On a cold winter morning in Memphis, in January of 1919, a committee of four white switchmen marched into the office of one Edward Bodamer, superintendent of the Yazoo and Mississippi Valley Railroad. The switchmen were there, they said, to discuss a demand by the area yard workers: fire all black workers, or they would strike. Bodamer threw the switchmen out of his office, warning them as they left that a strike would be illegal. Ignoring the warning, dozens of switchmen and yardmen walked off the job in protest.
Over the next five days, the strike spread like wildfire. Work at surrounding railroads and yards ground to a halt, shutting down the region’s transportation network and crippling the railroad’s operations. At its peak, the strike united over 650 white switchmen in racial solidarity, shutting down transportation in the countless small towns that lined the railroad in Tennessee, Mississippi, and Illinois. At the end of the fifth day, the switchmen called a halt to the walkout, but only after the railroad had promised investigation by government mediators. For the time being, the black workers remained.
A year later, the white switchmen were back in Bodamer’s office. This time, they had additional firepower, having gotten the backing of the Brotherhood of Railroad Trainmen, one of the “Big Four” railroad brotherhoods. Unable to risk another damaging strike, Bodamer and the railroad caved to the switchmen’s demands, and fired almost all of the company’s black workers. At the committee’s insistence, the railroad also adopted racially restrictive contracts that changed seniority systems and entrance requirements, and limited the number of black workers for particular positions.
What was behind this strike? Why had white workers so suddenly demanded that the railroad evict its black workers? After all, black workers had been around the railroad for a while, working as trainmen and switchmen since the 1870s. Although white switchmen had occasionally complained in the past, they had not taken much action against either the railroads or black workers. What had changed?
In a word, the economy. Historian Eric Arnesen argues that the post-war economic uncertainty over jobs triggered the Memphis strike and fueled other strikes just like it. As the economy disintegrated after the war, workers faced a labor market in such wild disarray that labor officials could barely track the job market from week to week, let alone make longer-term forecasts.
In addition, the wartime economy had cost white workers their positions of privilege. Out of necessity during the war, the railroad had abandoned its conventional practice of awarding jobs on the basis of race. To accommodate wartime labor shortages, a number of black workers had been slotted into historically white positions, and a few whites occupied historically black slots when the occasion demanded it.
As soldiers came home from the war, however, railroads had to choose whether to go back to the practice of assigning jobs by race. Some railroads quickly shifted back to race-conscious assignments, while others abandoned tracking race and status altogether, a move that would come to cost them dearly. Following standard economic theory, we could easily describe the Memphis wildcat strike as an irrational preference for exclusion that would eventually be eliminated by market forces. Indulging this preference would have been costly for the railroad—it would have had to pay more for white workers not just because they were a limited pool, but also because, as unionized employees, they earned higher wages. In addition, by excluding black workers, white union members were giving up the opportunity to vastly increase their numbers, and correspondingly their strength, in their labor struggles against employers. Black workers could have supplied (and did eventually come to supply) an important addition to the ranks. Because discrimination cost unions and railroads in terms of competitive advantage, racism should have died out quickly, and if it didn’t, imperfect market competition is to blame. Or so the story goes.
But we could tell another story to explain the Memphis strike: a story in which whites’ collective action was more profitable than it was costly. In this story, whites formed “racial cartels” to sidestep market competition and to earn higher wages than their black counterparts. In this story, the cost of discriminating was less than the material benefit to workers. Far from costing them, discrimination paid off, by earning striking workers higher wages.
How did white workers earn higher wages from discriminating? Classic collective action explains these wages as a sort of monopoly profit. By forming a union that excluded black workers and by pushing employers to hire whites only, white railroad workers could drive up wages relative to their black and brown counterparts.
Employers also profited from discrimination in their fight against unions. By dividing the labor market in two, railroads maintained a ready-made stable of black strikebreakers perpetually on call to undercut the power of the white union. For railroad and workers alike, then, discrimination was win-win. And those benefits came at the expense of black workers, in the same way that cartels displace the costs of their profits onto someone else.
