Using "Racism" with Discrimination

A noted economist challenges common misconceptions in this excerpt from his forthcoming book, The State Against Blacks.

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Error is never so difficult to be destroyed as when it has roots in language. —Jeremy Bentham

Words can, and usually do, have more than one meaning and therefore can be used ambiguously. Without a doubt, part of the confusion in understanding racial problems stems from the imprecise and ambiguous language used by scholars and laymen alike in discussing race. In analytical usage it is not only necessary to separate the connotative from the literal content of words, but precise and operationally useful distinctions and definitions must be made.

A good example of shifting definitions is found in the usage of the phrase racial segregation. If the average American were asked, Are public water fountains, libraries and theaters of the United States desegregated? a broad, if not unanimous, consensus would be reached that they are indeed desegregated. Then ask the average American whether the country's public schools are desegregated. For this question, a consensus would be virtually impossible. In fact, there are many legal actions charging that schools are segregated, and there are just as many claiming that the schools are not segregated.

A little thought on the matter shows that the term racial segregation means one thing when applied to water fountains, libraries, and theaters and quite another thing when applied to schools, jobs, and housing. In the case of water fountains, desegregation means that if a black is at a water fountain and desires a drink, he is free to take one. In the case of public schools, desegregation "means" that the number of blacks is some preconceived percentage, say 12 percent, of those in attendance. If the preconceived numerical figure is not realized, then remedial measures are proposed or legislated. No one ever bothers to apply a similar numerical test to establish whether water fountains, libraries, and theaters are desegregated. And surely no one proposes busing of blacks to all white water fountains, libraries, and theaters for the purposes of promoting "social justice."

There are other terms and concepts used in the racial literature and debate which are just as misleading and confusing. My aim here is to point out the ambiguities and suggest operational definitions to see whether more light can be shed on public policy analysis.

People may have likes or dislikes or be indifferent toward many objects of desire. In everyday language as well as in economic analysis, an individual is said to prefer object A to object B if he places a higher value on A than on B. In economic theory, we postulate that each individual has a consistent set of preferences—that is, tastes—and chooses the combination he most prefers from the available alternatives. When we are speaking as economists, there are no objective criteria by which we can judge whether one set of preferences is "better" than another. We cannot prove, for example, that it is better or more righteous for a person to prefer the wines of Bordeaux to those of Burgundy or to prefer blue cars to red cars. The most we can ever say objectively is that, given his preference pattern and income and price constraints, the chooser is—or is not—doing the best he can.

This holds true as well when we come to individual preferences for physical attributes such as height, weight, "richly" endowed body, hair color, and so forth: these are solely matters of individual taste. And given that there are individual preferences for or against physical attributes in general, we expect people to exhibit preferences for or against physical attributes as well. Indeed, so far as our analysis is concerned, there are no conceptual distinctions between racial and other preferences.

It may be rejoined that racial preferences are not comparable to other kinds of preferences in the consequences they have for society and for individuals. However, although the indulgence of racial preferences has specific effects that the indulgence of preferences for certain wines does not have, are the preferences basically different? If so, how do they differ? The preference for Bordeaux wines "harms" Burgundy producers by reducing the value of resources that are held for Burgundy production. If the consequences of preferences are generally thought to reduce the value of some resources and increase the value of others, then it can be said that preferences for physical attributes have effects similar to those of other preferences. The essential difference—by no means small—between preferences for racial features and those for wines is that the latter are not as specialized as the former. In other words, if Burgundy producers see that consumers prefer Bordeaux, they will try to shift their resources to Bordeaux production. On the other hand, for example, people who are black cannot become white.

But the fact that racial characteristics are unchangeable does not put them in a class by themselves. Persons with average IQs are preferred to those with below-average IQs, and persons who are not physically disabled are preferred to those who are. In each of these cases the less-preferred characteristic is unchangeable and in each the less-preferred person suffers a competitive disadvantage. This disadvantage is to be expected. Disadvantage and advantage are inevitable consequences of differences in individual tastes, abilities, and traits, on the one hand, and freedom of choice in a democratic society, on the other.

