Economic Theory and Racial Economic Inequality

ECONOMIC THEORY AND RACIAL ECONOMIC INEQUALITY William Darity Black people have always been troublesome for social scientists studying the United States. Theories that gleam brilliantly in academia's expansive sunlight when focused on the behavior of whites rapidly pale when their explanatory and predictive powers are directed toward the nation's largest racial minority. Political scientists enamored with their particular orthodoxy, pluralist theory, have had to squirm and wiggle in an attempt to preserve their beloved paradigm when faced with an "interest group" that did not comply with the dictates of their model of American political behavior. Generalizations that historians make about developments over time in the United States must include the addendum "except for the Blacks" to retain their accuracy. Sociologists have so consistently found Blacks to be the exception to their theoretical formulations that they now devote more time to the study of "the Blacks" than any other social scientists--so much so that they now have developed numerous theories that apply exclusively to Blacks. Economists also have spent much of their time researching "the black problem." They have looked primarily at the bread and butter issue of why proportionately more Blacks are poor than whites--the issue of black- white economic inequality. In a sense, they have been more "fortunate" than other social scientists insofar as black poverty potentially can be explained in the context of the prevailing economic paradigm, neoclassical microeconomic theory, via the concept of human capital. However, as neoclassical theory increasingly comes under fire, a growing school of researchers are contending that orthodox theory is not adequate to explain racial economic inequality. Efforts have begun to explain black poverty in decidedly more unorthodox terms--terms which call into question the 226 The Review of Black Political Economy continued validity of neoclassical microeconomics altogether. This article will examine and evaluate economists' efforts to explain black poverty. Three major approaches will be analyzed by discussing the major pieces of economic literature that attack the question of why a greater percentage of black people are poorer than whites. These three approaches are applications of (1) conventional trade models, (2) human capital theory, and (3) dual market theory to the phenomenon of racial economic inequality. It is pertinent to add that one behavioral assumption made by the neoclassicists will be retained as valid throughout the discussion--the assumption that individuals in the United States are materialistic, that they will more often than not act in their own self-interest. CONVENTIONAL TRADE MODELS AND BLACK POVERTY One of the earliest and most ingenious approaches to explain racial economic inequality employed a conventional two-nation trade model with a trade barrier--the taste of the white "nation" for discrimination. When applied to the United States this approach treats the black and white populations as having two separate economies. Given the white taste for discrimination, their greater numerical size, and their advantage in physi- cal capital ownership over Blacks, one could argue that a colonial relationship develops with whites holding a dominant economic position. The Becker Model The seminal work using this type of model was undertaken by Gary Becker 1 in the late 1950' s, preceding the currently popular description of the black community in the United States as an internal colony (popular in radical circles) by more than a decade. Becker proposed that we look at two economies, "W" and "N" in trade relationship. The critical assumption Becker makes that distinguishes his model from later conventional neoclassical explanations of black poverty is that" members of W are perfect substitutes in production for members of N." Moreover, the two economies share a common production function. Both economies are viewed as being perfectly competitive. Given that capital is more abundant in W and labor more abundant in N, it would be to the mutual benefit of both societies to engage in trade--W sending capital to N and N sending labor to W--until an optimum allocation of resources is arrived at, an allocation that maximizes the overall income of both societies. Because members of W and N are perfect RACIAL ECONOMIC INEQUALITY 227 substitutes the equilibrium wage rate of the two societies would be equal in a world where trade could occur freely. In the Becker world a trade barrier prevents such an equilibrium from being attained. The members of W have what Becket calls "a taste for discrimination" toward N. Treating discrimination as an analog to ordi- nary commodities, Becker argues: "If an individual has a 'taste for discrimination,' he must act as if he were willing to pay something either directly or in the form of reduced income, to be associated with some persons instead of others." In the Becker world white employers would prefer to hire white employees; white workers would prefer to work with white workers; and white consumers would prefer to purchase white-made products. But such preferences exist only if the wage rates of black and white workers are the same and if the prices of goods produced by Blacks and whites are the same. There is, Becket asserts, a sufficiently low wage and a sufficiently low price where the white employer will take the black employee and the white consumer will choose to buy the black-made product. Presumably, the white employee would be willing to work with Blacks at a sufficiently high wage. Becker therefore differentiates between the money costs and the net costs that members of W perceive. If a W pays a money wage of q to an N, then W acts as if his net cost is q(1 +a). If a W worker gets a money wage of r when working alongside an N, then W acts as if his net hourly pay is r(1 -b). And, finally, if W buys a commodity produced by N for a price p, then W acts as if the net cost is p(1 +c). The parameters a, b, c are discrimination coefficients (DC). If they are all greater than zero, the DC is associated with "disutility" and becomes a measure of the"psychic costs" of association with the undesir- able factor. The DC is not treated as being uniform from person to person in W; its magnitude varies depending upon the tastes of each individual. However, the taste for discrimination occurs with great enough frequency and magnitude among members of W for wage differentials to arise between members of W and members of N. It is "costlier" to hire members of N because of the psychic costs involved in deciding to employ them for members of W. Since N labor is more abundant than N capital in N' s economy while W labor is relatively more scarce in W's economy, N labor receives a lower wage than W labor, due to the trade barrier created by W's taste for discrimination. Economic inequality arises in the Becker world because of the trade barrier created by W' s taste for discrimination. A further important step in the Becker argument is his conclusion that the 228 The Review of Black Political Economy white taste for discrimination results in lower aggregate incomes for both W and N, that discrimination is not "optimal" for either society. Less labor and less capital are exported by each society respectively than would be the case in the absence of the trade barrier, thus lowering the equilibrium net incomes of both N and W. Becket's final critical point is that although aggregate net incomes in both societies decline due to discrimination, "... all factors are not affected in the same way: the return to W capital and N labor decreases but the return to W labor and N capital actually increases." But the cumulative effect in the Becker model is that the preferences of whites to avoid associations with Blacks lead to an outcome in competitive markets that results in an average income that is lower for Blacks than for whites. Plainly the Becker approach is an imaginative application of neoclassical theory to the problem of racial economic inequality, demonstrating how tastes determined exogenously from the market can lead to black poverty. In the Becker world prejudice is the sore point. There is, however, a fundamental weakness in this model that stems from its static nature. Becker assumes at the outset that N and W economies are competitive. If we distinguish between short-run and long-run competitive equilibria the flaw becomes clear. In the short run perfect competition and the existence of wage differentials among individuals with equivalent marginal productivities are compatible events; in the long run they are not. One of the basic tenets of neoclassical theory is the belief that the presence of competition will eventually lead society to an optimal allocation of resources. Under such circumstances equally productive workers will receive the same wage. Consider a dynamic application of the Becker static model. Assume that in the short run Becket's predicted black-white wage differentials do develop. W receives a hypothetical wage S and N receives a hypothetical wage T. T is lower than S. Next assume, as Becket does, that all firms in W economy are perfect competitors, producing an output at the point where marginal cost is equal to marginal revenue. For simplicity we will assume that all the firms in W produce the same commodity. We also assume that they all hire only W labor at the higher wage S. Because they are all perfect competitors they all earn only "normal" or "economic" profits, just covering their costs. There are no entry barriers.

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