With relatively little fanfare, the economics of discrimination seems to have been flipped on its head.
At least, that is one optimistic, heartening way to interpret the national backlash to Indiana’s new “religious freedom” law, which has set off a wave of boycotts by consumers, celebrities, politicians and businesses.
Reams of economic research, going back to Nobel laureate Gary Becker’s 1955 dissertation on racial discrimination, have suggested that a key reason firms discriminate is that their customers and employees probably demand it. After all, if employers refused to hire blacks, women, Jews or gays because the employers themselves were prejudiced, their businesses would be at a big disadvantage, since a more open-minded competitor could hire members of the passed-over demographic at an effective discount. But if the customers and employees had a taste for discrimination — and were unwilling to shop or work alongside members of a particular minority — then firms would be better off if they continued to actively discriminate.
In that situation, market forces encourage bad behavior; at least in the absence of anti-discrimination and public accommodation laws, doing the right thing becomes expensive, and potentially fatal, to any business whose customers are assumed to be even slightly prejudiced. Hiring gay men and lesbians, or allowing black people to eat at your restaurant, might drive away your other customers. Or so business owners could have reason to fear.
Becker’s civil-rights-era work was mostly theoretical, laying out a framework under which prejudice could persist in competitive markets. But other studies since then have used experiments and empirical data that seem to confirm that customers’ preferences (real or perceived) encourage discriminatory hiring practices by employers. In one recent study, researchers sent out fake résumés to test how often equally qualified black and white applicants were offered interviews. It found that blacks faced substantially more discrimination for positions in which they interacted more often with customers.
Now think about what’s happened in Indiana in the past few days, and how differently consumer power has been wielded.
Indiana’s new Religious Freedom Restoration Act, which protects against laws that “substantially burden” a person’s free exercise of religion, has multiple precedents: There’s a federal version of the law, and similar laws in 19 other states. But the Indiana law is much more expansive, both in how it defines religion and when religion can be invoked as a defense.
That’s why many have interpreted it to mean that businesses can now deny service to members of a minority group, particularly gay people, on religious grounds. One of the bill’s proponents cheered that it would help prevent “Christian bakers, florists and photographers” from being “punished for refusing to participate in a homosexual marriage.” Some critics also have suggested that the law could be used to justify discrimination against explicitly protected groups, such as Muslims or blacks, although it seems unlikely that such an argument would hold up in court.
Whatever the law actually allows, the outrage it unleashed, over a perceived blank check for bigotry, was overwhelming. And not just from liberal celebrities such as Miley Cyrus or Democratic politicians such as Hillary Clinton. Almost immediately, the Republican chief executive of Angie’s List announced the company was canceling its planned $40 million expansion in Indianapolis. The chief executive of Salesforce said he had canceled all his company’s events in Indiana and advocated a “slow rolling of economic sanctions” against the state. The organizers of Gen Con, the largest conference held each year in Indianapolis , threatened to move it elsewhere. The Indianapolis-based NCAA has said it’s “concerned” about how the law might affect student-athletes, employees and spectators attending Final Four games there this weekend, while some athletes have called for the conference and other sports leagues to avoid hosting events in the state in the future.
Businesses have fought similar laws elsewhere, too, saying they worry that a climate more tolerant of intolerance, either real or perceived, will make it harder to recruit talent, retain customers and attract tourists. An Arizona law along these lines was vetoed last year — by the Republican governor — after business leaders expressed concerns about the potential economic damage. Even Wal-Mart, not exactly known for its liberal values, came out against comparable legislation in its home state, saying it “sends the wrong message about Arkansas.”
This is an astonishing, and inspiring, turn of events. If in Becker’s day firms feared that customers would punish them for inclusiveness, today firms fear customers will instead punish them for exclusiveness. If in the past, to stay competitive and attract the most desirable talent, you needed to be discriminatory, today the opposite may be becoming true. Hooray for markets being on the right side of history.