In Poland between the two World Wars, an absolute majority of all the physicians in private practice
were from the Jewish minority, which was only 10 percent of the population. Yet the
Polish government did not hire Jewish physicians, though many other Poles obviously became patients
of Jewish physicians in the private sector, or else so many Jewish doctors could not have made a
living. What was the difference between the public sector and the private sector in this regard?
In both sectors, there were both financial and medical costs
to refusing to use Jewish physicians. To staff a government hospital with all-Gentile physicians,
in a country where so many of the physicians were Jews, meant either having to pay more to
attract a disproportionate share of the available Gentile physicians or accepting lesser-qualified
physicians than some of those available from the Jewish community. In either case, financial
or medical costs were entailed, if not both. However, in the case of those who made decisions
within the Polish government, there was no cost at all to be paid by them. Financial costs were paid
by the taxpayers and the human costs were paid by patients in government hospitals, subject to lower
quality medical treatment than was available in the society at the time. Neither of these costs
was a deterrent to discrimination by government officials. In the private sector, however,
both kinds of costs were paid by sick people. Concern for one’s own personal health, especially
in an emergency situation or when confronted with a potentially crippling or fatal disease, could
easily overcome whatever anti-Jewish attitudes one might have. Given the respective incentives
in the government and in the private sector, the different levels of discrimination against
Jews is very much what one might expect, on the basis of the most elementary economic principles.
Poland provides examples of another phenomenon—more discrimination
where there was less hostility and less discrimination where there was more hostility.
Anti-Jewish feelings tended to be stronger in eastern Poland than in western Poland.
Yet Jewish artisans were more prevalent in eastern Poland, just as black artisans
once had better job opportunities in the American South, where racism was most rampant.
In both cases, organized labor affected the cost of discrimination. Guilds were stronger
in western Poland than in eastern Poland and American labor unions were stronger in the
North than in the South during the eras under discussion. To the extent that organized labor
succeeds in raising pay levels above where they would be under supply and demand in a free market,
they provide incentives for employers to hire fewer workers because labor is now more costly,
both absolutely and relative to the cost of capital that may be substituted for labor.
At the same time, wage rates raised above the level that would prevail under supply and demand
attract more workers who apply for jobs that have higher pay.
The net effect is that organized labor tends to create a chronic surplus of job applicants.
Given that surplus, the cost to the employer of turning away qualified applicants from
the “wrong” group is less than it would be if the employer had to be concerned about
finding enough similarly qualified replacements for those who have been arbitrarily rejected.
Even in the absence of discrimination by guilds or unions themselves—and there was
plenty of that—it would still be cheaper for employers to discriminate on their own
than would be the case in a free market. Given this situation, it is not so puzzling that Jewish
artisans found it easier to practice their skills in that part of Poland that was more hostile to
Jews and that black American artisans found it easier to practice their skills in the Jim Crow
South than in the more unionized North. Differences in costs of discrimination
outweighed differences in negative predispositions. The same pattern can be
seen in employment statistics over time. Both in the American South during the Jim Crow era
and in South Africa under white rule, blacks were a much higher percentage of railroad employees in
the early twentieth century than they were at mid-century. In both countries, labor markets
were more freely competitive in the earlier era and more controlled in the later era—and
in both countries it would be hard to claim that there was less racism in the earlier era.
Not only labor unions, but also government regulation, can reduce the cost of discrimination.
Where a public utility with a monopoly has its prices set by a government regulatory agency
on the basis of its costs, it has little or no incentive to keep those costs down to a level
that would be necessary for its survival in a competitive market. Costs of discrimination,
like other costs, can simply be passed on to the customers of a regulated monopoly.
When the American telephone industry was a regulated monopoly, blacks were seldom hired
for even such routine jobs as telephone operators before the civil rights laws
were enacted by the federal government in the 1960s and by some state governments earlier.
As of 1930, for example, there were only 331 black women in the entire country
working as telephone operators, out of more than 230,000 women in that occupation.
As late as 1950 black women were only one percent of all the women working for phone companies.
Because each local telephone company was a monopoly within its own territory,
it could pass on higher costs to everyone who used telephones.
Had it not discriminated, its costs would have been lower and its monopoly profits could
theoretically have been higher but, because its profit rates were in fact constrained by
government regulation, the phone company would never have seen that additional money anyway.
Instead, its officials could indulge their racial preferences with no net loss of
profits. Meanwhile, blacks were beginning to star on Broadway as early as the 1920s, in an
industry with cut-throat competition, where large profits and devastating losses were both common.
The cost of refusing to hire black entertainers who could fill a theater
was just too high for this industry to follow the same practices as the telephone industry.
The one-to-one correspondence between racism and discrimination that is often assumed
cannot explain such differences between sectors of the same economy at the same time.
Even less can it explain the persistence of such differences between industries over time,
when there is a complete turnover of decision-makers throughout the economy.
Even after a given set of decision-makers and their individual predispositions have
passed from the scene, the persistence of the same set of incentives tends to
reproduce the same end results with a new set of decision-makers in the same respective industries,
whatever the individual predispositions of these new decision-makers. Given the influence of the
costs of discrimination on the amount of actual discrimination, it is also possible to understand
another otherwise puzzling phenomenon—the especially strong reversals of racial
policies in sectors of the economy least subject to the pressures of the competitive marketplace.
These include the government itself, government-regulated public utilities,
and non-profit organizations, such as academic institutions, hospitals, and foundations. Colleges
and universities that had never hired blacks for their faculties in pre-World War II America
led the way when affirmative action in the 1960s and 1970s meant preferential hiring and promotion
of black professors and preferential admissions of black students. There was also a very similar
sharp reversal of hiring policies in the telephone industry, among others, at the same time. Between
1966 and 1968, not only did the hiring of blacks increase by more than 10,000 workers,
blacks constituted one third of all new employees. As of 2007, A.T.& T. was ranked number one in the
country in promoting “diversity” or “multicultural business opportunities” among its suppliers.
Sudden radical changes from especially discriminatory policies against a particular group
to preferential policies toward the very same group are hard to explain by predispositions,
since many of the same decision-makers were in control during the transition period.
It is much easier to understand in terms of the incentives and constraints of the circumstances in
which they operated. More specifically, neither discrimination nor “reverse discrimination”
cost them as much as either policy would have cost decision-makers in those sectors of the economy
where institutional survival depends on keeping costs within narrow limits,
in order to meet competition in a free market.
Once the political and social climate changed, government, government-regulated utilities,
and non-profit organizations could change most quickly with the least cost to themselves.
Baseball Because major league baseball has operated as a cartel exempted from anti-trust
laws, it too had low costs of discrimination and was able to keep black players out—so long as all
teams did so. But this situation changed in 1947, when the Brooklyn Dodgers hired Jackie Robinson
as the first black major league ballplayer. Because there was competition within the cartel
among its various teams, once the color barrier was broken by just one team hiring just one black
player, the cost to other teams of keeping out other black players rose sharply. The net
result was that, in a matter of a relatively few years, large numbers of black players
flooded into the major leagues. For a period of seven consecutive years, no white man won the
National League’s Most Valuable Player award. Had other teams not followed the lead of the
Dodgers in hiring black players, all these MVP stars would have become Dodgers, giving
Brooklyn a virtual monopoly of National League pennants and perhaps of world championships.
This cost was obviously much too high for the competing teams to pay for continuing
racial exclusion in major league baseball. Their racial attitudes may not have changed,
but the cost of translating those attitudes into discriminatory exclusions had changed drastically.