Capitalism:
John
Hood
Do racial
minorities, women, and other groups need the government to protect them against
prejudice and discrimination? To hear some prominent social commentators tell
it, American business has a shameful record on social equality. Corporate
boards lack significant minority representation. Minority consumers are
underserved, and minority and female workers are underpaid. Minorities and
women can't get financing to start their own businesses. "In most fields,
there is a level beyond which people of color cannot rise:' said Stephen
Carter, the well-known author and law professor. 1 Similar complaints about the
economic prospects of women have been popularized in recent years by such
authors as Susan Faludi and Gloria Steinem.
This picture of
the private sector as an arena of continued discrimination, inequality, and
despair for everyone in society except white men is often repeated, presumed
accurate by reporters and politicians, used to defend government affirmative
action programs-and completely wrong. Not only is there great news to report
for the economic accomplishments and prospects of previously downtrodden groups
in America, but this good news is due almost totally to the triumph of
commercial values over alternative values that have in the past put fear,
racism, and insularity ahead of business success and profit.
The cornucopia of
good news about social equality and American business overflows with
little-noticed facts about our recent economic past. For example:
* American women
were forming small businesses at twice the rate of men in the early 1990s.
Businesses owned by women now employ more people than do all the firms in the
Fortune 500 combined. 2 If the trends of the 1980s and early 1990s continue,
women will own half of all U.S. businesses by the year 2000. 3 Similarly, the
number of businesses owned by members of racial and ethnic minorities more than
doubled from 1982 to 1994. 4
* Before the
Second World War, only 5 percent of American blacks had middle-class incomes.
Today, the figure is about 60 percent. 5 From 1981 to 1991, the total income of
blacks grew 38 percent, faster than the growth rate for the incomes of the
white population. Almost half of all black households own their own homes. 6
* Measured
correctly, there is no evidence of significant discrimination in bank lending
against prospective minority homebuyers. 7
* Among full-time,
college-educated workers, about the same percentage of blacks and whites have
executive, administrative, or managerial jobs. 8
Naturally, racial
stereotypes, invidious discrimination, and animus still exist in America. But
it is important to understand the role profit-seeking businesses play in
combating these lingering problems. For corporate managers, excluding potential
workers or customers because of race, gender, or other group characteristics
means sacrificing future productivity and sales. It simply stands to reason
that the wider you cast your net for employees or consumers, the better off you
will be. To do anything less is to fail in your responsibility to the owners or
shareholders.
Gary Becker, Nobel
laureate in economics and a professor at the University of Chicago, pointed out
the anti-discrimination effect of free enterprise in 1957, and has been
restating his conclusion ever since. The key, he says, is competition.
Screening out job applicants because of their group means reducing the chances
of hiring the best worker, who may well go to work for a competing firm.
Similarly, screening out whole groups of consumers means giving up sales to
competitors. "Competition forces people to face costs, and therefore
reduce the amount of discrimination when compared with monopolistic
situations," Becker said. 9 So racism and discrimination are, over time,
much more likely to persist in monopolistic institutions (like governments
themselves) rather than in businesses.
Indeed, one might
argue that without the largely unconscious pressure of the business sector on
social attitudes, there would be a great deal more racism and social
inequality. For governments, charged with protecting societies from their
external or internal enemies, loyalty to one's group and the distrust of others
is a virtue. It maximizes the physical safety of the society and protects its
land from encroachment. But for traders the greatest rewards lie in trusting
strangers, who are the source of new products and new ideas. That means seeking
out and embracing people who are different from you-the more different they are,
the more likely they are to have something of value to you. The social benefits
of trade-of breaking down barriers between groups in the interest of mutual
economic gain-have been enjoyed by every group in American society. Past
immigrants, recent immigrants, racial minorities, religious minorities, and
many others have sought and obtained in the marketplace what they did not have
and could not achieve through politics or social activism.