In the literature on race, prejudice is usually interpreted as meaning suspicion, intolerance, or an irrational hatred of other races. A more useful interpretation of prejudice can be found by looking to its Latin root meaning—"to judge before." Therefore, a prejudiced act may be thus defined as a decision made on the basis of incomplete information.

Making decisions without complete information is necessary in a world of scarcity and uncertainty. Another common experience in a complex world is erroneous interpretation of the evidence. Moreover, different individuals may arrive at different conclusions even if confronted with the same evidence. Furthermore, any given individual may sometimes be quite unresponsive to changes in the evidence.

Consider a simple, yet intuitively appealing, example of how decisions are made on the basis of incomplete information (and perhaps erroneous interpretation of evidence). Suppose a fully grown tiger suddenly appeared in the room. A reliable prediction is that most individuals would endeavor to leave the area with great dispatch. In most instances, the individual response to the tiger's presence is not based on detailed information about the behavioral characteristics of that particular tiger. Instead, the response is based on the individual's stock of information and perhaps misinformation about tigers as a class. The response is based on a stereotype; the individual makes a prejudiced decision. He makes no attempt to seek additional information but rather ascribes known or surmised group characteristics to the individual tiger. There abound examples of prejudiced behavior: not talking to strangers, running in response to rustling in the bushes, not buying dented cans of food, not recruiting employees from certain schools.

Decisions to prejudge are inextricably tied to individual judgments of what constitutes the right amount of information search. Information is not a free good; it is acquired by the expenditure of time, effort, and usually money. As a result, individuals can be expected to economize on information costs. For any of us, there will be a point at which the cost of acquiring one more unit of information is equal to the expected total gain from that unit. This means that additional information will not be sought because the total cost would be greater than the added gain.

A vast number of decisions must be made during our lives. Some of them, such as deciding to greet a passerby in the morning, require relatively small amounts of information. Others, such as selecting a marriage partner, require relatively larger amounts. A person is not prejudiced or unprejudiced. Rather, a person always exhibits prejudiced behavior to the extent that he substitutes general information (prejudgment or stereotypes)—which is less costly—for more costly specific information. What distinguishes different people are their comparative degrees of prejudiced behavior when facing similar situations; some people will get more information than others prior to a decision.

In the literature on racial behavior, the word prejudiced is most often used pejoratively to refer to those whose optimum quantity of information is deemed by the observer to be too small. Behavior based on racial or sexual stereotypes is commonly viewed as making use of too little information and thus viewed as opprobrious—and in many cases, of course, it is illegal.

However, the quantity of information effectively collected before decisions are made is up to the individual's calculation: for there is no social standard or optimum amount of search that is applicable to all individuals in all cases. For example, for the prospective house buyer there is no socially determined optimum number of houses to be canvassed before making a decision. Instead, the amount of information collected by free individuals before acting is determined by and reflects, among other things, the skill of the individual in converting resources into information. The value of those resources is measured against the expected value of a "correct" decision.

Since all of us will seek to economize on information expense, we will tend to substitute less costly forms of information for more costly forms. Physical attributes are easily observed and hence constitute a cheap form of information. If a particular physical attribute is highly correlated with some less easily observed attribute, then the physical attribute may be used as an estimator or proxy for the other. The cheaply observed fact that an individual is short or an amputee or a Negro or a woman provides what some people deem "sufficient" information for predicting the presence of some other unobserved attribute under certain circumstances. Most of us, for example, if asked to identify individuals with advanced academic degrees only by observing race and sex, would assign a higher probability that white males would have such degrees than black males or women. Such behavior is what decision theory expects where unobservable variables must be estimated from observable variables.

Discrimination may be defined as an act of choice based on utility maximization. Racial discrimination is an act of choice whereby racial attributes provide the criteria for choice. In this view, racial discrimination does not differ in any fundamental sense from other kinds of discrimination. All selection necessarily and simultaneously requires nonselection; choice requires discrimination. When we preface the word discrimination with the word racial, all we do is to state the attributes selected as the criteria for choice.

