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 blackwhite 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
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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.
C O N V E N T I O N A L T R A D E M O D E L S AND B L A C K P O V E R T Y
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 physical 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 t h a t " 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 t r a d e - - 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 ordinary commodities, Becker argues: " I f 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 m o n e y c o s t s and the net c o s t s 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 t h e " p s y c h i c costs" of association with the undesirable 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
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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 " n o r m a l " or " e c o n o m i c " profits, just
covering their costs. There are no entry barriers.
Suppose an entrepreneur enters the picture whose discrimination coefficient yields a money value that is less than the existing wage differential.
RACIAL ECONOMIC INEQUALITY
229
He is willing to hire black laborers at the lower wage T. He discovers that
he faces lower marginal and average cost curves than all the other firms in
W. As a result he can sell his output at a lower price than all the other firms
in W. This leaves the other firms with the simple choice to either hire
Blacks at the lower wage in order to reduce their own cost curves or to go
out of business. Assuming they choose the former course of action the
demand for black labor will rise and the demand for white labor will fall
until all workers will be paid the same wage, a wage equivalent to their
marginal productivity. The existence of competition has thus caused wage
differentials to vanish. Racial economic inequality vanishes as well. 2
In short, because Becker assumes that perfect competition exists in both
sectors of his model he fails to explain why economic inequality persists
between Blacks and whites, as long as the realistic assumption is made that
all whites do not share the same hostility toward associations with Blacks
(particularly if such associations are profitable).
The only potential redemption for Becker's model is to argue that we are
still in the short run, that the market has not yet had the chance to "correct"
the consequences of white attitudes toward Blacks. But this leads to a
rather eerie conception of the short run. After all, there has been close to a
century during which entrepreneurs could have exploited the profit-making
opportunities afforded by the lower wages they could offer Blacks, and
ultimately close the wage (and income) gap in a presumably competitive
world.
Today wage differentials do exist between Blacks and whites. The
average income of Blacks is still little more than 60 percent of the average
income of whites. 3 But in long-run equilibrium a perfectly competitive
marketplace should not demonstrate such a condition if Blacks and whites
are perfect substitutes.
A related subsidiary criticism of Becker's model concerns the severing
of the neoclassical umbilical cord connecting utility maximization with
money income maximization. In the Becker world whites are willing to
forego money income for the added satisfaction of staying away from
Blacks, but this is not consistent with neoclassical ontology. "Rational"
man prefers money above all else--and, as has been argued above, "rational" members of W can associate with Blacks and end wage differentials.
At base the observed existence of economic inequality in the United
States cannot be explained by Becker's model if the American economy is
perfectly competitive and the average productivities of Blacks and whites
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are the same, two assumptions that Becker makes at the outset of his work.
The Krueger Model
Anne Krueger's extension of the Becket model is equally ingenious.
Although she still uses a conventional trade model, her approach leads to a
markedly different explanation of black poverty.
She begins by borrowing most of Becker's basic descriptive
assumptions--two societies in trade relationship (one white and one black,
the latter a numerical and economic minority), each sector perfectly competitive and sharing identical production functions, and black and white
factors of production being perfect substitutes.
The crucial difference between her model and the Becker model is that
she seeks to restore the link between money income maximization and
utility maximization for whites. The practice of discrimination is no longer
purely a matter of "tastes"; instead it becomes economically rational
behavior for whites.
The difference between her approach and Becker's becomes clear when
the mathematical formulas for white income in each model are compared.
For Becket, according to Krueger, the "net income" of whites is equal to
the marginal product of capital in the white sector times all white-owned
capital (exported and domestically used) plus the white wage bill.
The relative scarcity of capital in N causes capital to command a higher
price in that sector, due to the white taste for discrimination which precludes exports up to the level where the marginal productivity of capital in
both sectors is equal. As a result capital exported to the black sector yields a
higher rate of return. But because Becket makes a distinction between
money incomes and net incomes (the latter including a discount factor that
associates a price with the white taste for discrimination) the white return
on exported capital is internalized within the production function.
Krueger, on the other hand, makes no such distinction, which enables
her to sift out the white return to exported capital and arrive at a slightly
different equation for the white sector's net income. It is equal to output in
the white sector plus the returns to exported capital.
To maximize white income Krueger determines algebraically that "the
marginal product of capital in the white sector should be lower than the
marginal product of capital in theNegro sector . . . . " The higher price that
whites can command for the capital they export by choosing a discriminatory level of exports rather than a mutually optimal level can be viewed as a
" t a x " on the black sector.
Unlike the Becker model whites gain while Blacks lose, instead of both
RACIAL ECONOMIC INEQUALITY
231
groups losing as a result of discrimination. Once again, however, the
distributional effects of the white gains are not uniform. While white
laborers gain from discrimination, white capitalists lose.
Economic inequality arises here because whites tax Blacks for the use of
capital that they export to the black sector, thereby reducing average black
income.
