If diversity increases profits then capitalists'll do it already
To remind of that idea derived from Adam Smith - capitalists are lazy, dumb and greedy. Not that he put it in quite those terms. Dumb in that finding the new profitable idea is difficult, lazy in that it’s an effort, greedy in that if someone else finds one then they’ll all copy it. This is, after all, why we have patents.
We also have Gary Becker telling us that taste discrimination - that’s the kind that’s just based upon gender, skin colour, prejudice in fact - is a money loser. It’s leaving rare and scarce talent on the table for someone else to use as a result of the prejudice of the discriminator.
So, we’d expect capitalists to not practice taste discrimination. For it’ll quickly become obvious that it’s a money loser, people ‘ll stop doing it. Obe of the proofs of this is the Jim Crow laws in the US last century. Those with the political power wanted to enforce discrimination. But to do so it was necessary to stop capitalists not doing so on the grounds of profit making.
More recently we’ve been told that greater diversity is in itself profitable. Further, that business needs to be between cajoled and forced into anti-taste discrimination and it’s for their own good. Despite all of the above the lazy dim and greedy are leaving money on the table.
Hmm:
In a series of very influential studies, McKinsey (2015; 2018; 2020; 2023) reports finding statistically significant positive relations between the industry-adjusted earnings before interest and taxes margins of global McKinsey-chosen sets of large public firms and the racial/ethnic diversity of their executives. However, when we revisit McKinsey’s tests using data for firms in the publicly observable S&P 500® as of 12/31/2019, we do not find statistically significant relations between McKinsey’s inverse normalized Herfindahl-Hirschman measures of executive racial/ethnic diversity at mid-2020 and either industry-adjusted earnings before interest and taxes margin or industry-adjusted sales growth, gross margin, return on assets, return on equity, and total shareholder return over the prior five years 2015–2019. Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that despite the imprimatur given to McKinsey’s studies, they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives.
Ah, so, one of those ideas that doesn’t survive actual examination then.
It’s worth noting what Becker is insisting is the driving force - competition for labour and talent. That is, this is an effect we’d only expect to see in a market system for labour. One of us was there to see and work in the tail end of the Soviet system. Which was, as we all know a monopsony - the state was the single buyer of labour. In that system your nationality was listed in your passport, one of those possbile nationalities was “Jew”. To our certain knowledge the graduates of one of the Mosow computing institutes who had that nationality were not offered jobs in any of the nice areas of the country nor in any of the interesting jobs. Instead, and specifically because of their nationality, very boring heavy industry out in the boondocks of those newly created industrial towns. Come the failure of the revolution of course all that changed markedly and people got hired by talent again.
Such taste dscrimination will really only happen in such a monopsony. In a market system the benefits to the individual of not doing so are too great for it to persist. Which neatly explains the absence of replicability of the McKinsey results. Everyone is already hiring on talent therefore - given that talent is not racially nor ethnically linked - there is no link between race or ethnicity and financial results.#
Markets for the win once again.