There are profound methodological differences between the Austrian and Chicago schools that lead to very different characterizations of the nature and function of the market economy. I was recently reminded of this by an article entitled "The Racist Premium Is Just One Way the Market Punishes Racism" by Andrew Moran. The point that Moran makes is basically correct. In certain circumstances taking race into account in market transactions does involve a cost to the one inclined to do so.
What I take issue with is the Chicago-school approach that the author implicitly adopts and the resulting rhetoric that he invokes, namely, that the market metes out punishment to "irrational" preferences that tends to inhibit their expression. This approach is based on the fallacious Chicago view pioneered by Nobel laureates George Stigler and Gary Becker in their famous article asserting that tastes and preferences for "fundamental" consumption commodities are both uniform among individuals and stable over time. In other words, all human beings whenever they have existed or will exist are viewed as possessing essentially the same underlying tastes — or in economic jargon, the same "stable, well-behaved preference functions" — for health, nutrition, "euphoria" (derived from alcohol or drugs), safety, social prestige, and so on. With subjective and unobservable tastes banished from economic analysis, the fact that different agents at the same time or the same agents at different times may consume goods in wildly different proportions is then wholly attributable to differences in objective and observable factors, namely, the prices they confront or the real income they earn.
Chicago school economists thus explain all intertemporal and interpersonal differences in human behavior as attributable to external forces, that is, to prices and incomes formed on the market. The market thus confronts the individual as an impersonal and unalterable system of incentives and penalties that governs his selection—I hesitate to use the word "choice" — of consumption commodities. In the Chicagoan view, then, the market economy is a mechanism that exists apart from the individual and shapes his behavior, penalizing or even stamping out aberrant preferences that do not accord with narrowly monetary considerations that maximize the acquisition of broad classes of fundamental consumption commodities.
For Austrians, multifarious, concrete goods — and not abstract homogeneous classes of consumption commodities — are the object of human action. Even when purchasing physically identical products, consumers differentiate among them by location, brand name, personal attributes of the producer and his employees, promotional campaigns, packaging, and so forth. There is no demand for nourishment, but a demand to eat at a specific restaurant at a specific location with a specific menu, wait staff, interior décor, and seating arrangement. The market does not "punish" those who would rather consume steak in a cozy restaurant with an attractive and polished wait staff by charging them a higher price than the price charged for the same quantity of equal grade beef at a curbside food truck. In fact what economists call "the market" is nothing but a network of voluntary exchanges of definite items of property in which both parties always expect to benefit.
This brings us to the case of discrimination by someone who takes account of the race or other personal attributes of his potential exchange partners. Is it not the case that the market levies a "racist premium," in the form of lower selling prices or higher buying prices, on any seller or buyer who discriminates in selling or buying on the basis of any other criterion then the money price? Now this racist premium appears to exist if one views the market à la Stigler and Becker as a censorious schoolmarm whose function it is to punish preferences that depart from the basic, uniform set of tastes that every human being is or should be endowed with. From the Austrian perspective no such premium is imposed, because voluntary exchange confers mutual benefits on all buyers and sellers. These include buyers who voluntarily and knowingly pay relatively higher prices and sellers who voluntarily accept lower prices for indulging their subjective preferences to avoid transactions with individuals with particular attributes or beliefs they object to, whether it be race, religion, ideology or hair color.
This is not to deny that sellers and buyers who choose among potential exchange partners on the basis of nonpecuniary considerations do in many cases incur higher monetary costs. But costs are not punishments imposed by an external mechanism. In an un-coerced exchange, a cost is a concrete opportunity for satisfaction that is voluntarily surrendered in exchange for a benefit of greater value to the individual. The man who pays a higher price to sip wine in in an elegant and comfortable wine bar in midtown Manhattan rather than imbibing in a local haunt in Staten Island is not being punished for his uneconomical behavior by an impersonal market. Indeed it is precisely this choice and those of many others like him that constitute the market and determines prices.
Let me be crystal clear. The market neither punishes nor rewards, neither censures nor condones, racism. The market determines prices that coordinate the actions of diverse human beings thereby permitting individuals with disparate and fluctuating values to peacefully coexist. Both the "racist premium" and the "tax on blackness" are misleading metaphors, the result of economic reasoning that profoundly misconceives the nature of the market economy. The market is nothing but a short-hand expression for the network of mutually beneficial voluntary exchanges undertaken daily by people each intent on improving his or her own welfare by serving the wants and needs of others. Unlike a moralistic schoolmarm, or a government, it does not punish or tax anyone. Higher prices paid by racists and lower prices received by those who choose to live in diverse or minority-majority neighborhoods reflect the values and choices of consumers no less than the prices of all other goods and services.
1. Ludwig von Mises, Human Action: A Treatise on Economics, Scholar's Edition, Mises Institute, Auburn AL, 1998, p. 372.
3. Ross B. Emmett, Frank Knight and the Chicago School in American Economics, Routledge, New York, 2009, p. 91.
4. Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War , Libertarian Press, Inc., Grove City PA, 1985, p. 182.
5. Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson, 2nd ed., Yale University Press, New Haven, 1953, pp. 177-78.
7. I am indebted to a comment by Mark Thornton for the content of this paragraph, although he bears no responsibility for its imperfect expression.