This essay suggests that we can better understand the nature of Jim Crow discrimination if we think of it as cartel conduct. A cartel story focuses on the material benefits to collective action that monopolize benefits for one group at the expense of another. Collective discrimination earns its keep in the form of higher wages, better housing, higher property values, and greater political power.
Before we redescribe the worst of our racial history using a cartel framework, we should remember why investigating history is important in explaining modern racial gaps. Why isn’t the past long over and done with? What is the link between historical segregation during Jim Crow and contemporary outcomes?
To see the importance of history, we will take an unexpected detour into probability theory, to look at something that mathematicians call the Polya urn model. In a Polya urn model experiment, researchers fill an urn with two balls, one red and one white. The experimenter draws a single ball from the urn, and then replaces it together with an additional ball of the same color as the ball she originally drew. If the draw produces a red ball, that ball goes back into the urn, together with another red ball. Same goes for white. The experimenter continues drawing and replacing for an infinite number of times.
In a typical set of draws, the percentage of red and white balls will fluctuate wildly in the first few draws. But at some key threshold point in the drawing process, as the urn continues to fill, the percentage of reds and whites settles at a particular proportion, and remains very stable for all later draws. Amazingly, later events don’t change the final percentages in any appreciable way.
As mathematicians have demonstrated, early draws determine the composition of the urn. The very earliest draws will tip the urn toward some equilibrium mix of colors, and this mix will persist from then on. This is true, even though we can’t determine in advance what the final composition of the urn will be. Indeed, the urn could settle into any combination of percentages of red and white balls. But the urn’s early history matters far more than later history, because the early draws chart the path that subsequent developments will reinforce.
By analogy, the early history of competition among racial groups can explain contemporary outcomes. In much the same way that the early draws of the urn determined the ultimate composition of the urn, those early rounds of economic, social, and political competition among the races were rigged anticompetitively by racial cartels. If the early draws favored whites, it should now come as no surprise that the urn is now mostly white.
We are ready now, in this chapter and the next, to describe racial discrimination as cartel conduct, and to understand why early history played a very important role in contemporary racial disparities.
Cartels and Collective Action
So what is a racial cartel? And how did racial cartels operate to exclude people of color during Jim Crow? A little more economic theory is helpful here. As we learned in Chapter 1, standard neoclassical economic theory teaches that market competition should eliminate racial discrimination because discriminating is more costly than hiring without regard to race. Recall also from that chapter that in the economists’ version of a perfect world, the market should eliminate racial gaps. This is because people with a taste for discrimination will have to pay an extra cost for indulging such a bias, and will thereby compete less effectively than participants without this costly preference. Real estate brokers, for instance, who interact only with white buyers and sellers will have to give up the additional profit they might have made by doing business across racial lines, and they will eventually be outcompeted by brokers who are willing to sell across racial lines.
But the concept of a racial cartel turns this neoclassical story on its head. Economists typically define a cartel as a group of actors who work together to extract monopoly profits by manipulating price and limiting competition. For example, OPEC, the oil-producing cartel, restricts the output of oil by its members in order to raise prices for a scarce commodity. Cartels can adopt many types of agreements, ranging from an informal gentleman’s agreement to a formal contractual agreement covering supply, pricing, and a range of other areas. Cartels can be primarily defensive, organized to gain a competitive advantage in a chronically depressed market. Or they can be more offensive and economically aggressive, operating even during boom times. Cartels can be state-sponsored, using state law to run cartel operations. Or they can be privately governed by trust and cooperation or other informal means of operation.
The concept of racial cartel can help us to better understand racial discrimination and the institutional role that groups played in perpetuating discrimination. If economic theory predicts that market competition will drive out discriminating market actors, the concept of racial cartels helps to explain why markets did not successfully eliminate discrimination during Jim Crow. Cartel conduct disrupted the forces of the market, as whites engaged in cartel conduct for their own economic gain. Indeed, even Gary Becker (the economist who proposed the “competition will drive out discrimination” idea) has acknowledged that collective action by erstwhile competitors constitutes a significant challenge to his “market forces” model.