Our lives are largely spent discriminating for and against selected activities, objects, and people. For example, many of us discriminate against those who have criminal records, who bathe infrequently, who use vulgar speech. Some employers discriminate against applicants who speak with a foreign accent or who have a low intelligence or cannot read or went to the "wrong" college. There is also evidence of discrimination in politics. Not many short men have been elected to the US presidency. Furthermore, personal discrimination is not consistent. Sometimes people discriminate against theater in favor of parties or against women in favor of men, and at other times the same people do the reverse.

When a choice is made on the basis of race, that choice may reflect the preferences of the chooser for a particular race, but it also may not. It is impossible for an observer to say for sure whether choices based on a particular physical feature reflect the indulgence of preference (tastes) or the attempt to minimize information costs (prejudice) or the recognition of real differences.

Some may think my discussion of discrimination and prejudice renders the words meaningless, since it can be said that all human acts involve choice and all choices are based on incomplete information (as well as on tastes). But the discussion is useful because it permits us to avoid confusing one form of behavior with another. It enables us to see that certain kinds of choices—those made on the basis of racial, sexual, and other physical attributes—may be intelligent optimizing or may be the result of tastes. An example will clarify these points.

Suppose we are on a university campus where the racial and sexual composition of the student body is the same as that of the US population, and suppose we play a game of trying to identify students who can find the integral for the mathematical expression ? x2dx. Players are given zero information about the students' mathematical proficiency and may not communicate with students except to ask, "What is the integral?" In other words, players can distinguish between students only by observable attributes such as race, sex, mannerisms, dress, and speech accent. The pay-off from the game is $2,000 for each student chosen by the player who answers correctly, and the player loses $200 for each student that he chooses who does not know the answer. Finally, it is assumed that the payoff is sufficient to induce participation and that the player's sole objective is to maximize his winnings.

The player is in a situation where choices must be made on the basis of incomplete information. He is faced with identifying those observable attributes that will be the best indicators of student proficiency in calculus (the unknown and unobservable attribute). If he thinks that mathematical proficiency is equally distributed by physical attributes, his choice process will be essentially random. But if he thinks that mathematical proficiency is not randomly distributed, he must adopt a different (nonrandom) decision rule.

In his first cut at such a rule, he may decide not to choose females because he knows that women are not well represented in the quantitative sciences. (Note that such a rule might not be as valuable in the Soviet Union, where a greater proportion of women enter the quantitative sciences.) In successive cuts at a decision rule, the player may discriminate against—not choose—Negroes, Puerto Ricans, and American Indians, perhaps reflecting his awareness that math skills are related to the quality of precollege schooling and that these particular minorities have historically received grossly inferior elementary and secondary education. In the end, the player may settle on a rule that confines his choices to males of Jewish or Oriental ancestry.

The fact that the choice may be made on the basis of race and sex is not the same as saying that there is a genetic or causal relationship between race or sex and mathematical proficiency. What is said is that these variables are correlated in the real world.

Suppose we relax the implicit assumption of neutral racial preferences and assume that instead the player has a dislike for Jews and Orientals but still believes these groups to be disproportionately represented in the quantitative sciences. So long as we retain the assumption that the player seeks to maximize winnings, his decision rule—his prejudice, or decision-making on the basis of incomplete information—will not be distinguishable from that of a player with no particular racial preferences.

This illustrates an important point that is lost in most discussions of racial issues: choices made on the basis of race (or sex) do not always permit us to put the preferences of the chooser in unambiguous categories. Moreover, the example raises a question whether anyone should care if the player in the game chose to indulge his preference and not select Jews or Orientals. In our scenario (assuming that Jews and Orientals are disproportionately represented in the class of individuals knowing calculus), the player who because of tastes discriminated against Jews and Orientals would win less than other players. Even the most fervent advocate of civil rights would have little reason to seek a social policy that required anti-Jewish or anti-Oriental players to give Jews and Orientals an equal opportunity to be selected. The racist (or, for that matter, any individual who permitted his choices to be determined by economically irrelevant "preferences" of whatever kind) would bear the full cost of such an action. He would lose money.