Race,
Gender, and Entrepreneurship
As mentioned, the
number of businesses owned by racial minorities and women has been increasing
rapidly in recent decades. Not only has the number of firms grown, but their
share in the national economy has, too. Just from 1991 to 1995, for example,
the combined revenue of the Black Enterprise 100 for industrial/service
companies and auto dealers grew by 63 percent to $11. 7 billion. 10 A third of
the roughly 6.5 million enterprises with fewer than 500 employees were owned or
controlled by women in 1994. 11
Entrepreneurship
has been a traditional route out of poverty for American minority groups of all
sorts. Jewish, Greek, Cuban, and Japanese immigrants, for example, overcame
prejudice and social barriers by entering occupations and markets ignored by
native born Americans, making themselves indispensable to the growth and
development of the economy. As generations of immigrants gained economic
success, their children and grandchildren pursued higher education, befriended
and married individuals outside their own groups, and gradually obtained social
tolerance and acceptance. 12
Even within the
artificially restricted markets left to them by Jim Crow segregation, some
American blacks of the late nineteenth and early twentieth centuries were able
to find opportunities for economic success. Arthur G. Gaston was born in 1892
in a log cabin his grandparents, former slaves, built in rural Marengo County;
Alabama. After the early death of her husband, Gaston's mother moved to
Birmingham in 1900 to be a cook for A.B. and Minnie Loveman, founders of what
would later become the state's largest department store chain. Young Gaston, an
admirer of Booker T. Washington, worked a number of odd jobs, including selling
subscriptions for the local black newspaper. Later, he moved to Mobile and
became a bellhop. After serving in the army during World War I, Gaston came
home and took a job at the Tennessee Coal and Iron Co. Always looking for
opportunities, he began selling box lunches (prepared by his mother) and
peanuts and lending money to workers at the TCI plant. He started a burial
society for the workers, too, which eventually acquired a mortuary and became
Smith and Gaston Funeral Directors. In 1932, the burial society was
incorporated as Booker T. Washington Insurance Co. 13
New ventures
followed. Gaston started a business college for black clerical workers in 1939,
bought a cemetery in 1947, opened the Gaston Motel in 1954, and started the
Citizens Federal Savings Bank in 1957 to lend money to blacks excluded from
lending markets by segregation. Active in the civil rights movement and
numerous civic and community organizations, Gaston kept adding to his business
holdings during the 1960s, 1970s, and 1980s, buying radio stations and opening
his own construction company. In 1994, Black Enterprise named A.G. Gaston, then
102 years old, as the magazine's Entrepreneur of the Century. In Gaston's view,
his business success has enabled him to advance the cause of racial equality
just as his hero Booker I Washington had predicted. "Money has no color,"
Gaston said. "If you can build a better mousetrap, it won't matter whether
you're black or white, people will buy it." 14
The
entrepreneurial explosion among women and members of minorities in the past few
years has demonstrated that consumers, both households and businesses, will
generally buy from anyone who can supply a high quality product or service at a
low price. The same might be said about American employers, who have discovered
that businesses that want to compete effectively cannot afford to discriminate
against workers because of race, sex, or other such characteristics. Indeed,
having a workforce of people who meet high standards of quality and performance
and bring differing backgrounds and perspectives to their jobs is often a
recipe for success.
Vigorous political
debates about such subjects as affirmative action and comparable worth obscure
what is actually occurring in the American economy today: the gradual
elimination of discriminatory hiring and firing practices, as well as rising
levels of compensation and respect for minority and female workers. According
to economist Howard R. Bloch of George Mason University, 70 to 85 percent of
observed differences in income and employment among American racial and ethnic
groups disappear when you adjust the numbers for factors such as age,
education, and experience. "That's been shown by studies dating back to
the mid-1960s," Bloch said. "And you can't even be sure that the
residual gap is due to discrimination. It could be due to factors we haven't
controlled for." 15
In measurements of
accumulated household wealth, as contrasted with annual income, minorities have
also made tremendous gains. A Federal Reserve Bank of St. Louis study in 1989
found that observed differences between whites and minorities were no longer
statistically significant once age and education were taken into account.
"Members of minority groups are typically younger than whites, and
therefore have had less time to accumulate assets," noted the author, John
C. Weicher of the Hudson Institute. 16
Similarly,
apparent pay gaps between men and women don't prove the lack of "equal pay
for equal work;' as many critics allege. June O'Neal, head of the Congressional
Budget Office, noted that when earnings comparisons are restricted to men and
women with similar experience and life situations, the differences are small,
particularly among today's young people. Among people 27 to 33 who have never
had a child, the earnings of women are close to 98 percent of men's. 17 Even
for broader groups of men and women, today's pay gaps mostly reflect the impact
of such factors as women's shorter average working week and women's choice of
careers that allow for greater flexibility should they wish to bear and rear children
later on. Full-time workingwomen also have, on average, less work experience
than comparable males, again affecting their value to firms and thus their
compensation. 18
Progress toward
more equal treatment of workers began long before the state and federal
governments passed laws governing hiring. Thomas Sowell, a senior fellow at the
Hoover Institution and the author of numerous books on affirmative action,
notes that the number of blacks in higher-paying, professional occupations was
increasing rapidly before the passage of the 1964 Civil Rights Act. 19 Several
studies have found that the convergence of economic opportunities for blacks
and whites, and men and women, began before World War II.20 Harvard economist
Richard Freeman has found that blacks and whites with similar backgrounds and
education had essentially achieved pay equity by 1969. 21
Many explanations
for the pay convergence among American workers lie in the social changes
wrought by an innovative business sector. Technological innovation in our
economy, for example, has not only made us all collectively better off but also
had the side effect of promoting greater pay equality. The substitution of
machinery for human labor has reduced the value of physical strength and
increased the value of mental acuity and social skills-which are distributed
more evenly between sexes. At the same time, laborsaving devices in the home
have given married women more freedom to pursue education and employment.