First, as always, a bit of theory will be helpful. The idea of a racial cartel draws from theoretical work in a number of subjects, including economics, social psychology, and law. In early research on racial discrimination, economists acknowledged that whites engaged in a wide range of anticompetitive strategies to increase their income and social status. These strategies included employment discrimination, which gave whites better jobs; pushing people of color into particular occupations, which produced higher wages for whites; and discrimination in lending, which gave whites better interest rates than blacks. But though economists described these as anticompetitive conduct, they did not focus on whites’ collective action in engaging in such conduct.
By contrast, social psychologists have focused on the collective action aspect. Group conflict scholars describe how social groups form in part to gain some competitive advantage in contests over scarce resources, like social status and material wealth. In particular, people form closed membership groups as a way to limit competition within the group.
In a now-famous group conflict experiment by social psychologist Muzafer Sherif, researchers brought together boys in a summer camp who had been randomly assigned to different groups. After only a short while in their groups, boys strongly favored other members of their randomly assigned group and showed hostility toward boys in the other groups with whom they were competing. Sherif found that competition shaped almost everything, from the way that the boys structured their group to the nature of their conflict with other groups in camp.
Sherif also discovered a way to break this sort of competition-induced group conflict. Researchers had the boys work together on some common goal. This common task reduced conflict between the groups substantially, and also helped to reshape group norms and group structure.
In helping us to see how people naturally form in-groups and out-groups in conditions of competition, group conflict theory provides great support for the cartel story. If Sherif ’s boys relied on randomly assigned group identity to engage out-group conflict, we can only assume that cartel conduct could make use of whites’ group identity, an identity that is both easily observed and freighted with historical meaning.
Robert Cooter was the first legal scholar to suggest that we might understand discrimination as the work of collective actors. Cooter developed an economic model of discrimination based on collusion by social groups to obtain monopoly control over the market by excluding competitors. In his theoretical model, groups exerted such power through informal social means: by gossip, ostracism, and other informal social sanctions. In Cooter’s view, this kind of social power permitted the dominant group to shift the cost of segregation from its perpetrators to its victims. Cooter analogized these powerful groups to cartels, even as he pointed out that such cartels were unstable because individuals had the incentive to break the cartel, for reasons we will explore. Cooter ended by analogizing antidiscrimination law to antitrust law, seeing them both as government interventions to restore competition to the marketplace.
This chapter builds on and extends Cooter’s ideas about discriminatory cartels. We will explore the mechanisms of Jim Crow racial cartels that kept them stable. We will look at actual cartels in action—home-owners’ associations, unions, and political parties, for example—as they gain competitive advantage by driving out their competitors. And we will examine in depth the role that law played in the operation of such cartels.
The cartel story helps to explain why market forces never managed to dissolve racial exclusion during Jim Crow. But we will take up separately the question of why discrimination persisted even after Jim Crow restrictions were lifted. Before we begin that inquiry, we first need to address the question of how racial cartels remained stable.
Cheater, Cheater: The Problem of the Unstable Cartel
Despite the persistence of cartels like OPEC, modern neoclassical theorists have claimed that cartels are inherently unstable. In their view, cartels suffer from three central stability-related problems. First, to form a coherent group, cartel members have to coordinate carefully. Group members need to make sure they all agree on the rules of engagement—for example, whether the rules require members to sell products at below cost or alternatively restrict output, in order to drive out a competitor. Economic theorists call this “the coordination problem.”
Second, cartels face “the defection problem.” Defectors are members who will breach cartel agreements, when doing so is profitable. In the case of market cartels, it pays handsomely to be the first to breach or abandon the agreement, because the first-mover defectors will earn the highest profits in a market where price has not yet begun to fall.
Third, and relatedly, cartels face the “free-rider” problem. As anyone who has ever joined a group knows from experience, every member of the cartel has a reason to free-ride by making others do all the hard work while the cheater enjoys all the benefits. As an institutional matter, cartels have to figure out a way to induce members to do coordinated cartel work without free-riding on other members, or abandoning the agreement altogether when the incentive to do so is high enough.
In the orthodox view, then, cartels do not play a role in the economics of discrimination because they are just too unstable to persist for very long. To get past these objections, any cartel theory of discrimination must explain how cartels can get their members to deploy the same anti-competitive strategy, to monitor each other’s compliance, and to continue to cooperate even when they are tempted to defect or free-ride.