For some reason, these points get lost in discussions of racial discrimination. We overlook the fact that not every discriminatory action reflects dislike of Negroes. For example: certain discrimination may come from the rational behavior of individuals minimizing information costs or confronting real differences in the market, whether that market is free or institutionally constrained. And we often overlook the fact that in a free market, economically irrational preferences will impose costs on whoever indulges them. Institutional restraints may render that indulgence costless to the indulger. If they do, the answer is to lift the restraints and reimpose the costs. In other words, to free the market.

When we are formulating policy, we must be careful to distinguish among the three sources of "discrimination"—preference, prejudice, and real differences. If we assume that racial tastes cause the problem we are addressing, when in fact the problem is caused by something else, our policy will be at least ineffectual and quite possibly harmful to its intended beneficiaries. Let us briefly look here at three areas where whites are generally charged with discrimination against blacks and where the assumption is generally made that the discrimination is based on racial preferences. These areas are hiring, home mortgages, and the prices ghetto shoppers pay.

Many recruitment and hiring practices are said to reflect racial preference, but an alternative explanation can be drawn from our knowledge of hiring procedures. When a firm seeks labor, it must find out how productive those seeking jobs are likely to be and must train the persons it hires. Since this process costs money, the firm has an incentive to search for recruits that appear to have a high probability of success. If the firm believes there is an important relationship between a recruit's high school performance (and the quality of his high school), on the one hand, and employee productivity, on the other, it can reduce some of its recruitment costs just by knowing the job candidate's record (and high school). If a firm knows that blacks at grade 12 (regardless of transcript grades) are frequently three to five years behind whites in scholastic achievement, it can assign a higher probability to a white recruit's having the desired productivity.

To the employer, then, skin color may be a first indicator of expected worker productivity. To observe a process that selects in part by skin color and to attribute the selection to taste (in this case, to employer "racism") would be misleading. It would be like concluding that auto insurance companies charge drivers under 25 years of age higher premiums because companies dislike them. Or that life insurance companies charge women lower premiums because the companies like women better than men. In both cases, a physical attribute may act as a general proxy for some other attribute (in the case of drivers, the higher probability of an accident) that is individually more costly to ascertain.

Suppose an employer who has racially neutral preferences incorrectly perceives that, on the average, a Negro worker is less productive than a white worker. What kinds of laws would cause him to seek more information and perhaps revise his perception? And what kinds of laws would discourage him from doing so? Clearly, he would be discouraged from seeking more information by laws that require him to pay all workers identical wages or laws that make it very costly to fire an employee. The reason is that laws or union rules that mandate a certain specified pay for a particular job reduces the incentive for experimentation. At a given pay level, the employer quite rationally hires that employee whom he perceives as more productive. The basis for the perception can be sex, race, accent, demeanor, school, and other factors. The existence of laws or union rules that make it difficult to fire a worker reinforces the reluctance of employers to experiment in hiring. The reason is that if his experimentation turns out to be a mistake, the employer has to incur additional costs to reverse the error.

This kind of behavior by employers is just a special case of a general principle that all people employ in their conduct. A brief example will demonstrate it. If a new, unheard-of supermarket located in an area in the presence of established supermarkets, how would it entice customers (employers of food) to try it out? The standard way is to offer "sales," that is, sell some of its merchandise at a lower price than charged elsewhere. Customers have additional inducement to experiment with the new supermarket because if they are dissatisfied they need not come back—they "fire" the supermarket. Now suppose there is a law or rule (1) requiring that all supermarkets charge the same price and (2) stipulating that once a customer chose a supermarket he had to stick with it; he could not "fire" it. The response of customers to the new supermarket would be obvious: Why try it?

Some of the principles discussed above apply to "redlining," a practice whereby banks and other lending institutions refuse to grant mortgages for homes in certain neighborhoods. Because the practice most often applies to minority inner-city poor neighborhoods, the national debate about it has focused on its racial aspects, with banks being labeled racist.

