Ducks and Economics

A friend who wishes to be identified only as “PhantomOutlaw” from www.cross-x.com writes to me in response to my posts (here and here) on Rand Paul’s naive libertarianism:

Can you expound on this “I could say alternatively that racism by businesses has serious negative externalities in practice and I’m ok with government regulation on those grounds.”

An externality is (very useful) economic jargon that just means a spillover cost or benefit of a transaction affecting people who weren’t involved in the transaction. An example would be a coal-burning power plant, where customers purchase electricity but the plant gives off pollution that affects non-customers. That would be a negative externality (which is bad). An example of a positive externality is if my neighbor hires a security guard for his house; if the guard deters thieves from the whole area, not just the neighbor’s house, I benefit from something I haven’t paid for.

In the context of this discussion, I think that government has a role in regulating away the bad things that come with a business actually engaging in racist business practices. Imagine if the steakhouse next to my house began only serving white people. That would probably prompt demonstrations and riots outside my house (negative externality). Now I face increased safety risks and the quality of the time I spend at home decreases.  Additionally, other businesses around the area now face decreased business because the area has a reputation for being racist, something that they weren’t responsible for but suffer from. Clearly these are all legitimate reasons why a government would seek to enforce content-neutral regulations against racism.

PhantomOutlaw continues:

Also, I don’t really understand this argument: “It is not unreasonable that a government seeks to actively curate a city’s image (to enforce voter-expressed preferences) and regulates the business climate with that in mind, nor is it unreasonable that government should seek to prevent the public disorder that inevitably follows racist practices.”

I hear you saying that if a municipality doesn’t want to be seen as racist, then its OK for them to regulate against racism if that is the will of the electorate. I may be missing something here but it seems like Paul would concur with this line, since it would be a state/local law. Additionally, isn’t there an argument for why civil liberties are key and shouldn’t be trampled on by the will of the people.

Sure. The first paragraph just says that a government has the right to shape a city’s image to express what voters want. For instance, if the voters of Columbia want to attract big software companies, they might vote for policies like bike trails and more downtown police officers walking the beat. They might pass new zoning regulations that tell people what they can and can’t do with their property. Sometimes these policies are hotly contested, but generally the ability of city governments to enact those content-neutral regulations is well established.

I agree with a stronger version of your second paragraph. I would say something like this: representative governments represent all citizens, and we don’t allocate citizenship by race or sex. So it is intrinsically a function of government to protect the interests of everyone and a violation of this social contract to allow businesses to be racist. Everyone is represented by government, so the businesses that we allow to exist should not be allowed to discriminate. Otherwise we’d be taxing people for governmental goods and services that flow to businesses that aren’t willing to serve everyone for some arbitrary and wrong reason. No taxation without representation, basically. These are the implicit protections of representative democracy.

The notion of representative democracy justifies federal action. Citizens of all 50 states are affected by the racist policies of one state much in the same way businesses close to a racist business are affected. So I think there is room for the functions of different levels of government to curb bad decisions or policies of other levels of government, and this is not inconsistent with libertarian principles. Hopefully that is a sufficient answer?

So I want to expand on this argument that there is a difference between consensual relations between individuals and consensual relations between individuals and businesses. The thing that Rand Paul gets wrong is that business transactions don’t happen in a vacuum, they happen in a market. Markets (at least legal ones) have the feature that they feature a varied and rich legal architecture binding a business to the larger communities like the cities and states where they have business licenses. In some senses this is a very democratic notion: markets should be accessible to anyone regardless of race because it is only through the regulatory functions of representative governments that they are able to exist in the first place.

In other words, if we have to give everyone suffrage regardless of race, we have to ban racist business practices.

Think of the analogy to building codes. Businesses operate under the very real parameters that they have to conduct business in buildings that are physically safe. If these buildings were not physically safe, and were for instance in a negligent state that inappropriately risked catching on fire, then there are serious obvious negative externalities that exist. If one building is on fire, other nearby buildings are at risk, and there is damage to property and life that must be evaluated. Hence, we have building codes and fire codes (regulations) to mitigate these risks so that one business can co-exist with others in geographic space.

Regulation against racism is much the same. Has anyone ever proposed to Rand Paul that in a world where he refused to regulate racism, racist businesses risk being focal points for violence and riots? The public safety considerations are substantial and presumably justify quite a lot of government intervention (anyone remember the Rodney King riots?) You could come up with a variety of empirically relevant scenarios here.

I understand that part of Paul’s argument is that federal regulation is not necessarily good. That is conceded. But the part of his argument that says government shouldn’t intrude on private conduct does not extend to business conduct and I think it is important that people understand that.