It is the lack of uniformity of the distributional effects of the gains reaped
by whites through discrimination that makes this explanation of blackwhite income inequality doubtful9 Krueger comments, "White capital
owners would not discriminate if they were maximizing their own incomes
and had no taste for discrimination 9
In a world where free trade exists the economies of two separate societies
can be viewed as functioning as one. Only the introduction of barriers to
trade (such as the phenomenon of discrimination) segment the economic
environment in a perfectly competitive world. Krueger accepts the Becker
assumption that the black and white economies are internally competitive 9
Consequently, within the white sector, white capitalists behave atomistically in their own individual self-interest. For discrimination to occur that
maximizes the income of the white population as a whole, white capitalists
must act in a collusive manner vis-h-vis the black sector. By doing so they
actually suffer a loss. They would maximize their own income if free trade
existed. Aware of the paradox in her analysis, Krueger offers the following
potential explanation:
9 white capitalists may aim at maximizing the income of the whole
white community rather than white capitalist income only. A welfare
function of this kind would be quite similar to Becket's, except that
discrimination would be directed at maximizing white real income
rather than avoiding the distastefulness of working with Negro factors of production. 5
This implies that there is an awareness (or "consciousness' ') on the part
of whites that their discriminatory allocation of capital to Blacks will
maximize their community's income, and there is a willingness on the part
of white capitalists to lose income for the economic gain of the white
population as a whole.
Krueger herself suggests that conscious efforts to maximize white income relative to black income might be evident "in the allocation of
publicly owned capital," but the allocation of publicly owned capital is
politically determined, an event external to the marketplace. Therefore,
this type of conscious behavior is not the same as discrimination by whites
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in the marketplace to exploit their capital advantage. This type of conscious
behavior ascribes the causes of black poverty to white political control over
public resources rather than the collusive actions of white capitalists who
stand to lose money by their behavior.
The fundamental weakness of the Kmeger model--like the fundamental
weakness in the Becket model--is that the long-run equilibrium of a
perfectly competitive marketplace does not lead to income differences
between individuals who are perfect substitutes as factors of production. In
the Becker model we would expect perfect competition to eventually erode
wage differentials between Blacks and whites. In the Krueger model the
collusive behavior of white capitalists vis-a-vis the black sector is inconsistent with their independent, income-maximizing behavior within the white
sector. 6
As long as perfect competition is assumed and Blacks and whites are
viewed as perfect substitutes, wage differentials should not persist when
the economy is in long-run equilibrium. Competition should lead to the
collapse of efforts to collude, particularly if a collusive pact actually leads
to the loss of income for a given group of economic actors.
To arrive at a sound explanation of black poverty that preserves the
behavioral assumption that economic man is materialistic, economic
theorists would either have to dispose of the assumption that the American
economy is characterized by competition or they would have to dispose of
the assumption that Blacks and whites are perfect substitutes as factors of
production. The former step was too threatening to the orthodoxy to be
pursued immediately. The second step dovetailed neatly with the neoclassical paradigm. It is the step taken by human capital theorists. If any
explanation can be considered the conventional wisdom among members
of the economics profession, human capital theory is the strongest candidate.
H U M A N C A P I T A L T H E O R Y AND B L A C K P O V E R T Y
The fundamental shortcoming in the use of conventional trade models to
understand why proportionately more black people are poor is their simultaneous assumption that the two societies engaged in trade have perfectly
competitive internal economies and that the members of both societies are
equally productive workers. Neoclassical theory does not direct us toward
a long run equilibrium that sustains a trade barrier yielding economic
inequality between the two societies. Market imperfections that block
optimal allocations of resources are expected to fade in the face of continued competition in the orthodox view. r
A revision in the assumptions that Becker and Krueger make does result
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233
in a theoretical approach that can explain the existence of black poverty in a
competitive world--human capital theory. The necessary revision is the
discarding of the assumption that Blacks and whites are perfect substitutes
in production.
Human capital theory falls squarely into the neoclassical paradigm. It
proposes that low income is the result of low wages. Low wages are the
result of workers holding low productivity jobs. Holding low productivity
jobs is the result of workers having a lower ability or skill level (or, in
economic jargon, " a lower level of human capital," which is the theoretical concept treated as distinct from physical capital, such as machinery,
tools, factories, land, or savings accounts). Individual workers can raise
their personal level of human capital by investing in increased education or
training for themselves that would allow them to fill occupations with
higher levels of productivity (and, commensurately, higher wages).
Human capital theory preserves the neoclassical link between wages (the
price of labor) and the marginal productivity of labor. In this sense, labor is
paid what it is " worth " - - n o more, no less. 8
How does this apply to economic inequality between Blacks and whites
in the United States? The argument a human capital theorist would make is
that Blacks have not accumulated a level of occupational abilities and skill
comparable to the level attained by whites. Blacks, in this context, are
viewed as having a lower average level of productivity. Race correlates
with productivity. Firms are aware of this and their hiring practices reflect
this awareness. They expect the white worker to be more productive
because whites as a group are better educated. Race then becomes a cheap
screening device when a white and a Black apply for the same job. Because
human capital theorists would argue that the expectation is correct, race
becomes an efficient surrogate variable for allocating jobs in a competitive
market. It becomes an accurate means of predicting job performance. After
Doeringer and Piore, this is the phenomenon of "statistical
discrimination." 9
This perspective is epitomized in the work of Thomas Sowell. 1~ He
defines human capital as "the vital accumulation of knowledge, skill and
organizational experience," and then proceeds to argue that black people
have less of it. For him, this explains why black people are poor:
The poverty of the domestic poor generally, or of black people
specifically, is not only a poverty in terms of the physical things they
own or don't own; their share of the human capital of the country is
even more desperately small. 11
Part of these differences is due to educational differences between
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Blacks and whites, according to Sowell. He presents four sources of
differences in the amount of formal education Blacks and whites
receive--(1) lower expenditures per student in poor neighborhood schools
leading to the hiring of "a large proportion of temporary, substitute, and
inexperienced teachers and larger classes"; (2) disproportionate amounts
of public funds directed toward middle-class educational needs rather than
lower-class educational needs; (3) cost barriers that the poor face in
attending four-year colleges and universities; and (4) disproportionate
numbers of poor students who must, therefore, attend junior colleges
where they receive a lower quality preparation.
