What’s wrong with the theory of racial inequality: Toward a more effective theory of racial inequality in economic life
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Explaining or resolving the apparent incompatibility between tradi-tional economic theory and the persistence of racial inequality or dis-crimination in economic life has been the most significant motivation for conventional studies of race and economics. The conventional theory that resulted from this interest, however, has been of limited utility in advancing understanding of racial inequality in economic life. This essay discusses an alternative to the conventional theory that is intended to facilitate a better understanding of racial inequality. It is also designed to provide a more effective tool for the evaluation and design of policy.
The alternative model takes the existence of racially distinct groups and initial racial difference in the ownership of resources as given and exogenous. It is specified in a manner that allows the evolution of racial inequality over time to be explained. The structure of the model responds to challenges posed by Robert S. Browne to develop viable economic theories useful in the study of the interaction of race and economics.
KeywordsHuman Capital Racial Discrimination Economic Life Initial Endowment Conventional Theory
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- 1.Throughout the text the terms “traditional” or “conventional” economic theory refer to standard economic theory presented in most undergraduate texts such as C. E. Ferguson,Microeconomic Theory (Homewood, Ill.: Richard D. Irwin, 1972), and graduate texts such as Henderson and Quandt,Microeconomic Theory (New York: McGraw Hill, 1972). This theory stresses the ability of markets to bring about efficient outcomes in which returns to all market participants depend primarily on their contributions to production.Google Scholar
- 2.This is apparent in works on the theory of discrimination, such as Gary Becker,Economics of Discrimination, 2nd ed. (Chicago: University of Chicago Press, 1971) and Kenneth Arrow, “Some Models of Racial Discrimination in the Labor Market,” in A. H. Paschal, ed.,Racial Discrimination in Economic Life (Lexington, Mass.: D. C. Heath, 1972).Google Scholar
- 3.For an interesting treatment of the impact of researcher bias on the perpetuation of scientific error see Stephen Jay Gould,The Mismeasure of Man (New York: W. W. Norton, 1981).Google Scholar
- 4.The weakness of the conventional model has been pointed out by the author in David Swinton, “The Economics of Discrimination in Non-Competitive Labor Markets,” unpublished Ph.D. dissertation (Harvard University, 1974). Also see Kenneth Arrow, “Some Models of Racial Discrimination.”Google Scholar
- 5.The marginal productivity theory of factor returns is presented in most standard textbooks. See, for example, the references in note 1.Google Scholar
- 6.For a discussion of the concept of human capital, see Gary Becker,Human Capital (New York: National Bureau of Economic Research, 1964).Google Scholar
- 7.A number of early studies, including Gunnar Myrdal’s classic,An American Dilemma (New York: Harper and Row, 1962), documented the unequal economic status of blacks.Google Scholar
- 8.This position was advanced in treatises such as Edward Banfield,The Unheavenly City (Boston: Little, Brown, 1968). More extreme versions of this explanation have been advanced by the biological determinists, such as Jensen and Schockley, who advance claims that blacks are genetically inferior to whites; see, for example, Arthur Jensen, “How Much Can We Boost I. Q. and Scholastic Achievement?”Harvard Educational Review 33:1-123.Google Scholar
- 9.James Smith and Finis Welch provide a leading example of practitioners of this approach. See, for example, theirRace Differences in Earnings: A Survey and New Evidence (Santa Monica: Rand, March 1978).Google Scholar
- 10.See Becker,Human Capital.Google Scholar
- 11.These shortcomings have been discussed by this author, Annie Krueger, and Kenneth Arrow, among others. See Swinton,The Economics of Discrimination in Non-Competitive Labor Markets, cit. for a discussion of these critiques and other references.Google Scholar
- 12.This flaw, the inability to predict unemployment differentials, was admitted by Becker in the second edition of theEconomics of Discrimination. See also the discussion in Swinton, “The Economics of Discrimination,” and Arrow, “Some Models of Racial Discrimination.”Google Scholar
- 13.See Krueger; Arrow, “Some Models of Racial Discriminating” and Swinton, “The Economics of Discrimination.”Google Scholar
- 14.Many empirical studies have found that measured human capital differences could not account for most of the observed differences in racial inequality in the labor market. See, for example, Christopher Jencks et al.,Inequality (New York: Basic Books, 1972); Stanley Masters,Black/White Income Differentials (New York: Academic Press, 1975); William Darity, Jr., “The Human Capital Approach to Black/ White Income Inequality,”Journal of Human Resources 13:2, (1978); David Swinton, “The Dimensions and Causes of Youth Unemployment” inSymposium on Minority Youth Employment Urban Disadvantaged Youth, (Washington, D.C.: Institute for Economic Development, 1980); Frank Levy, “Have Black Men Gained in Employment?”Brookings Papers on Economic Activity 2, 1980; and Julianne Malveaux,Unemployment Differentials by Race and Occupation, unpublished Ph.D. dissertation, M.I.T., 1980.Google Scholar
- 15.The limited policy guidance offered by the conventional theory has been discussed by the author elsewhere. See, for example, David Swinton, “Economic Theory and Poverty: Towards a Reformulation,”American Economic Review (May, 1987).Google Scholar
- 16.In addition to the references cited in earlier notes, the author has also discussed the alternative theory in several other places. See, for example,A Conceptual Frame-work for Studying Minority Business Growth and Impacts, a report submitted to the U.S. Department of Commerce, Minority Business Development Agency, Washington, D.C. by the Southern Center for Studies in Public Policy, Atlanta (1988);Systemic Barriers to Economic Progress for Black Americans, Working Paper 3-84 (Atlanta: Southern Center for Studies in Public Policy), June 1984; “Orthodox and Systemic Explanations for Unemployment and Racial Inequality: Implications for Public Policy,”Review of Black Political Economy (Spring, 1983); andTowards Defining a New Research Agenda, Working Paper 1-82 (Atlanta: Southern Center for Studies in Public Policy), 1982.Google Scholar
- 18.A simple dynamic model was presented by Swinton in “Racial Inequality and Reparations,” in Richard F. America, ed.,The Wealth of Races (New York: Green-wood Press, 1990).Google Scholar
- 19.The implications of the theory for policy has been suggested in a number of papers. Perhaps the most explicit discussion is contained in Swinton, “Economic Theory and Poverty.”Google Scholar