October 23, 2018 Reading Time: 5 minutes

Last week’s bankruptcy filing by Sears provided an interesting moment of historical retrospection about the once-dominant retail chain. As Cornell historian Louis Hyman noted in a Twitter-inspired New York Times article, Sears played an important role in circumventing the institutionalized racial discrimination of the Jim Crow South.

This fascinating story began around 1891 when the company issued its first mail-order catalog. At the time of this innovation, both legal restrictions and discriminatory cultural norms subjected blacks to second-class treatment in daily life, even when it came to shopping. During this period, store owners would often require black patrons to wait in line while white customers received priority attention. In other cases, retail stores would deny service to black patrons entirely.

For example, a black shopper would likely face greater difficulty than a white shopper in obtaining credit for a large purchase when such decisions fell to a racist store owner. The retail store could impose a higher credit price structure on black patrons as a matter of personal discretion, or deny them credit entirely. The Sears catalog, by contrast, would allow black patrons to buy the same item by mail on credit, with Sears having little ability to bring race into the equation.

Black patrons could also be refused a sale in a store if they sought an item deemed dangerous to the racial hierarchies of segregated society, such as a firearm. By contrast, Sears offered an assortment of rifles, ammunition, and hunting equipment for home delivery (this practice pre-dated federal gun control regulations prohibiting such sales). At a time when black people were frequent targets of mob violence, the ability to order the tools of self-defense from a Sears catalog could be a matter of life and death.

The Sears catalog circumvented the ability of local store owners to discriminate as it essentially allowed for a faceless transaction that took place entirely by mail. Combined with the expanded price competition it brought to the retail industry, Sears’ innovative business model brought unprecedented market access to black customers — and did so in a way that allowed them to avoid the indignities of discriminatory treatment at the cash register counter.

While historians like Hyman correctly note the revolutionary nature of the Sears catalog in combating discrimination, they have actually stumbled onto a long-recognized insight from economics. Specifically, the introduction of competition into a previously restricted marketplace can serve as a powerful tool for undermining racial discrimination.

The logic may be seen in the foregoing historical example. Prior to the Sears catalog, local shop owners were in a position to impose restrictive controls upon black customers by altering the level of service they were willing to provide, or denying it entirely, on account of racist cultural norms. Sears removed that ability by taking advantage of the visual anonymity of the postal system. Note, however, that its motive was primarily competitive. Sears recognized a neglected and abused consumer base, and provided them a service that local retailers denied. The result was a mutually beneficial exchange that profited Sears while delivering previously inaccessible goods to black customers.

Commerce Is the Key

Several economists drew attention to this insight at the peak of the civil rights era of the 1950s and ’60s, presenting the strategy as a viable way to break down segregation. Gary Becker provided the theoretical basis for this argument in his 1957 book The Economics of Discrimination.

Becker’s key insight held that a discriminatory cultural belief such as racial prejudice also carries associated economic costs for the discriminator. For example, a factory owner who refused to hire black employees would also have to absorb the expenses of a less competitive labor pool on account of his beliefs. And shop owners who refused to service black patrons would also cut into their own customer bases by willingly refusing to accept potential sales. All else equal, these conditions would carry economic costs adversely affecting their bottom lines.

Of course, several factors could alter the weight of competitive economic pressures, including employer concentration and the population size of the minority group. Thus a society with widespread existing racial discrimination might endure despite the self-inflicted costs of this practice, as would a society where discrimination was codified into law.

Several of Becker’s contemporaries extended this line of economic reasoning to policy issues in their day. Milton Friedman, for example, explained its applications in his 1962 book Capitalism and Freedom. He observed that businesspersons’ bottom lines are closely associated with their productive efficiency. As he put it, “The purchaser of bread does not know whether it was made from wheat grown by a white man or a Negro, by a Christian or a Jew”; therefore its producer is in a position to base his decisions on economic efficiency rather than the identity characteristics of his suppliers. Insofar as discriminatory beliefs intrude upon that efficiency, they also create an opening for a new entrant into the marketplace to capture these forgone economic gains. In a way, the free market takes the ugliest features of racial politics out of the equation.

Here we see the value of the Sears example, as it involved an outside company with a national reach entering into a racially restrictive local retail market and disrupting the earlier discriminatory equilibrium.

Despite growing recognition of the Sears example, a number of historians evince strong hostility to the economic logic behind it and particularly the works of Becker and Friedman. They dismiss the notion that market competition could provide a more effective tool at combatting discrimination than state coercion.

A recent collection of essays on the history of capitalism, co-edited by Hyman no less, contains several arguments to this effect, including entire chapters decrying the “neoliberal” ideology of market competition and the supposed “depoliticization of consumption” implicit in the anti-discriminatory analyses of Becker and Friedman. In the eyes of these historians, the economists fail to capture the “collective identities” of racial politics. This leads economic critiques of discrimination to overemphasize individual consumer choice and markets in place of favored “progressive” approaches to political action.

Note that this critique largely ignores whether markets yield a better and less discriminatory outcome than politics; it simply assumes an inherent virtue in progressive political action through state rather than market channels. One of the more extreme examples of this type of argument even accuses Friedman of being disingenuous in his stated concern for the victims of discrimination.

Curiously, this instinctive dismissal of economic thinking is likely to persist even after noticing tangible examples of economic anti-discriminatory pressures in action, such as the Sears catalog.

That Sears is recognized at all though is its own testament to the economists’ prescience. As we see in its example, the pressures of market consumption did indeed trump local politics and prejudices, and that is a worthy object of commendation. In applying economic analysis to the extreme example of South African Apartheid, economist W.H. Hutt observed that while political tools are often captured for discriminatory ends, including at the expense of market choices, the market itself is color blind. It’s an important lesson that more historians should heed.

Phillip W. Magness

Phil Magness

Phillip W. Magness works at the Independent Institute. He was formerly the Senior Research Faculty and F.A. Hayek Chair in Economics and Economic History at the American Institute for Economic Research. He holds a PhD and MPP from George Mason University’s School of Public Policy, and a BA from the University of St. Thomas (Houston). Prior to joining AIER, Dr. Magness spent over a decade teaching public policy, economics, and international trade at institutions including American University, George Mason University, and Berry College. Magness’s work encompasses the economic history of the United States and Atlantic world, with specializations in the economic dimensions of slavery and racial discrimination, the history of taxation, and measurements of economic inequality over time. He also maintains an active research interest in higher education policy and the history of economic thought. His work has appeared in scholarly outlets including the Journal of Political Economy, the Economic Journal, Economic Inquiry, and the Journal of Business Ethics. In addition to his scholarship, Magness’s popular writings have appeared in numerous venues including the Wall Street Journal, the New York Times, Newsweek, Politico, Reason, National Review, and the Chronicle of Higher Education.

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