But Sowell does not limit his analysis of the sources of black-white
differences in human capital to differences in formal education--both in
quantity and quality--between the two groups. He goes on to observe:
Trying to understand these differences in human capital accumulation in terms of years of formal schooling between black and white is
barely to scratch the surface of the problem. Human capital does not
consist solely or even primarily in the kinds of knowledge acquired in
classrooms and certified by embossed pieces of paper. 12
Sowell then makes a culturological argument, obviously borrowing
heavily from conventional sociological and anthropological theories about
the black community, asserting that the cultural experiences of black
people block the development of the kinds of behavioral characteristics and
attitudes that are conducive to high productivity performances on the job:
The pattern of cumulative inequalities in human capital investment in
formal schooling is repeated in the other forms of human capital. The
whole way of thinking and behaving appropriate to the more lucrative
and responsible occupations is something which comes freely, and
even unconsciously, to people reared in families where such occupations have been common for generations, whereas human capital
comes to the low-income person only slowly, imperfectly and with
great deliberate efforts to break his natural patterns. Such basic traits
as punctuality, efficiency and long-run planning are of little use to
people who have been limited to menial jobs for generations as with
most black Americans. Everyone can understand the economic value
of such traits as an abstract intellectual proposition but to understand
such qualities abstractly and to have such habits in reality are very
different things. Those black people who have such traits have
RACIAL E C O N O M I C I N E Q U A L I T Y
235
typically acquired them through persistent, and sometimes painful,
adjustments, which would be difficult to explain to people who grew
up with those patterns as a free cultural inheritance. 13
Finally, Sowell argues that a third cause of the lower average level of
black human capital accumulation is less access to appropriate contacts:
9
good deal of human capital consists of economically valuable
knowledge of particular situations and individuals . . . . Knowledge
of specifically who, where, and how to get things done is very
unequally distributed and constitutes a tremendous handicap to the
poor in a highly complex society. 14
This is a coherent explanation of racial economic inequality, attributing
racial economic inequality to causes external to the competitive
market--(I) white political control over publicly owned resources (as
Krueger suggested) leading to a lower level of investment in the education
of Blacks; and (2) white racism and history, isolating Blacks from the kinds
of cultural and social experiences that would equalize human capital
formation between the races. 15
But when put to empirical test human capital theory virtually explodes as
an explanation of racial economic inequality. Indeed, a debate is raging
among labor economists over the usefulness of human capital theory as an
explanatory tool for wage and income differences among all workers in the
American economy. It is a debate which, if the critics of human capital
theory prevail, threatens to topple the descriptive power of all of orthodox
economics. We need not concern ourselves with that debate here. Suffice it
to say that human capital theory does not succeed in explaining why
proportionately more black people are poor than whites.
The most recent research that presumably lends support to human capital
theory as an explanation of black poverty is the work of Richard
Freeman. 16 Freeman believes that there has been an observable decline or
" 'collapse' of market discrimination." His data focus on the improvements in the economic position of highly-trained and college educated
Blacks in recent years relative to the position of their white counterparts.
His most provocative observations include the following: (1) economic
differences between black women and white women are now negligible (by
1970 he finds that the ratio of incomes had risen to 86 percent compared
with 50 percent in 1950); (2) equality of starting salaries has been attained
for men with college degrees; and (3) from 1960 to 1970 the proportion of
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black college men working as managers almost doubled, rising from 7
percent to 13 percent while the white proportion changed only slightly from
19 percent to 22 percent over the same period.
In summary Freeman concludes:
All told, the d a t a . . , show a remarkable decline in black/white
economic differences among women and high level male workers
and a smaller decline in over-all male differences. 17
Freeman attributes the income differences to educational attainment treating educational attainment as the indicator of the level of
"human capital" the individual has acquired. For Freeman human capital
theory is the fundamental explanation for the persistence of black-white
economic inequality.
But Freeman's work is at best deceptive. Initially, there is the potential
for the classic confusion to arise between correlation and causation. Although Freeman might have found a high degree of correlation between
differences in educational attainment and incomes for Blacks and whites,
differences in income may not be caused by differences in educational
attainment.
Whether as strong a correlation exists as Freeman suggests is open to
doubt. The correlation that exists for an entire sample may not exist for part
of the sample. The approaching economic parity for Blacks who have
attained educational parity with whites is only occurring for a small
percentage of the black population, the group that Freeman himself characterizes as "elite" Blacks. Black women with college degrees earn as much
as white women with college degrees ($7200 annually). 10 And indeed, the
most recent black male college graduates receive starting salaries equal
with those of white males with the same amount of education.
Contrast the earnings of the preceding two groups with the experience of
other black college graduates. Black male college graduates 35 years and
older earn $9300 annually--S300 less than the earnings of white male high
school graduates ! And younger black male college graduates do earn more
than white high school graduates, but their $8700 median income is much
less than the $9200 median for white males who have dropped out of
college. 1a
These figures do reflect declines in the differentials over time which may
support the Freeman view that labor market discrimination is in decline.
