In a market setting, racists who arbitrarily discriminate are forced to pay for that decision. If an employer refuses to hire anyone of a particular race or sex, they are limiting their potential pool of labor. With self-imposed diminished options to choose from, the most productive employees may be excluded, and the firm overall will be less productive than it otherwise could be. Likewise, if a company refuses to exchange goods or services with people because of arbitrary characteristics the firm will have fewer sales and be less profitable. On top of these effects, many forms of discrimination can spark boycotts from other potential customers.

Even if someone prefers one race over another, they will probably still value profits and market share over the costs of discrimination. If they are willing to absorb those costs for the personal satisfaction of not doing business with people they dislike, they will lose ground to competitors who do not arbitrarily discriminate, since the latter will be more profitable. Since market forces work against racists, sexists, etc, one way these people can have their ideals enforced without personally suffering is through the political apparatus. In the post-reconstruction south, that is exactly what happened.

In an article in the Journal of Economic History, entitled The Political Economy of Segregation: The Case of Segregated Streetcars, Jennifer Roback remarked, “My evidence suggests that segregation laws did not simply codify an already existing, well-established social custom. On the contrary, contemporary reports indicate that whites and blacks customarily sat where they chose on municipal streetcars in the absence of segregation ordinances. Second, the streetcar companies frequently resisted segregation, both as custom and law. The reason most often gave was that separate cars and sections would be too expensive. In addition, there is little indication that pressure for segregation came from the average white passenger.”

After the abolition of slavery, it was nearly 3 decades until the first laws mandating segregation started popping up in southern states. As Roback documents, during that time streetcars and railroads did not impose segregation. To do so would have entailed significantly higher operating costs for owners. Additionally, these companies relied on the black population far too much to be able to afford to refuse service to blacks or to risk sparking a boycott with segregation practices. A report issued by a Georgia company in 1906 reads, “The Savannah Electric Company of this city is now facing a boycott from the negroes on account of the putting into effect here yesterday of the law providing for the separation of the whites and blacks on streetcars. The action on the part of the company was not voluntary.”

A Georgia state law mandating segregation was actually passed much earlier, in 1891. It took a full 15 years of political pressure and police enforcement for the Savannah Electric Company to comply. They were not the only ones. The Georgia Railway and Electric Company did not segregate until 1906, and the Augusta Railway and Electric Company neglected to do so until 1898. Roback documents similar stories in cities across much of the south; opposition to discriminatory laws by private companies, followed by forced compliance and predictable boycotts.

One means of opposition was in the form of pre-planned confrontations that would lead to legal challenges of segregation laws in the courts. In 1892, the East Louisiana Railroad cooperated with a group of organized citizens to arrange for an encounter with Homer Plessy. As Michael Klarman notes in From Jim Crow to Civil Rights, The Supreme Court and the Struggle for Racial Equality, “Because Plessy appeared white, the arrest could not have taken place without the connivance of railroad officials, which was forthcoming because railroads disliked the segregation law, which was both expensive and inconvenient for them.” This confrontation led to the now famous case of Plessy v. Ferguson, which went all the way to the Supreme Court.

Private companies likely did not fight against Jim Crow laws because they thought all races were equal. They may very well have been just as white supremacist as anyone else. But in a competitive market setting, arbitrary discrimination has significant associated costs. So even if the owners of these companies were as racist as anyone else, they still desired profit more than they wanted to discriminate. Since market forces tend to punish arbitrary discriminatory practices so severely, proponents of discrimination are often left resorting to the only remaining means of obtaining their objectives: the power of government force.

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