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.
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 nativeborn 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
highquality 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 working women 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, labor-saving 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 histo-ry likely to communicate to potential lenders the likelihood
that their loans will be repaid- that explain virtually all racial or ethnic
dis-parities. The most important measure of dis-crimination 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 signifi-cant difference
between households and busi-nesses 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 appli-cants 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.
--------------------------------------------------------------------------------
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), ftom which this article is adapted.
--------------------------------------------------------------------------------
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.