But they are only declines in income differentials that are significant for
"elite" (i.e. college educated) Blacks.
Freeman's optimistic reading of his data masks the continuing gap in
black-white family income that has remained fairly constant over the past
RACIAL ECONOMIC INEQUALITY
237
two decades (in the vicinity of 60 percent)9 In fact, a 50,000-family survey
undertaken by the Bureau of the Census established that the ratio of black to
white family income dropped from 64 percent in 1970 to 62 percent in
1972.2o Clearly the incomes received by Blacks with a high school diploma
or less are the major determinants of average black family incomes;
otherwise the ratio would more closely reflect the differentials that exist
between college-educated Blacks and whites. If Freeman had focused on
this portion of his sample his optimism would probably have been severely
tempered.
The basic question then becomes, can the income differential that exists
between "non-elite" Blacks and whites be attributed to differences in
educational attainment? Empirical research by Barbara Bergmann, Randall Weiss, and Bennett Harrison suggests that much less can be so
attributed than Freeman assumes.
Bergmann used 1960 census data to identify "occupations which have
historically had low educational requirements. ''21 She identified these
occupations by determining which ones had 50 percent or more employees
with less than a high school diploma. After identifying the occupations
with "low educational requirements" she proceeded to compute " . . . an
expected number of nonwhite e m p l o y e e s . . , by assuming that nonwhites
would share in employment in each occupation to the degree that they
shared in the educational achievement shown by all persons in that occupation." She found:
9
the twenty-nine occupations identified eighteen had significant
deficits. Of the eighteen deficit occupations, fifteen had deficits of
nonwhites of more than 50 percent. The surpluses of nonwhites were
heavily concentrated. Two occupations, service workers and nonfarm laborers, accounted for 82 percent of the surpluses. 22
Bergmann's research uncovers a job allocation process that she describes
as occupational crowding, a process whereby Blacks are limited to certain
fields by virtue of their blackness, regardless of their educational attainment. This raises the wages of whites in the deficit occupations relative to
the wage rate that they would have been able to receive if Blacks could
compete freely with them for jobs, and depresses the wages of Blacks in the
surplus occupations because their wage rate is a function of an inflated
supply curve.
Bergmann's findings are damaging to the human capital explanation of
economic inequality because (1) they indicate that the presumed slotmachine relationship between years of schooling and income is not the
same for Blacks and whites; and (2) the fact that employers have not
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undercut the crowding phenomenon by hiring Blacks into the deficit
occupations at lower wages than they offer whites--eventually leading to a
vanishing of the wage differential--casts doubt once again on the neoclassical assumption that the economy is competitive 9
But defenders of human capital theory can still argue that Bergmann's
findings are inadequate for disposing of their paradigm's usefulness on this
subject because her research did not account for the possibility of interracial differences in educational quality. Or, the argument could be made that
one year of education for a white worker endows him with more human
capital than one year of education for a black worker because the white
worker is more likely to go to a better school. If equal years of schooling do
not lead to an equivalent level of educational attainment for Blacks and
whites, then Bergmann's findings do not necessarily demonstrate that
Blacks are " c r o w d e d " into certain occupations for reasons other than their
alleged lower productivity.
A major attempt to control for interracial differences in educational
quality was undertaken by Randall Weiss in which he compared the
earnings of Blacks and whites, who had had similar schooling experiences,
by using the Coleman criteria for evaluating school quality. For Blacks and
whites with the same number of years of schooling in similar educational
settings, Weiss found that whites earned significantly more. 2a
A more recent study, also attempting to control for interracial differences in educational quality, was performed by Bennett Harrison. z4 Hardson compared the incomes of Blacks and whites who live in ghetto areas,
assuming that black and white neighbors in urban ghettos all are likely to
have received low quality schooling. He then compared the earnings of
whites and Blacks who have had the same number of years of schooling.
His findings have devastating implications for human capital theory:
9
weekly wage of white high school graduates in the pooled set
of twelve poverty areas is nearly $25 higher than that of whites who
never entered high school. For nonwhites, the difference is only
$8.33. High school, therefore, has three times the marginal payoff
for ghetto whites as for ghetto nonwhites. On the assumptions of a
forty-year working life, a rectangular earnings distribution, and a 6
percent rate of time preference, the present value of the lifetime
return to completion of high school is nearly $19,000 for whites but
only $6,000 for nonwhites. Clearly, education has a very high opportunity cost for nonwhites living in the urban ghetto. There are any
number of (largely illegal) activities out " o n the street" which are
capable of returning at least $6,000 in a single year. 2~
RACIAL ECONOMIC INEQUALITY
239
Differences in education may explain why certain individuals earn more
than others (in general, the more education one has, the more one earns),
but it certainly does not explain differences in income across racial lines.
But, returning to Sowell's formulation of human capital theory, it is only
fair to recall that he says that education is only part of the human capital
equation--and perhaps not the primary part. The other two factors he
cites--sociocultural background and contacts--are more elusive. They
have not come under the direct scrutiny of the empiricists and are more
difficult to evaluate. Direct tests of their role have not been made probably
for two major reasons: (1) Sowell's formulation is somewhat unique;
typically, human capital theorists take a narrower view of the concept,
limiting human capital solely to the level of education and training an
individual has received26; and (2) concepts like "socio-cultural experiences" and "contacts" are harder to test; whereas years of schooling and
diplomas held provide a rather direct means of measuring educational
attainment, more indirect variables are needed to test for an individual's
"socio-cultural experiences" or the number o f " human capital enhancing
contacts" they might make.
