Economist Writing Every Day

There is a narrative about US history that goes like this: “Historical racism was really bad and limited opportunities for blacks. Blacks were not allowed to participate in a set of occupations and other civic life. The absence of blacks from typically higher income occupations reduced the number of competitors in those sectors. Not only did blacks have fewereconomic opportunities, the whites who were insulated from competition earned monopoly rents. Therefore, if blacks were excluded, the whites who were in exclusive sectors earned profits at the expense of blacks.”

The logic is neat. Are there any holes in it?Let’s see.

First, we know that more suppliers is not synonymous with more competition – despite many Econ textbooks assuming infinite suppliers and demanders as part of the perfectly competitive mode. That assumption is sufficient for price taking behavior, but not necessary. Plenty of details matter. There can be a few large firms that utilize economies of scale such that market demand can only support a few firms producing at minimum average cost. Therefore, saying that competitors were fewer does not imply that there are monopoly profits.

Another seemingly more trivial criticism of the narrative is that, if more competitors implies more competition, then every passing decade of increasing population implies more competition. If we were to cut the population by 11%, then would competition suddenly be less? The answer is no. The long-run equilibrium profits would still be zero under both perfect and monopolistic competition.

Indeed, general equilibrium models show that excluding a subset of producers/consumers leaves *everyone* worse off. Let’s think about this in tangible terms. If blacks were barred from being, say, lawyers, then more whites in law-adjacent occupations would enter law, attracted by the higher wages, and leave accounting or clerical positions. Then, secretaries and supervisors would enter clerical work, and manual laborers would enter supervisory positions, etc, etc. As wages adjust and entice white workers toward the jobs protected from black entry, black workers fill the vacancies left by whites departing from occupations that did not prohibit blacks.

But this is where the truth is. Segregation and racist policies harmed *everyone* in absolute economic terms so that whites could have a greater position *relative* to blacks. The difficulty with this line of logic is that it acknowledges the historical harm to both blacks and whites. So, any discussion of reparations or compensation for absolute harms must also consider similar transfers for whites to a lesser degree.

This is why inequality features so prominently in popular arguments that use the original narrative above. Because “we” can address inequality with policy – even sloppy policy. This is why policies that promote economic growth aren’t so interesting to many. It’s abstract. And while it may improve the absolute economic outcomes for blacks, it doesn’t scratch the current itch that the bite of historical unequal treatment caused. There is a deep desire to ‘fix’ it.