It is worth pausing here to note that reality seems to contradict neo-classical theory. Notwithstanding their supposed instability, cartels have had long and fruitful lives in a wide range of markets—from sugar, rubber, and steel to electric lamps, aluminum, chemicals, and explosives. Indeed, some market cartels like DeBeers (diamonds) and OPEC (oil) have been around for decades.
How then do we account for cartel stability? Anthropologists have pointed out that among other things, punishment and reputation can play an important role in getting past the defection and free-riding problems in any joint enterprise like cartels. If some cartel members punish others for cheating, then members find it less costly to abide by the cartel rules, and more costly to sell across cartel lines. Of course, punishing that involves anything more than minimal ostracism is costly, and we run into the second-order problem of how punishment ever got off the ground at some point in human history as an altruistic norm. But whatever its evolution, punishment of cheaters and defectors has become a well-established social norm, and racial cartels appear to have made ample use of punishment to police racial cartels to make sure members abided by cartel rules.
Law appears to have played an important role in racial cartel punishing. Public law, in particular, appears to have been quite useful in policing against cartel members who were tempted to defect or free-ride. To take the most obvious example, white homeowners and developers worked together to enact segregation ordinances in several cities to police the boundaries of white neighborhoods. In the early twentieth century, zoning ordinances like those in Baltimore, Winston-Salem, Atlanta, and Louisville legally restricted areas for either black or white residents or prohibited blacks from moving into blocks where a greater number of whites than blacks resided.
Even earlier, in the post–Civil War South, racial cartels used law to restrict competition by white planters for black labor. White planters persuaded state legislatures to enact the Black Codes just after the Civil War, which strictly enforced contracts between planters and labor, providing little room for negotiation over labor contracts. Other statutes prevented labor recruiters from “enticing” away labor.
These laws limited the level of cross-racial contracting and employment so as to prevent a full integration of black workers into agricultural labor markets.
Private contracts were also very helpful in stabilizing racial cartels. Most notably, the racially restrictive covenant helped to police against white homeowners who might otherwise have “defected” to sell their homes across racial lines. During Jim Crow, white homeowners negotiated private covenants with each other to prohibit the sale of homes in white neighborhoods to blacks, Mexicans, and Asians. As part of the contract to buy a house, white home buyers agreed not to sell their property in the future to nonwhite buyers.
Like cross-licensing, racially restrictive covenants tied neighbors to each other through private agreement. Such agreements were enforced not by the previous owner, but by the “third-party beneficiary” neighbors, who presumably had relied on the all-white character of the neighborhood when deciding to buy. Even the threat of potential litigation from neighbors served to scare homeowners who might otherwise have sold to a willing nonwhite buyer.
Most importantly, cartel members used social incentives to keep brokers in line. Group members used punishment and rewards involving approval, shame, and informal retaliation to keep people from crossing the line. For example, real estate brokers who defected faced a wide range of non-legal punishments for doing so: among others, sanction by the Chicago Real Estate Board for violating its code of conduct, loss of clients, mortgage funding, insurance vendors, property listings. More generally, brokers also faced the loss of their business good will, their reputation, and their status within the community.
Internal rewards and punishments—guilt and self-esteem or feelings of aversion, among other things—also appeared to play an important role.
As the next chapter describes in detail, real estate brokers who refused to sell across racial lines reported feeling guilt about having betrayed their race and their code. Once norms of exclusion were sufficiently internalized, group norms were self-administered, without the need for as much work on the part of organization members. In short, internal and external punishment worked to keep cartel members from crossing racial lines.
Cartel Conduct: A Historical Overview
Now that we know what to look for, we can see evidence of racial cartel operation throughout the Jim Crow era, from 1870 to the mid-1960s. Consider the example of white homeowners’ associations in Chicago operating during the era of Jim Crow. Homeowners’ associations looked a lot like a paramilitary cartel. They divided up their turf on precisely defined geographic lines, much as market cartels do. The home-owners’ association used ordinary market cartel tactics like harassment and coercion to keep potential black homebuyers from moving into white neighborhoods. Members monitored the racial identity of prospective buyers and the willingness of sellers to trade across racial lines. Group members approached prospective and actual buyers and sellers, to convince them to sell their property to the association. For more persistent buyers, members coordinated as a group to harass them, often terrorizing them physically into withdrawing an offer.