What evidence that can be assembled suggests that the culturologlcal
explanation for differences in black/white human capital accumulation
resulting in economic inequality is not very powerful.
If it was a sound explanation then those Blacks who moved into occupations from which they had previously been excluded could be expected to
demonstrate lower productivity characteristics than white workers in the
same occupations. But during the mid-1960's, when the labor market was
tight, " m a n y disadvantaged workers who had previously been unacceptable to employers because of their alleged lack of skills (widely attributed to
the poor quality of their education) were at least temporarily given an
opportunity to demonstrate their capabilities," and there was little evidence that their job performances were significantly different from those of
their white predecessors. 27 And Peter Doeringer found in examining Boston antipoverty programs that as ghetto workers moved into higher wage
occupations they may have demonstrated higher productivity characteristics than their white predecessors; he observed that "for wages higher than
the 'prevailing' ghetto wage, disadvantaged workers are more likely to be
stable employees than other workers,"~8 indicating that low productivity
characteristics such as high rates of turnover are more a function of a
worker's occupation (and wage) then his cultural background.
The final component of Sowell's human capital vector--special access
to economically valuable information--is his argument for the importance
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of contacts. There is little reason to doubt that black people do have less
access to economically valuable information. But one of the major analytical strengths of the application of human capital theory to the problem of
black poverty is that observed black/white income differentials are consistent with the assumption of perfect competition (if Blacks, on the average,
are less productive than whites). But unequal access to special knowledge
is not consistent with a perfectly competitive world--a world where a free
and open flow of information is essential. Information monopolies distributed along racial or any other lines means reduced competition. If the
informational advantage that whites hold over Blacks is significant enough
to cause income differentials, then the assumption of perfect competition
must be discarded. Human capital theory itself would no longer be useful
as a means of explaining racial wage (and income) differentials. After all,
human capital theory posits that the profit maximizing firm must pursue a
marginal hiring rule to remain in business, hiring the most productive
worker at the going wage rate. Again, in the long run in a truly competitive
world, firms would break down informational barriers that prevented them
from hiring a particular group of workers who were equally as productive
as another group.
The analytical validity of human capital theory and perfect markets for
labor are tightly interwoven. This leads us finally to the last major approach
being pursued by economists to explain black poverty--dual market
theory--in which the American marketplace is no longer assumed to be
strictly competitive.
DUAL MARKET T H E O R Y AND BLACK P O V E R T Y
We have found that black people are a problem for believers in orthodox
economic theory after all. In trying to arrive at an " e c o n o m i c " explanation
for the lower average income received by Blacks in the United States,
theoretical approaches that preserve the neoclassical assumption of perfect
competition and treat Blacks and whites as perfect substitutes do not lead to
income differentials in long run equilibrium. When they retain the assump:
tion of perfect competition and assume that Blacks and whites are imperfect substitutes, empirical research places such theoretical formulations on
shaky ground.
Nevertheless, many economists cling by nails of faith to the latter
explanation despite mounting evidence that says, "it ain't necessarily so."
Like the political scientist who still clutches pluralist theory despite what
"the Blacks" do to it, many economists still cling to human capital theory
and the neoclassical assumption that the economy is competitive despite
RACIAL ECONOMIC INEQUALITY
241
what "the Blacks" do to it as well. For to do otherwise is to admit that the
orthodox economic world that economists have designed for themselves
and teach their students may not be approximated in the real world.
It is only recently that any economists have begun to look at institutionalized market imperfections as a means of explaining wage differentials between Blacks and whites.
One of the earliest attempts to explain black poverty through the use of
market imperfections was undertaken by William Tabb. 29 Almost borrowing directly from Becker and Kmeger, he divides the American economy
into two sectors, one white and one black. Instead of assuming, as Becker
and Krueger did, that both sectors are competitive, Tabb assumes that the
white sector is characterized by oligopoly, high wages, and high occupational opportunity while the black sector is characterized by cutthroat
competition, low wages, and little occupational opportunity. Tabb says
himself that this approach means looking at "the manpower problems of
the ghetto" in the context of " a dual labor market."
The theory of the dual labor market is rapidly being subsumed under
radical economic theory. Although David Gordon takes great pains to
emphasize that dual market theory stands in a "neutral corner" between
orthodox and radical economic theory, this is a hedge. He admits that the
radical theorists have grasped dual market theory for their own, as the most
accurate description of the American economy. 30 This is ironic. Although
there are hints of a theory of a dual labor market in Galbraith's The New
Industrial State, the earliest formalization of such a theory was developed
by Robert Averitt--by no means a major critic of the economic status
quo. ~1 Averitt did intend his theory of the dual economy to be a challenge
to the prevailing orthodoxy offered by neoclassical economics, but when
he partitioned the economy into an oligopolistic core and a highly competitive periphery he praised the core firms for being the source of the
economy's growth and strength. Radical theorists have readily been able to
seize dual market theory, identify the noncompetitive core as the source of
villainy, and emerge with a powerful critique of orthodox economics as
well as the existing economic order.