Forgotten in much of the debate is the existence of regulations that place ceilings on the interest rates banks can charge for home mortgages. Given these ceilings, banks have an incentive to ration credit—namely, to lend money to those whose perceived creditworthiness is appropriate to the permitted legal interest rate. It turns out that, for a number of reasons, the probability of default per dollar lent is greater in some neighborhoods than in others. Moreover, several laws designed to protect borrowers make the collection and eviction of debtors who are in default more costly to bankers. These circumstances reduce the probability of earning normal profits in some neighborhoods.

Thus, redlining need not be a result of bankers' racism. In many cases (perhaps almost all) it occurs not because bankers are unwilling to make home loans to inner-city blacks but because the inner city is not perceived as a profitable market at the state-imposed interest rate ceiling. The real villain in the redlining issue is the legislature that imposes, say, a 10-percent interest rate ceiling. Such a ceiling in effect says that if an applicant is not a good enough risk for a mortgage at 10 percent, he will not get a mortgage at all—although without a ceiling he may get a mortgage at a 15-percent rate. Interestingly, black-owned banks that do not find the ghetto an attractive place to make loans are not called racist, and we should note that most black-owned banks invest more of their loan portfolio outside the community in which they are located than do white-owned banks.

Public policy directed at supposed banker racism will miss its mark and may, like affirmative action in lending, exacerbate the credit problems of blacks. Banks will simply move away. An effective policy would examine cost conditions in inner-city ghettos and remove or change state usury laws. Once again, what is prejudice or perhaps a recognition of real differences is misdiagnosed as "preference"—with predictably poor policy results.

During the mid-1960s it was widely alleged that white merchants in ghetto areas exploited their customers by charging higher prices and selling lower-quality merchandise there than they did elsewhere. The merchants, it was said, were trying to earn supranormal profits as a way of acting out their racial hostility toward Negroes. But it turns out that racial hostility by merchants could not adequately explain ghetto prices.

Prices were indeed higher in ghetto areas, and several studies showed that retail food chains followed different pricing policies in ghetto and nonghetto areas. With these findings in hand, the Federal Trade Commission, along with consumer advocate groups and public interest lawyers, attempted, through public pressure, to require that ghetto merchants offer their customers the same terms of exchange offered in nonghetto areas.

But to view the merchants' behavior as exploitative or racist ignores the fact that ghettos tend to present a high-cost business environment. Losses from business-related crime are higher there than elsewhere as a percentage of total sales; business, fire, and theft insurance premiums are also higher; and extension of credit is riskier. In addition, because of the low income of ghetto residents and its effect on sales mix and volume, merchandising techniques used to lower sales costs in nonghetto areas are not readily adaptable to ghetto areas. Much of the behavior that critics have condemned is merely an economic response to an environment that raises the cost of doing business. If products and services are to be provided in the ghetto, prices must reflect their higher costs.

Evidence substantiates this explanation of merchant behavior. The Federal Trade Commission has shown that while gross margins were higher in ghetto areas, the difference was more than accounted for by higher operating costs, and the return on equity was considerably lower in the ghetto than elsewhere. The assertion that supranormal profits were earned becomes even less credible when we recognize that retailing is characterized by relative ease of entry, so that if supranormal profits existed, merchants would open new businesses until profits in ghetto and nonghetto areas were equalized. The opposite of this has occurred in urban areas: businesses have left without being replaced. Furthermore, none of those who attributed the prices charged by white merchants to racism noted that the prices charged by Negro merchants were about the same.

The crusade that blamed the problem of the ghetto consumer on the greed and racism of whites may well have reduced the welfare of the ghetto consumer. The adverse publicity and boycotts (and other actions) against merchants in ghetto communities gave these merchants increased reason to move out. The result is fewer neighborhood stores, with shoppers being forced to travel longer distances or pay even higher local prices than in the past.

I have sought here to give operational meaning to the terminology used in the analysis of race and to extricate that analysis from some of the emotive language in which race is so often discussed. Dispassionate analysis and a clear meaning of language are two minimal requirements for effective policy.

Walter Williams is a professor of economics at George Mason University and a syndicated columnist. This article is excerpted, by permission of the publisher and the author, from his just-released book, The State Against Blacks (McGraw-Hill).

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