Household chores that previously consumed hours of tedious work are now
performed in whole or in part by electrical appliances or by outside
contractors. 22 The result has been a revolution in time and family
responsibility that is difficult to overstate.
If the logic of
business success works against unfair and capricious treatment of workers on
the basis of race or sex, then it virtually mandates that companies with the
desire to maximize revenue not discriminate against potential customers. The
fact that some businesses have done so, and continue to do so, reflects only
that they are run by people who put their own personal biases above profit.
Flagstar Cos., Inc., which operates Denny's and Hardee's restaurants throughout
the south and west, is clearly not one of these businesses, despite some
well-publicized cases of discrimination in the early 1990s.
In 1991, reports
began to trickle in to Flagstar CEO Jerry Richardson of racial discrimination
at some of his Denny's restaurants in California. Some black customers charged
that they were denied service, while others said they were forced to prepay for
food unlike white customers. Richardson immediately fired managers who had
discriminated, apologized to offended customers, and instituted programs to
train managers and workers with respect to racism. In a restaurant chain with
thousands of employees across many states, it would have been impossible not to
inadvertently hire some racists. The key issue was how company management saw
its responsibility to correct problems as they arose. "It makes no sense
that we would condone racism," said Richardson. "Denny's needs all
the customers it can get." 23
The efforts of
corporations to cultivate regular customers among minority groups has been
largely obscured in the public mind by the lingering controversy over
"redlining" by banks, insurers, real estate agents, and similar types
of businesses. Discussion of redlining is complicated by the fact that
historically, some lenders and insurers were clearly willing to forgo the business
of blacks and others to reinforce a social consensus of segregation in their
communities. But this despicable-and economically unwise-practice would seem to
be extremely rare today, despite incessant claims by activists and the media
that redlining remains the rule.
The problem is
that studies purporting to show discrimination in bank lending or insurance
focus almost exclusively on rejection rates for loans and policies. These
rejection rates often do, indeed, differ significantly among racial groups in
studies. But these studies ignore many important factors that provide a more
plausible explanation for the apparent disparity than does racism. 24 Sometimes
the studies promoted so widely by the mass media, like the celebrated 1992
Federal Reserve Board of Boston study purporting to show higher black rejection
rates than those of whites with similar incomes, are simply invalid; that study
contained transcription and mathematical errors, inappropriate generalizations,
and the skewing of average results by a few exceptional cases. 25
Ironically, higher
rejection rates are often found for those very institutions, including
minority-owned banks, that are trying to extend credit in inner-city and
minority neighborhoods, since banks in predominantly white areas are more
likely to receive applicants from a smaller, more select group of minorities
with better-than-average financial resources, work histories, or business
prospects. When a bank opens a branch in a minority community, it will
necessarily reject more minority applications than before 26 It is the personal
characteristics of loan applicants-the items in their financial history likely
to communicate to potential lenders the likelihood that their loans will be
repaid- that explain virtually all racial or ethnic disparities. The most
important measure of discrimination is not rejection rates, which are affected
by a host of racially neutral factors, but instead the rates at which customers
of different races or communities default on their loans. If households or
businesses in black areas tend to default at lower rates than those in white
areas, that would be evidence of discrimination, since blacks would seem to
have to meet higher credit standards than whites do to get loans. On the other
hand, if the default rates of blacks are higher, that would suggest
discrimination in favor of them. In reality, the available evidence on default
rates suggests that there is no significant difference between households and
businesses of predominantly white and predominantly minority communities,
suggesting that the latter are not being "redlined" 27 Other studies
that have tried to identify actual racial discrimination by interviewing loan
applicants have often failed to find any significant evidence of it. 28
It is important to
understand the role of profit-seeking business in eliminating disparities in
income and economic opportunity that are based on racism and sexism. For groups
kept from realizing the American dream by the prejudices and failures of the
past, the best hope for progress in the future is an economy populated with
companies whose managers put performance and profitability first.