Unless applications of the theory of the dual labor market to the problem
of black poverty are cast in a radical framework, they become mere echoes
of human capital theory as an explanation of racial economic inequality.
For example, consider Frank Davis's fully developed application of dual
market theory to racial inequality. Like Tabb, Davis views the ghetto as
having an economy separate from the white majority's. The white
sector---external to "central city ghettos"--is characterized by "rapid
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technological change in manufacturing under conditions of oligopolistic
pricing" in low productivity employment and low paying service
industries . . . . ,, 32 For Davis, Blacks are poor because they are confined to
the ghetto economy in low-wage occupations.
The fundamental question then becomes why Blacks are confined to the
ghetto economy. Davis describes black workers as being largely unskilled,
lacking the productivity characteristics that would enable them to readily
fill the occupations in manufacturing industries which dominate the white
sector. He criticizes the "war on poverty" for failing to provide a manpower development strategy that would have offered a " m a s s i v e " training
and employment program "tied specifically to the higher-paying jobs in
the labor market." Actual manpower and training programs were not
massive, and they directed participants toward continued low-wage
employment. 3a At this level, Davis's explanation for the limited intersectoral mobility of Blacks is not far removed from human capital theory. The
only major difference is that the Davis world is not uniformly competitive
and as a result the terms of trade between the white and black sectors
steadily worsen. But if Blacks had improved education and training their
economic condition would also improve markedly.
This is precisely the criticism advanced by Robert E. Klitgaard of
applications of the theory of the dual labor market to the analysis of
poverty. He ascribes the low level of intersectoral mobility experienced by
the poor to their own work characteristics--"low learning a b i l i t y . . .
tardiness, absenteeism, turnover and [low] motivation." Klitgaard even
argues that dual market theory is unnecessary for analyzing poverty because "conventional interpretations bolstered with insights into the motivations and incentives of the disadvantaged do a more elegant and empirically supported job," charging that advocates of the dual labor market
explanation "often lapse into conspiratorial accusations which their own
evidence makes unnecessary and misleading."a4
Indeed, the Davis model does convey an image of the American
economy that is patently antiblack; but he hardly develops a conspiratorial
model if the cause of black confinement to the periphery is the lack of skills
needed to enter core occupations. If this is the case, core employers behave
no differently from perfect competitors, hiring the most productive workers, who happen to be white. If anything is conspiratorial in the Davis
world it is the political factors external to the market that cause Blacks to
accumulate a lower average level of "human capital."
The significant weakness in the Davis model is his failure to truly
distinguish his explanation of the causes of black poverty from that offered
RACIAL ECONOMIC INEQUALITY
243
by human capital theorists (or Klitgaard). A new answer is needed to the
" w h y " of black confinement to peripheral occupations, however, because
contrary to Klitgaard's view, the "conventional interpretations" are not
"empirically-supported." In fact, empirical research is consistently disproving the conventional interpretations' predictions.
The application of dual market theory undertaken by Bennett Harrison
results in a superior treatment of the " w h y " of confinement because of his
reliance on a radical framework.
Actually Harrison has two major explanations for black confinement to
the periphery--(1) a modified version of the "statistical discrimination"
hypothesis, and (2) a neo-Marxian interpretation.
Harrison's modified version of the "statistical discrimination"
hypothesis involves the argument that firms do indeed assume that the
average productivity of Blacks is lower than the average productivity of
whites, using educational credentials as an inexpensive proxy variable for
arriving at such a conclusion.
Where Harrison departs from the human capital theorists is where he
argues that employer perceptions are wrong, that the actual productivities
of Blacks are equivalent to that of whites for many occupations. Moreover,
Harrison argues that education and productivity are poorly correlated,
citing evidence from research by sociologist Ivar Berg that demonstrates
that in some cases the two variables may be negatively correlated ! Then the
screening rule becomes inefficient. He goes on to add, " . . . w h a t all of
human capitalists m i s s . . , is that workers adapt to their work environments, so that the job attachment (stability, interest, willingness to take
discipline, even health of an underemployed worker will deteriorate over
time, making the social decision to reject him a self-fulfilling
prophecy!" a5
The problem with this formulation is that it still characterizes noncompetitive employers as behaving like perfect competitors. Although they
may be using an incorrect decision rule for hiring workers, they perceive
that they are hiring the most productive workers at the going wage. The
explanation of black intersectoral immobility is based upon nothing more
than the ignorance of white employers. It means that all white employers
must be viewed as sharing this ignorance, none of them willing to break
new ground and try hiring Blacks. As a result, although they follow
marginal hiring rules, they are all failing to minimize their costs because
they exclude competent workers from consideration, thus lowering their
relevant labor supply curves. White or black entrepreneurs who might
doubt the alleged inferiority of Blacks could exploit the profit advantages
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of hiring them at lower wages--until their wage is driven up to a level equal
with whites. In short, it is not terribly persuasive to attribute black poverty
solely to white ignorance.
The second argument, in which dual market theory is placed in a
neo-Marxian framework, is the far more interesting and provocative one.
