Racism and discrimination obviously hurt the victim. But besides that, who gains and who loses?

Consider the economics.

Suppose in a certain town there are just two grocery stores. The town is isolated so it is impractical for anyone living there to go to another town for groceries. One of these stores is owned by Mr Smith and the other by Mr Jones. Smith is a complete racist: he hates all black people and doesn't want to even associate with them. Jones is not a racist but he's no champion of civil rights either. The only color he cares about is green.

Let's further suppose that in this society the government has no laws either encouraging or prohibiting racism. Business owners can do whatever they like short of violence and fraud.

So what happens? Smith refuses to sell to black people or even let them in his store. He certainly won't hire any. Jones is happy to let anyone shop at his store as long as their money is good, and he's happy to hire people of any color as long as they can do the job.

Who gains and who loses? Clearly black people in this town lose. While white people have a choice of two stores to shop at, black people have only one. If Smith has a better price on a certain product, or if he carries a product that Jones does not, white people can take advantage of this, but black people can't. White people have the possibility of getting jobs at either store. Black people have only half the job opportunities.

But how does it work out for Smith and Jones?

If Smith won't sell to black people, then they all must buy from Jones. Smith loses customers and Jones gains customers. Smith's racism costs him money and profits Jones.

If Smith won't hire black people, then Jones gets his pick of the hardest working and most qualified blacks. Jones can choose from both whites and blacks, while Smith can only choose from whites, thus reducing the potential pool of employees. If Jones has no scruples about exploiting black people -- we said he wasn't racist but all he cares about is money -- he can hire black people for less than he would pay an equally qualified white, because they have fewer employment opportunities. Smith has to pay more for less qualified employees, while Jones pays less for better qualified employees. Again, Smith's racism costs him money while Jones profits.

In a free market, racism costs the racist money. In the long term, the racist business owners will be driven out of business by those who are not racist.

The only way around this is to get the government to protect the racist. This was the point of the "Jim Crow" laws in the south after the civil war. For example, the government passed laws requiring railroads to have segregated cars for blacks. The railroads fought against these laws because they cost them money: they had to run two cars instead of one, spend more on fuel to pull the extra cars, hire more conductors to work the extra cars, etc. A racist railroad owner who did this voluntarily would face higher costs than a non-racist railroad owner. But the capitalist railroad owners lost and the racists won. The government passed laws forcing all railroads to act racist. This allowed the racists to discriminate against blacks without paying the price that a free market would have imposed. Big government saved the racists. At least until public opinion changed enough to put the racists out of power.

© 2009 by Jay Johansen

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