Interrogating Inequality

Introduction to economic theories of discrimination & other explanations

of racial economic inequality

4 marxist conceptions of racial inequality 1) As general working class exploitation – derivative of capitalist relations (race is ‘ultimately’ class) 2) General working class exploitation and specific working class exploitation due to racial discrimination in the

workplace (analysis remains confined to market relations) 3) Resulting from autonomous systems of general working class exploitation and national oppression 4) Resulting from general and specific working class exploitation, racial oppression and patriarchy so

intertwined they form single system of white supremacist capitalist patriarchy full analysis requires macrostructural and microinstitutional analyses, as well as broad genealogical

investigation i) Macrostructural political economy approach including modes of overdetermined class exploitation and

political repression ii) Microinstitutional analysis of social & psychological mechanisms that inscribe and sustain logics of white

supremacy and patriarchy in the everyday lives of women and people of color iii) Critical historical deconstruction of discursive conditions for the rise of white supremacy and patriarchy

(genealogies of modern racism/patriarchy) – European ‘enlightenment’ discourse & modern ‘western’ science – (Sandra Harding’s ‘curious coincidence’)

INTERROGATING INEQUALITYQuestions to keep in mind when examining any economic theory/model purporting to explain racial/gender

economic inequality:

1) Does the theory assume that markets are competitive? If yes, what conception of competition is offered (e.g., neoclassical perfect competition, classical/Marxian competition, Austrian approach, neo-Marxian monopoly capital approach, etc.)? If not, what market imperfections are assumed?

2) Does the theory assume that productivity is equal across racial or gender lines?

3) Does the theory acknowledge discrimination? If yes, what conception of discrimination is offered (e.g., ‘taste’, individual irrationality, structural factors, etc.)? If no, what explains ‘race’/gender economic inequality?

4) Are discrimination and competition compatible in the model?

5) Is the theory a general theory of discrimination (e.g., can it be applied to gender as well as racial inequality)?

6) Is discrimination viewed as ‘rational’ or ‘functional’ in this model?

7) Who ‘benefits’ from discrimination in this model? Who is ‘hurt’ by discrimination? How are ‘hurt’ and ‘benefit’ defined?

Theories of discriminationMainstream (neoclassical)

• G. Becker’s ECONOMICS OF DISCRIMINATION (perfect competition and discrimination)• • Arrow-Phelps Statistical Discrimination (imperfect competition and discrimination)• • Human Capital theory (Becker et al.): (Perfect competition and no discrimination)• • Culture of poverty – Thomas Sowell et al. (perfect competition and no discrimination)• • Dual economy (mainstream)• • Labor market segmentation (mainstream)• • Efficiency wage theories

• Audit Studies (experimental studies with actors or using applications or résumés)

Theories of discriminationAlternative (heterodox)

• Domestic (or internal) colonialism – Robert L. Allen, Stokely Carmichael, et al.

• • Dual economy (alternative)—Michael Piore, et al.• • Labor market segmentation (alternative)—David M. Gordon, et al.• • Divide-and-Conquer thesis (Michael Reich et al.—neo-Marxian)• • Classical Marxian—reserve army—Darity, Williams, Mason, Botwinick:

(competition and discrimination):(wed to interdisciplinary and historical studies of white supremacy and patriarchy)

Gary Becker – Economics of Discrimination (1957)

Becker assumes markets are perfectly competitive.

Becker assumes Black and White workers are equally productive.

Model recognizes discrimination, but it is an individual ‘taste’ or ‘preference’, not historically analyzed racism as a social institution, etc.

Becker I (1957)

Firms that discriminate must ‘pay’ to indulge their taste for discrimination. Willingness to hire only some members of the working class reduces the size of the potential labor supply pool available and drives up wages. Firms that do not discriminate will have lower costs when they hire the employees discriminated against. Non-discriminating firms will tend to replace discriminating firms. Competitive markets limit the impact of discrimination on wages. Firms that do not discriminate will be more profitable than those that do discriminate.

Becker I (1957)

Discrimination and competition are not compatible in the long run in the model.

Discrimination is not rational or functional in the model.

Capitalists who do not discriminate benefit in the model; capitalists who discriminate are hurt. White workers benefit in the short run in the model, getting higher pay, but they are hurt in the long run because their firms go under.

Becker I (1957)

It is not clear that it can be a general theory of discrimination, although it has been applied to gender differentials.

