more at a time like this, what does that say about their connection to—or rather disconnection from—life in U.S. cities? The internet is thick with comments that corporations are the real looters. Davey D, a journalist and hip-hop historian, garnered almost half a million likes on Twitter for a tweet saying “corporations collected over 500 billion dollars in stimulus money while everyone else was left with a $1200 dollar check and having to decide if they pay for food or rent.”
Nowhere is the corporate disconnect clearer than in Minneapolis, whose history of philanthropy by local businesses did precisely nothing to save the life of George Floyd. Minneapolis and its twin city, St. Paul, have a tradition of progressive policy and generous corporate giving from a dense regional concentration of corporate headquarters, including those of Best Buy, Cargill, Ecolab, General Mills, Land O’Lakes, Target, 3M, and U.S. Bancorp. When the philanthropist John D. Rockefeller III visited in the 1970s, he said he’d heard so much about local business giving “that I feel a bit like Dorothy in the Land of Oz. I had to come to the Emerald City myself to see if it really exists.”
But while the companies were giving, 20th century segregationists were barring black residents from living in certain parts of town. When segregation became illegal, the zoning code took its place, restricting 70% of the city’s residential land to single-family housing, which was unaffordable to many black families. In Minnesota as a whole, the difference in the poverty rate between white and black residents is the nation’s third-widest, the Star-Tribune in Minneapolis reported last year.
The police department has been a special problem: Black people constitute 20% of the city’s population but accounted for more than 60% of the victims of police shootings from late 2009 through May 2019. There were widespread protests two years ago when police killed Thurman Blevins, a black man who begged for his life. “A decade ago the narrative was, we got it all figured out. Now the issue is, a great city includes everyone, and we’re not there yet,” says R.T. Rybak, who was mayor from 2002 to 2014 and is now chief executive officer and president of the Minneapolis Foundation, which manages charitable funds for donors. “We solved so many issues together, but we haven’t solved race—and certainly not with the police.”
Before the killing of Floyd, Minneapolis was moving in the right direction. In 2018 it became the first big U.S. city to abolish single-family zoning, a step that should over time reduce segregation and the cost of housing for all by increasing the supply of living units. Under Mayor Jacob Frey and Police Chief Medaria Arradondo there have been steps to demilitarize policing. It clearly wasn’t enough. Rybak, the former mayor, says the city has finally woken up to the problems in its midst: “Minneapolis has been smug for too long.”
It’s not just one city that’s been smug. Many whites view the nation’s race problem as more or less fixed—well, except at times like this—feeling absolved by the successes of black athletes and entertainers and their own cordial relations with people of other races. The problem is that racism is embedded in the structure of society, made more harmful by the fact that it doesn’t require deliberate hostility to persist.
It should go without saying that none of this amounts to an excuse for rioting, looting, arson, and attacks on police officers. The crimes dishonor the memory of George Floyd and others who’ve died. Authorities are investigating clues that some of the attacks have been carried out or at least instigated by trained anarchists, whose goal is destruction. Owners of small businesses have lost their life savings. Cities already burdened by Covid-19 have an even tougher challenge; Detroit and Newark, N.J., never fully recovered from the riots of the summer of 1967. Even the triumphant launch of SpaceX’s manned spacecraft on May 30 to resupply the International Space Station was tinged with sadness. To those with long memories, it recalled the 1960s, another time when American cities burned while astronauts flew in space. Has the U.S. made no progress in more than half a century?
Trump is seizing on the riots to cast himself as a law-and-order president, threatening to deploy active-duty troops in cities. “You have to dominate,” he said on June 1 in a videoconference with governors and law enforcement authorities. “If you don’t dominate, you’re wasting your time. They’re going to run over you, you’re going to look like a bunch of jerks.” An hour earlier, Joe Biden, his presumptive Democratic challenger in the November election, was more sympathetic to the protesters in a meeting with big-city mayors, saying, “The fact is we need that anger, we need that to tell us to move forward.”
If anger is what’s needed, as Biden says, then the U.S. is well-supplied with raw material. There’s anger on the left and the right, from protesters and police, from families of victims of police brutality and families whose businesses have burned to the ground. Whether all that anger will move America forward isn’t so clear. What’s clear is the need for the power structures of economics and business to grapple with life as it’s lived, not as the textbooks specify.
Read next: Black Economists Recall 50 Years of Struggle
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