Prejudice is free, but discrimination has costs: The holocaust and its parallels

[Ulli]

I have uploaded this essay by Steve Farron on my wordpress account, because it is too big for the forum. It is worth reading.

Except:

The purpose of FMF Monographs is to use the analytic method of political economy to shed light on how best the promotion of free markets will improve the workings of the South African economy. In particular, authors are urged to apply the microeconomic approach of studying how individuals, firms and households behave in response to either naturally occurring or regulatory incentives. This requires that they display a sound, institutional knowledge of their theme.

Steven Farron has researched deeply and thought hard about government-enforced racial and ethnic discrimination in different countries and contexts. In this monograph he discusses examples in Malaysia, white-ruled South Africa, the United States and Nazi Germany.

Each example is from a different continent. Some involve discrimination against a minority: Chinese in Malaysia; non-Afrikaner whites, especially Jews, in South Africa; and Jews in Germany; others involve discrimination against a majority: blacks in South Africa and whites in the United States. But all failed because the desire of individuals to obtain the best goods and services at the least cost and of businesses to maximize profits proved to be stronger than massive government intervention.

In Malaysia a century of discrimination against Chinese, first by the British colonial rulers, then by the government of independent Malaysia, totally failed to close the huge economic gap between the Chinese minority and the Malay majority; a failure that was recently acknowledged by the Malaysian Prime Minister Dr Mahathir (pp.10-11), who did more than anyone else to enforce anti-Chinese discrimination.

In white-ruled South Africa, the government spread a ubiquitous web of regulations over the economy to protect white manual workers from black competition and to prevent economic integration, which would make black political power inevitable. At the same time, Afrikaans-speaking whites, who were a majority of the white population and controlled the government, used a huge government bureaucracy to advance Afrikaner businesses. But individual self-interest proved to be stronger than perceived collective interest. Whites, including Afrikaners, circumvented the regulations that they had their government impose.

In the United States also, even though federal, state and municipal government have tried every means imaginable to help black businesses and even though most black Americans say in surveys that they prefer to buy from black-owned businesses, blacks own only a small minority of businesses even in completely black neighborhoods (p.38).

Professor Farron calls Nazi Germany from 1933 to 1938 ‘the ultimate test’ of his thesis. For generations nearly all Germans, even those who prided themselves on not being anti-Semites, regarded Jewish hyper-success as a serious problem, especially since they thought of it as Jewish ‘domination’ of German life. But the Nazis’ initial attempt to solve it, through discriminatory legislation, boycotts and sporadic violence, failed because most Germans were unwilling as individuals to pay the cost that implementing their collective prejudice imposed. However, this example had a different end from the others. People who knew Hitler, his biographers and Hitler himself often observed that he did not differ from most people in his ideas, but in the absolute literalness with which he held those ideas, the relentless logic with which he followed them to their conclusions and the ruthless thoroughness with which he implemented those conclusions (p.61).

Professor Farron’s examples cover every imaginable type of government program to promote or impede the economic and occupational success of racial and ethnic groups. All were initiated and implemented by people who were certain of their justice and usefulness; yet their only success was enriching a small elite of the preferred group; and that was achieved at a terrible cost: the creation of a huge bureaucracy, which individuals and businesses managed to circumvent, but only by diverting time, effort and resources from productive activities to subterfuges that seriously distorted the economy.

The present government of South Africa, like its white-ruled predecessor, has embraced government-enforced discrimination; this time in favor of ‘historically disadvantaged’ groups, especially in the form of black economic ‘empowerment’. From government procurement practices to competition policy; from investment incentives to industry ownership; from military purchases to state asset restructuring; from labour hiring regulations to financial sector lending laws, discrimination is all-pervasive and often mandatory.

At the end of his discussion of white-ruled South African racial discrimination, Professor Farron points out that this post-1994 discrimination is already having the same results as all similar policies.

The reason, as Professor Farron repeatedly demonstrates, is that although prejudice is free, discrimination – that is, considering race, ethnicity, religion or any other extraneous factor in making economic decisions – involves costs; and most people are unwilling to pay those costs.

Professor Farron also demonstrates that government-enforced discrimination succeeds in government employment, since there its costs are hidden and governments do not compete with organizations that hire employees on the basis of merit. In large businesses government-enforced discrimination succeeds somewhat because the government ensures a level playing field for all competitors, and the costs incurred are diluted by non-discriminatory hiring, promotion and business transactions. In both cases the beneficiaries of this ‘success’ are a small elite of the preferred group. However, governments cannot enforce discrimination uniformly on small businesses; and its costs for them are obvious, painful and impossible to dilute. That is even truer of individuals. So they always manage to get around it in one way or another.

A crucial factor that must always be kept in mind when considering these policies is that it is the general society that pays the costs that are hidden or diluted in government and big business; the cost of the time, effort and resources that small businesses and individuals expend to circumvent them; and the cost of the large bureaucracy that is needed to try to enforce them. These social costs include higher taxes, products and services of poorer quality and/or higher prices, higher interest rates (to compensate for unpaid loans), wasted investment and capital flight to less regulated countries.

In fact, government-enforced discrimination, previously in favor of whites, especially Afrikaners, now in favor of ‘historically disadvantaged’ groups, is probably a main reason for South Africa’s per capita income decline since the late 1970s.

Professor Farron’s richly documented and tightly argued Monograph represents neither the opinions of the Free Market Foundation (which has no corporate view), nor those of its Directors, members or staff. Nevertheless it should be regarded as a critical input to the debates surrounding the development of the modern South African polity, as government seeks both to engage with the wider world through Nepad1  while energetically pursuing the goals of black economic empowerment.

Read the whole essay:

http://goldfasan.wordpress.com/2009/07/07/prejudice-is-free-but-discrimination-has-costs-the-holocaust-and-its-parallels/