In this view, what underlies the black confinement to the periphery is the
desire of the managers of core finns to preserve the existing economic
order. If Blacks could enter the primary labor market freely class conflict
would be likely to supplant race conflict--and class conflict is potentially
far more dangerous to a hierarchical economy. Harrison suggests this when
he refers to Barbara Bergmann's crowding study in which she found that
"Without any compensating increase in the stock of jobs in the economy,
the elimination of occupational discrimination by race (would according to
the Bergmann equations) cause a 6 to 9 percent reduction in the incomes of
white men lacking an eighth grade diploma--a group which constitutes
14% of all adult white men in the United States and displacement of white
women would be even greater." Plainly this significant group of white
workers has the most " r e a s o n " for expressing their "oftimes vocal
opposition.., to government programs designed to expand job opportunities for blacks . . . . ,,36 The white blue collar worker views the black
worker as the greatest threat to what economic hegemony he has achieved,
and this keeps him from directing his continued discontentment with "the
way things are" at the economic system as a whole.
This is, as Klitgaard suggested, a conspiratorial view of the American
marketplace. It suggests that corporate managers have a stake in preserving
the dual market system--the preservation of their oligopoly profits--and
that exclusion of Blacks from the core of the economy enables them to
continue. It is a view that also suggests a certain degree of "consciousness" on their part. Historical data being assembled by Reish, Gordon, and
Edwards indicate that managers of large corporations actively fostered
labor market segmentation, to keep the workers divided politically! 37 In
addition, a recent research study by William Comanor led to the finding
t h a t " . . . e s t i m a t e d measures of racial discrimination are generally higher
in more skilled occupations, more profitable industries, and in industries
heavily concentrated in the largest metropolitan areas. ,,38 This particular
finding is entirely consistent with the expected hiring pattern for a "typical" core firm.
This is an extremely grim vision of the American economy and it
demands further research--particularly research that tests dual market
theory by making precise distinctions between core and peripheral firms
RACIAL ECONOMIC INEQUALITY
245
and core and peripheral occupations. What is critical here is that discrimination is viewed as serving the interests of the powerful. It also serves the
;~'interests of white workers who are protected from job competition with
Blacks. And it also protects white employers in the periphery who are
assured of a continued supply of low-wage labor. In short, all of white
society benefits from discrimination against Blacks. The only departure
from the Krueger model is the fact that the presence of imperfect competition in the core of the economy enables white capitalists to gain from
discrimination rather than lose. That is an all-important departure.
CONCLUSIONS
The only common implication of all of the models is that what really
enables whites to engage in discrimination against Blacks with adverse
effects on black income is the black disadvantage in physical capital
ownership. If Blacks owned a comparable level of physical capital they
could engage in the segregation game without any loss of income. Blacks
could ignore the "white sector" altogether if Blacks owned a comparable
independent set of resources. This implication is especially evident in the
trade and dual market models.
The normative implications of each of the three main approaches vary
widely. The Becker-Kmeger models would require either (1) a change in
white attitudes (improved race relations) or (2) affirmative action or equal
employment opportunity efforts to change conditions confronting Blacks.
Sowell's theoretical outlook would suggest either (1) increased investments in the education of Blacks until complete parity with whites in
educational attainment is achieved (this was fundamentally the "antipoverty" strategy of the mid-1960's--when increased education and training
for the black poor were the ticket government officials said would give
them passage into the middle class) and (2) increased black exposure to
economically valuable cultural experiences (i.e., integration).
For the dual market theorist with a radical perspective the situation may
well be hopeless. All of white society gains from discrimination. If the
power system in the society is not to be successfully attacked or if a major
group of whites does not recognize that their "class interests" are best
served by opposing the status quo, expectations of any major political
strategy being mounted that will change the economic condition of black
people must be viewed as slim. Nevertheless, dual market theorists typically propose (1) undertaking community development efforts in urban
poverty areas and (2) provision of public employment opportunities at
nonpoverty wages. These strategies are viewed as being least likely to
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threaten the white working class and yet have genuine positive effects on
black incomes.
Of equal interest is the descriptive difference between the explanation
offered by dual market theory (and Anne Krueger's trade model) and the
more orthodox models. The Becker model holds the prejudices of whites as
the source of racial economic inequality, but there is nothing wrong with
the economic system itself which is viewed as competitive. Exogenous
tastes are the key. In human capital theory, factors external to the marketplace also are responsible for black poverty--factors which determine the
racial distribution of productivities. Again the economic system itself is
viewed as sound. But when Kreuger and the dual market theorists identify
economic motivations for discrimination--then, and only then--do factors
endogenous to the economic system become crucial.
The application of dual market theory to this question represents a
rejection of the prevailing paradigm in the discipline of economics. It is a
theory that scuttles the assumption that the American economy is perfectly
competitive, proposing that the causes of economic inequality be explored
in a world dominated by firms with market power. The irony of dual market
theory is that it also proposes that the neoclassical ideal of perfect competition is only approximated in the peripheral region of the market; only the
sector in which Blacks are crowded demonstrates the ideal form of
capitalism.
Not only is this ironic, it is deeply disturbing--because the probability of
substantial social change occurring that will reduce black poverty significantly becomes highly unlikely. The segmented marketplace generates
antagonisms among lower-income workers along racial lines that mask
"the real problem." The segmented marketplace generates political attitudes that are system preserving, and the perpetuation of those political
attitudes depend, in part, upon the system's ability to keep Blacks out of the
economy's core. There is no sign of a break in this pattern. In large part this
is because the view of the American marketplace that dual market theory
provides is widely discounted.
After all, economists are as vulnerable to cognitive dissonance as anyone else.