2 options facing neoclassical analysis of racial economic inequality

Given empirical fact of over 100 years of racial wage differentials (long run under any definition), either:

1) Abandon assumption of perfect competition;

2) Explain differentials by something other than discrimination

Arrow-Phelps Statistical Discrimination Models

Ken Arrow and others relaxed assumption of perfect competition, specifically the assumption that employers have perfect information about productivity of job applicants.

If employers do not know how productive an applicant will be, it may be costly to find out that information, and so race or gender may be used as a screening device. Applicants are assumed to have the average productivity of their racial or gender group.

Statistical Discrimination

The strengths of the statistical discrimination model are that:

1) it appears to be able to explain long run discrimination, and;

2) there is a sense in which discrimination can

be seen as rational or functional in the model.

Rationality of statistical discrimination

Rather than discrimination being rooted in the ‘exogenous’ preferences of whites to associate with other whites, even in the face of economic loss, statistical discrimination occurs because of the profit motivated behavior of risk-averse employers.

Arrow-Phelps Statistical Discrimination ModelsBut, the perception of racial differences in average

productivity would only persist if the cost of determining an individual’s productivity exceeds the benefit of doing so. Probationary periods, work histories, sophisticated personnel departments, etc., make this implausible.

Also, if employers differ in their risk aversion, that is, some are willing to take a chance in hiring those who it is believed come from a group with lower average productivity, then erroneous beliefs about a group should be shattered.

Becker II – Human Capital

In the attempt to salvage perfect competition, Becker himself and others abandoned discrimination, giving up the assumption that black and white workers are equally productive and rooting wage differentials in differences in ‘human capital’. This preserves marginal productivity theory.

Human Capital

human capital - set of acquired and innate traits that determine productivity, e.g., education, training, experience, ‘home-life’ (i.e., socialization).

Three schools - Jensen (biogenetic differences), Chicago (education), and Moynihan-Elkins (culture, socialization)

human capital‘investment’ model - atomistic individuals

maximizing consumption over time invest in future

—assumes rational actors who know the average rate of return to investing in more school, etc. But in a world where the future is uncertain, we don’t have that information. Technically, this means econometric equations are misspecified. Intuitively, we are leaving out a lot of the determinants of the demand for education, or the complex determinants of other life choices.

human capital—assumes individuals choose careers and their job history

follows a career pattern—this not supported by evidence—most take first job that comes along, sequence of jobs do not follow career pattern; importance of ‘inside contacts’ in getting jobs, jobs held do not have clear connection to skills.

—if experience determines human capital, what determines entry level? If discrimination at entry level, then this sets the future paths and possibilities.

human capitalLink between education and productivity not clear.

Considerable evidence to the contrary. Some studies show primary determinant of earnings is luck (Jencks), or who you know.

Rate of time preference argument – Lots of evidence that Blacks save more than whites, so do Blacks really tend to resist deferring gratification? Is it impatience of lack of money that results in lower years of schooling? Same with argument about single-parent families, i.e., would children from single-parent families with same economic resources fair differently in labor markets?

human capital• methodological individualism misses important

structural features - causes of different quality of schools, changing nature of workplace

• deskilling hypothesis - control of workplace & workers more important than ‘skill’- hierarchies of pay are used to divide and control workers

• these considerations are not conceivable in the neoclassical human capital framework

Lester Thurow critiqueHuman capital wrongly treated like any other

investment. H.C. not like machinery. • 1) HC embodied in one, cannot be separated

from the owner like a machine can. One must be ‘with it’ to obtain one’s rate of return

• 2) disinvestment not possible• 3) cannot be discarded when obsolete• 4) can’t be transferred at death

Human capital – empirical record

50 years of econometric testing, millions of $ in resources, demonstrate that equalizing for human capital does not eliminate racial wage and employment differentials.

“unexplained residual” remains, equation after equation, year after year.

Human capital – general theory?

1) white and blacks go to different schools, do males and females?

2) whites and blacks grow up in different

families, do males and females?

Human capital—missing variable?

For many, the unexplained residual is discrimination.

But others have put forward notion that the unexplained residual represents another missing explanatory variable—”culture”!

Culture of Poverty

Some racial, ethnic groups have values, attitudes, behaviors constituting a culture of market success.

Others have attitudes and behaviors constituting a culture of failure in markets, a “culture of poverty”—the “underclass”

Culture of Poverty

Includes Black neoconservatives such as Thomas Sowell, Walter Williams, etc.

Some ‘liberals’ as well, e.g., Glen Loury, and even some white radicals.

Dinesh D’Souza’s The End of Racism - “rational discrimination” (combination of statistical discrimination and culture of poverty)