Economic coercion was a favorite tactic among associations. Home-owners worked together with real estate boards and banks to restrict the availability of loans for black buyers and sellers. Under pressure from brokers and customers, banks targeted their loans to whites and to white neighborhoods, where profits were more likely, because homes in those areas enjoyed higher property values. And of course, the association played a key role in persuading homeowners to adopt racially restrictive covenants, to prohibit members from selling across racial lines.
Cartel conduct earned white cartel members a handsome profit. White homes were bigger, newer, and on larger pieces of land in neighborhoods with better public services than black homes, which tended to be smaller, older, and in dilapidated neighborhoods with deteriorating housing stock and paltry services. Beyond bigger homes and better land, association members also enjoyed monopoly access to wealthier neighbors. Owing to historical discrimination during the Jim Crow era, black neighbors possessed far less wealth than whites. Not surprisingly, then, white neighborhoods were also wealthier neighborhoods. Correspondingly, whites disproportionately enjoyed the benefits that frequently accompany wealthier neighbors—among other things, lower tax rates, higher tax revenues, and better-funded public amenities, like sanitation and security.
Perhaps most importantly, white association members enjoyed a monopoly on the higher property values that came with wealthier white neighborhoods. Owing to all these benefits—better housing stock, bigger parcels of land, access to wealthier neighbors, and better funded amenities—white properties were worth more, despite the premium that white buyers paid to be in a racially-homogenous neighborhood.
Accordingly, white buyers were willing to pay higher prices to buy in a white market, because they would then be able to sell their property for more, assuming that neighborhoods remained white. And although white sellers had a stronger incentive to defect from the cartel and sell to whomever could offer the highest price, in the longer run, working to keep neighborhoods all white was in their best interest as well.
Beyond homeowners’ associations, we see evidence of cartel conduct during virtually every period of Jim Crow. In the early twentieth century, racial cartels were mostly informal white organizations with little state support. In the South, employers maintained segregation via a network of community norms. Outside of agriculture, employers and unions together orchestrated occupational segregation, essentially creating a dual labor market where blacks and whites did not compete with each other. Within particular industries, certain jobs were designated black jobs or white jobs. World War I challenged some of these designations, particularly as white women took jobs reserved for blacks, and black men took jobs reserved for white men. But the war only temporarily dislodged racial designations.
After World War I, the role of government in cartel conduct increased dramatically. In the case of residential segregation, the federal government institutionalized the process known as redlining in support of a network of lenders, brokers, and homeowners’ associations that engaged in housing discrimination. The Home Owners’ Loan Corporation, which offered low-cost mortgages to whites moving to the suburbs out of the inner city, used redlined maps to determine where and to whom to provide mortgage support. The Federal Housing Administration adopted similar racial restrictions.
Some of the most progressive social policies adopted by New Deal legislators functioned essentially as massive racial cartel anticompetitive supports favoring white workers. For example, white legislators from the South collaborated with members of the Roosevelt administration to exclude blacks from Social Security, by exempting agricultural workers and domestic workers.
Likewise, private business organizations functioned together in ways that resembled racial cartel activity. Agricultural growers collaborated to segregate Mexican workers in company towns and housing in order to control them as a source of labor. White unions excluded blacks from organizing in crafts unions to keep them out of the crafts and unable to earn the high wages associated with the profession.
After World War II, public organizations like citizens’ councils and parent-teacher associations encouraged whites to coordinate their collective action to exclude nonwhite groups from key education, labor, and political markets. In the South, organizations like the Ku Klux Klan served as vehicles to coordinate violence against African Americans. To be sure, at the beginning of the 1950s white collective action showed signs of weakening on a number of fronts, as the Supreme Court and Congress worked to advance civil rights for a number of groups. But white cartel conduct in various parts of the country would remain strong even without the force of law to keep cartels stable.
Excerpted from “Reproducing Racism: How Everyday Choices Lock In White Advantage” by Daria Roithmayr. Copyright © 2014 by Daria Roithmayr. Reprinted by arrangement with New York University Press. All rights reserved.