Let us consider discrimination in employment. Let there be in a certain community the majority of Blues and the minority of Yellows. Let a “Civilized” person be one who is qualified to work at a well-paying job in all senses; he is not only competent, say, but also has good “communication skills,” is punctual, will not steal office supplies, and has a variety of other useful virtues. A “Savage” person is one who would be speedily fired from a well-paying job as soon as his character flaws are discovered by the boss.
It so happens that 80% of Blues are Civilized, and 20% of Yellows are Civilized; the rest are Savages. (I am sorry, but there ain’t nothing anyone can do about raw facts like this.)
It should come as no surprise that the efficient ways of hiring Blues as opposed to Yellows differ. It can make sense to subject a Yellow applicant to a more stringent interview. For example, a hiring manager may want to run a background check on a Yellow, have him drug tested, check his references and employment history more thoroughly, hire him on strict probation, or keep him as an apprentice (such as contract-to-hire) for a longer period of time. This is an aspect of discrimination not primarily between Blues and Yellow, but between the Civilized and Savages, given the information in the market.
Let certain employers prejudicially refuse to go to the trouble of finding Civilized Yellows. The competition for Yellow workers from businesses declines concomitantly, and these workers’ wages will fall. This is an immediate incentive to less biased entrepreneurs to pick up those perfectly good Yellow workers as a lower price. As we can see, stubbornly refusing to seek out qualified Yellows is costly to a firm; it shrinks the pool of its applicants, drives up prices of labor for it, and thus increases its costs of doing business.
In short, then, businessmen who do not discriminate between Blues and Yellows but do discriminate between the Civilized Yellows and Savage Yellows will obtain an advantage in the marketplace: they’ll slurp up the Civilized Yellows — who by stipulation are as good as Blues — at a lower wage. Moreover, there is an incentive to all firms to improve their discrimination of Yellow characters with time, as outdoing one’s competitors at the discriminating business means superior matching of candidates with jobs and hence profits.
Let’s see what happens when the state forbids discrimination. Clearly, now both Blues and Yellows have to undergo the same “objective” qualifying procedures. The background check, the drug test, etc. now have to be administered either to all job applicants or to none of them irrespective of their color. It is obvious that thusly verifying both Blues and Yellows introduces new extra costs to any business, and some businesses will no longer be able to afford them. They’ll choose rather to not verify anybody, but, knowing that doing that will pollute their workplace with many Savage Yellows, will refuse to hire any Yellows at all.
Here’s the lowdown: Whereas a businessman’s false belief that YS = “all Yellows are Savages” was unprofitable before, will, with the advent of anti-discrimination laws, become — surprise! — profitable. This is because the alternative to YS before was “some Yellows are Civilized” (which is true); now it’s “Yellows are exactly like Blues” (which is also false, and the consequences of extending belief to it are even more disastrous). The government gives an incentive to agents in the market to make mistakes; it subsidizes those mistakes, and when you subsidize something, you get more of it.
Since the number of discriminating businesses decreases, the competition for who will be best discriminators also weakens, and improvement of discriminating techniques slows down, as well.
As a result, employment of Yellows in good jobs will decline. Since it’s only cost-effective to discriminate for longer-term high-paying jobs (because spending a lot of money to filter out bad applicants for an $8 / hour job is too expensive), the Yellow elite will suffer the most.
The only remedy for that is quotas, but at that point, when human resources issues within companies are so regimented by the state, we are no longer dealing with a capitalist labor market at all. We’ll have a totalitarian state which today imposes quotas of Blues to Yellows, and tomorrow, upon a change in policy, will send the Yellows to gas chambers, because why not if it can? Of course, under quotas, business efficiency will decline substantially, and consumers — both Yellows and Blues — will be poorer than before.
It may be said that it is impolite (or some such thing) not to firmly believe in the perfect equality between Blue and Yellow workers, regardless of the facts of the matter. But to quote Mises,
economics does not say anything either in favor of or against myths.
It is perfectly neutral with regard to the labor-union doctrine, the credit-expansion doctrine, and all such doctrines as far as these may present themselves as myths and are supported as myths by their partisans.
It deals with these doctrines only as far as they are considered doctrines about the means fit for the attainment of definite ends.
Economics does not say labor unionism is a bad myth. It merely says it is an inappropriate means of raising wage rates for all those eager to earn wages.
The same can be said about the Blue and Yellows equality myth. Economics says merely that employment of Yellows will decline, and that the pursuit of the equality myth by the government is not in the pecuniary interests of Yellows. “It leaves it to every man to decide whether the realization of the [equality] myth is more important than the avoidance of the inevitable consequences of [non-discrimination] policies.” (HA, 884)