NOTES
1. Gary S. Becker, The Economics of Discrimination, (Chicago: The University of
Chicago Press, 1957), pp. 6-27.
2. Thiscriticism of the"p ure labormarket" explanationof blackpovertyis also madeby
Richard B. Freeman, "Decline of LaborMarketDiscriminationand EconomicAnalysis,"
RACIAL ECONOMIC INEQUALITY
247
The American Economic Review (May 1973):283-84; and by Joseph Stiglitz, "Approaches
to the Economics of Discrimination," The American Economic Review (May
1973):288-89.
3. Herrington J. Bryce, "Putting Black Economic Progress In Perspective," Ebony
(August 1973):60.
4. Anne O. Krueger, "The Economics of Discrimination," Journal of Political
Economy (October 1973):481-86.
5. Ibid., p. 483.
6. This criticism is also developed by Thomas Sowell, "Race and the Market," The
Review of Black Political Economy (Summer 1973): 11.
7. David M. Gordon, Theories of Poverty and Underemployment, (Boston: D.C. Heath
and Company, 1972), pp. 90-91.
8. Bennett Harrison, Education, Training and the Urban Ghetto, (Baltimore: The Johns
Hopkins Press, 1972), pp. 3-4.
9. Peter B. Doeringer and Michael J. Piore, Internal Labor Markets and Manpower
Analysis, (Lexington: Heath Lexington Books, 1971).
10. Thomas Sowell, "Economics and Black People," The Review of Black Political
Economy (Winter/Spring 1971):3-21. A large part of this article is Sowell's personal
diatribe aimed at other black educators, black colleges, and black "militants." This article
will, however, only examine his application of human capital theory to racial economic
inequality.
l l. Ibid., p. 5.
12. Ibid.
13. Ibid., p. 7.
14. Ibid., pp. 7-8.
15. More invidious extra-market reasons social scientists have offered for the presumed
lower level of black human capital accumulation are twofold: (1) Blacks have been given
the opportunity to raise their human capital stock but have failed to take advantage of the
opportunity and (2) Blacks are genetically inferior to whites in intelligence and cannot be
expected to have an equivalent proportion of human capital. These reasons are either
explicitly or implicitly advanced in the works of academicians like Daniel Moynihan,
Edward Banfietd, Stanley Elkins, Arthur Jensen, William Shockley, and Richard Hernnstein.
16. Freeman, op. cit., pp. 280-86.
17. Ibid., p. 282.
18. "The March to Equality Marks Time," Time (September 8, 1973):74.
19. Ibid., p. 74.
20. Ibid.
21. Barbara R. Bergmann, "The Effect On White Incomes of Discrimination in Employment," Journal of Political Economy (March/April 1971):294-313.
22. Ibid., p. 297.
23. Randall Weiss, "The Effects of Education on the Earnings of Blacks and Whites,"
Review of Economic Statistics (May 1970): 150-59.
24. Bennett Harrison, "Education and Underemployment in the Urban Ghetto," The
American Economic Review (December 1972):796-812.
25. Ibid., pp. 809-10.
26. Human capital theorists are notorious for paradigm stretching because of the flexibility that their conceptual child offers. Like the multiheaded Hydra, when one version of the
theory seems to be sliced away another takes its place. Two other versions should be
mentioned here. Instead of viewing human capital accumulation as a function of years of
schooling, one group of theorists argues that "education" at home during the preschool
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The Review of Black Political Economy
years is the most important consideration (childhood investments). This may involve
something as simple as parents reading to the children each night. However, this would not
explain wage differentials that occur between whites and blacks with a high school
education or less--whom we would expect to have the least preparation and least time to
provide planned cognitive stimulation for their sons and daughters. Another school of
theorists has retreated to the point where they view on-the-job training as the only really
important type of human capital. But this does not explain why whites have greater access to
the entry points for jobs where such training can be received, although their credentials may
even be "worse" than those of a black worker.
27. Harrison, op. cit., no. 9, pp. 34-38.
28. As quoted in Bennett Harrison, "Employment, Unemployment, and the Structure of
Urban Labor Markets," Wharton Quarterly reprint (Spring 1972):5.
29. William Tabb, The Political Economy of the Black Ghetto, (New York: W.W.
Norton & Company, Inc., 1970).
30. Gordon, op. cir., no. 8.
31. Robert T. Averitt, The Dual Economy: The Dynamics of American Industry
Structure, (New York: W,W. Norton & Company, Inc., 1968).
32. Frank Davis, The Economics of Black Community Development, (Chicago: Markham Publishing Company, 1972), p. 24.
33. Ibid., pp. 98-110.
34. Robert E. Klitgaard, "The Dual Labor Market and Manpower Policy," The Monthly
Labor Review (November 1971):46.
35. Harrison, correspondence.
36. Harrison, op. cit., no. 29, p. 3.
37. Michael Reich, David M. Gordon, and Richard C. Edwards, "A Theory of Labor
Market Segmentation," The American Economic Review (May 1973):359-65.
38. William S. Comanor, "Racial Discrimination in American Industry," Economica
(November 1973):363-78.
In addition a recent case study on St. Louis uncovered employment patterns that
demonstrate the existence of racially segmented labor market throughout the entire metropolitan area. See David M. Streifford, "Racial Economic Dualism in St. Louis," The
Review of Black Political Economy (Spring, 1974):64-78.