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At the time of the
original publication, John Hood was president of the John Locke Foundation, a
nonprofit think tank in North Carolina, and the author of The Heroic
Enterprise: Business and the Common Good (Free Press), from which this article
is adapted.
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1. Stephen Carter,
"The Glass Ceiling for Blacks Is All Too Real," Fortune, November 2,
1992, p. 124.
2. "Women
Entrepreneurs: 'A Pretty Big Game,"' Nation's Business, August 1992, p.
53.
3. E. Holly
Butler, "Female Entrepreneurs: How Far Have They Come?" Business
Horizons, March/April 1993, p. 59.
4. James
Overstreet, "Minority businesses riding a wave of sucoess," USA
Today, October 25, 1994, p. 4B.
5. Peter Drucker,
"The Age of Social Transformation," The Atlantic Monthly, April 1994,
p. 62. Of course, this increase in income potential isn't due solely to the
actions of firms, since minority workers are employed by government and
nonprofits as well as by businesses.
6. Paul KJebnikov,
"Showing Big Daddy the Door," Forbes, November 9, 1992, p. 150.
7. Benjamin Zycher
and Timothy A. Wolfe, "Mortgage Lending, Discrimination, and Taxation by
Regulation," Regulation, vol. 17, no.2,1994,pp.61-71.
9. John Leo,
"Our Addiction to Bad News," US, News and World Report, June 5, 1995,
p. 20.
9. Peter Brimelow
and Leslie Spencer, "When Quotas Replace Merit, Everybody Suffers,"
Forbes, February 15, 1993, p. 80.
10. Angela G.
King, "Black-Owned Businesses: Lean But Healthy," USA Today, May 10,
1995, p. 4B.
11. Wendy Zellner,
"Women Entrepreneurs," Business Week, April 18, 1994, pp. 104-105.
12. John Sibley
Butler, Entrepreneurship and Seo_-Help Among Black Americans: A Reconsideration
of Race and Economics (Albany, N.Y.: State University ofNew York Press, 1991),
pp. 1-33.
13. Harold
Jackson, "True Grit," Black Enterprise, June 1994, pp.230-34.
14. Ibid.
15. Brimelow and
Spencer, p. 86.
16. John C.
Weicher, "Getting Richer (at Different Rates)," The Wall Street
Journal, June 14, 199 5, p. I OA.
17. June Ellenoff
O'Neill, "The Shrinking Pay Gap," The Wall Street Journal, October 7,
1994, p. 12A.
18. Christina Hoff
Sommers, "Figuring Out Feminism," National Review, June 27, 1994, p.
34.
19. Elizabeth
Wright, "Preferential Policies: An International Perspective,"
Associates Memo, Manhattan Institute for Policy Research, August 2, 1990, p. 3.
20. See, for
example, Mary C. King, "Oocupational Segregation by Race and Sex,
1940-8g," Monthly Labor Review, April 1992, pp. 30-36.
21. Brimelow and
Spencer, p. 86.
22. These Are the
Good Old Days, 1993 Annual Report, Federal Reserve Bank of Dallas, 1994, pp.
7-8.
23. Andrew E.
Serwer, "What To Do When Race Charges Fly," Fortune, July 12, 1993,
p. 95. Allegations of discrimination continue, however, according to reports
published in May of this year.
24. Zycher and
Wolfe.
25. Stan
Liebowitz, "A Study That Deserves No Credit," The Wall Street
Journal, September 1, 1993, p. A14.; see also Joseph Blalock, "Testing
Fair Lending," Savings and Community Banker, June 1994, pp. 44-48.
26. See Jeff
Taylor, "Ratings Present Misleading Picture," Cansumers'Research,
October 1992, p. 23; and Tim W. Ferguson, "The Next Lender Wave: Mortgage
Bias," The Wall Street Journal, May 25, 1993, p. A 15.
27. Jonathan R.
Macey, "Banking By Quota," The Wall Street Journal, September 7,
1994, p. A14.
28. See George J.
Benston and Dan Horsky, "The Relationship Between the Demand and Supply of
Home Financing and Neighborhood Characteristics: An Empirical Study of Mortgage
Redlining,"
Reprinted with
permission from The Freeman, a publication of The Foundation for Economic
Education, Inc., August 1998, Vol. 48, No. 8.