Abstract
Dr. Harold Black has made a career of investigating the effects of different rules and institutional arrangements on the extent to which market participants in finance can exercise a taste for discrimination. This paper considers the nature of Black's contributions, and reviews some particulars of his voluminous published research, focusing especially on his work on the number of "overages" charged by banks, and the differences in the effects of the race of bank owners, as explained by the race of customers. The paper concludes by connecting Dr. Black’s work to his “origin story,” which helps explain his consistent focus on careful empirical distinctions rather than preconceptions and biases.
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Notes
Financial Accounting Standards Board (n.d.); Chartered Financial Analyst Institute (n.d.).
For a summary of federal regulations, see Federal Reserve Board of Governors (n.d.); For a summary of state regulations see Compliance Alliance (n.d.). For background, see Shughart (1988).
As Coase (1997) put it: “My usual practice is to look into what actually happens.” It is perhaps surprising to discover that this method is essentially unheard of in academic political economy and finance.
An amusing body of evidence on the truth of this claim is the informal survey conducted by P.J. O’Rourke (1998).
“If an individual has a ‘taste for discrimination,’ he must act as if he were willing to pay something either directly or in the form of a reduced income, to be associated with some persons instead of others. When actual discrimination occurs, he must, in fact, either pay or forfeit income for this privilege.” (Becker, 1957, p. 14).
Douglass C North claimed: “Institutions are the rules of the game in a society, or, more formally, are the humanly devised constraints that shape human interaction.” (1990, p. 3).
Obviously, this conclusion is too strong, if the costs of hiring white workers from a labor pool where bigotry is universal would exceed the benefits of hiring African-Americans just because they will work for a lower wage. See Lang and Spitzer (2020) for a review of some literature on this point.
Remember, we have defined bigotry as a taste for exercising bias against an “out group,” which is culturally defined and constructed. In the U.S. this construction was at least partly intentional, as Grynaviski and Munger (2017) document. Racism is a set of institutions and legal restrictions that reduce the cost of bigotry by “solving” the collective action problems that open competition creates.
He was openly called “the skinflint” and “El Cheapo” in newspapers, and privately called those things, and worse, behind his back by players (Kahn, 2014).
Again, Darity and Mullen (2021) document the history of financial abuses by government agencies and other entities, which explains a substantial part of the enormous wealth difference between black and white individuals, even those who have similar incomes.
This kind of endogenous selection problem is common in policy analysis. For example, suppose that there are two hospitals, one with much more sophisticated critical care and emergency treatment capabilities than the other. All of the most difficult cases, and sickest people, will be sent to the “better” hospital. But that hospital is likely to have higher patient death rates, precisely because it is taking all the hardest cases. The death rate alone is misleading as a guide to quality. If the transaction costs of negotiation were low enough, of course, then the differences in bank loan acceptance rates would be competed away. But in politics the transaction costs are almost never “low enough” (Munger, 2019b).
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Munger, M., Tilley, C. Race, risk, and greed: Harold Black's contributions to the institutional economics of finance. Public Choice 197, 335–346 (2023). https://doi.org/10.1007/s11127-023-01073-w
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DOI: https://doi.org/10.1007/s11127-023-01073-w