The power of the free market was perhaps best demonstrated in whiteruled South Africa during
the era of apartheid.
Here we need not wonder about racial predispositions or about the fact that the vast majority of
employers in industry, agriculture, and government were white.
Yet, even in a country which became a worldwide symbol of racial oppression, white employers
in competitive industries violated official government policy on a massive scale by hiring
more black workers and in higher positions than the law allowed.
There is no compelling evidence that these particular white employers had different racial
predispositions than the white people who administered the apartheid government.
What they had were very different costs of discrimination.
While government agencies and government-regulated railroads, for example, could maintain apartheid
policies at virtually zero cost to themselves, it was a wholly different economic situation
for people spending their own money.
Home-building was a typical example: To build a house in Johannesburg meant either waiting
for months for a white, expensive, legal building gang, or finding a black gang, perhaps with
a white nominally in charge in case an official came inquiring.
Most customers opted for the quicker, cheaper service.
Such practices became so widespread in South Africa that the white-run apartheid government
cracked down in the 1970s, fining hundreds of building construction companies.
Moreover, this was by no means the only industry that hired more blacks than they were allowed
to by law.
In the clothing industry, no blacks at all were allowed to work in certain categories
of jobs, under the apartheid laws.
Yet, as of 1970, blacks were an absolute majority of the workers in those job categories.
There were also residential areas in South Africa set aside by law for whites only—and
yet there were not only many non-whites living in these areas (including black American economist
Walter Williams), at least one such area had an absolute majority of non-whites.
Competition in a free market simply made discrimination too expensive for many, even though violating
the apartheid laws also cost money.
The expansion of black residential areas into
white residential areas has been even more common in the United States.
However, this more or less continuous expansion of black ghettoes has been in contrast to
the history of the original ghettoes—those of the Jews in Europe in centuries past.
Jewish ghettoes in Europe in centuries past tended to become more overcrowded as the Jewish
population grew, though there were particular times and places where Jews were allowed to
expand an existing ghetto or to set up a new ghetto to accommodate their growing populations.
Here again, the difference has been in the economic costs of discrimination.
Black ghettoes have expanded through the marketplace because of the costs of excluding black renters
and home buyers.
This is not to say that there was no resistance by whites.
Often there was organized, bitter, and even violent resistance.
The key question, however, is: What was the end result?
The usual end result was that black ghettoes expanded in cities across the country.
Moreover, where this expansion was stopped by laws or government policies, by restrictive
covenants, or by violence or the threat of violence, that reinforces the point that the
costs of discrimination were too great for the expansion of black ghettoes to be stopped
in the marketplace.
By and large, black ghettoes continued expanding with the growth of the black population.
The boundaries of Jewish ghettoes in Europe were not determined by the marketplace but
were established by the dictates of those with political power.
Only when these political leaders found it expedient did these boundaries expand.
That is why Jewish ghettoes tended simply to become more crowded with the passage of
time and population growth.
There was usually no cost to political leaders for discriminating against Jews.
In particular circumstances—when there was a war on, for example, and the rulers needed
the help of Jewish financiers—various proscriptions might be eased and more ghettoes allowed to
be founded to relieve overcrowding.
During the Thirty Years War (1618–1648), for example, new Jewish communities were permitted
to be established and new occupations and markets opened up to Jews, while a synagogue
was permitted to be built in Vienna for the first time in more than 200 years and a synagogue
was permitted in Denmark for the first time ever.
In short, costs of discrimination are not only a fact of life, they are a potent force
in actual decision-making, even in countries with strong racial, ethnic, or religious predispositions.
How much of a force depends on the economic incentives and constraints in particular sectors.
What this means is that not only is the assumed one-to-one correlation between racism and
discrimination false, but also that those who wish to reduce discrimination need to
pay attention to the economic conditions which make it more expensive or less expensive for
decision-makers to discriminate.
Too often, however, those opposed to discrimination are also opposed to free competitive markets
that make discrimination more costly.
They do not think beyond stage one.
Even a given market—such as the market for housing or the labor market, for example—can
have more discrimination or less discrimination according to whether its prices are determined
by supply and demand or are imposed by external agencies such as government, labor unions,
or a cartel.
For example, when a landlord refuses to rent an apartment to people from the “wrong”
group, that can mean leaving the apartment vacant longer.
Clearly, that represents a loss of rent—if this is a free market.
However, if there is rent control, with a surplus of applicants, then such discrimination
may cost the landlord nothing.
Similar principles apply in job markets.
An employer who refuses to hire qualified individuals from the “wrong” groups risks
leaving his jobs unfilled longer in a free market.
This means that he must either leave some work undone and some orders unfilled or else
pay overtime to existing employees to get it done, losing money either way.
However, in a market where wages are set artificially above the level that would exist through supply
and demand, the resulting surplus of applicants can mean that discrimination costs the employer
nothing.
Whether these artificially higher wages are set by a labor union or by a minimum wage
law does not change the principle.
In all these cases, the crucial factors in the cost of discrimination have been the presence
or absence of competition and whether those making the decisions have been spending their
own money or someone else’s money.
When one’s own money is at stake, groups hostile to each other may not only fail to
discriminate, they may in fact seek each other out.
A landmark study of Polish immigrants and Jewish immigrants from Poland in early twentieth-century
Chicago reported: . . . the Poles and the Jews in Chicago . . . have a profound feeling
of disrespect and contempt for each other, bred by their contiguity and by historical
friction in the pale; but they trade with each other on Milwaukee Avenue and on Maxwell
Street.
A study of numerous cases shows that not only do many Jews open their businesses on Milwaukee
Avenue and Division Street because they know that the Poles are the predominant population
in these neighborhoods, but the Poles come from all over the city to trade on Maxwell
Street because they know that there they can find the familiar street-stands owned by Jews.