Exclusion is Economically Stupid
Racism, xenophobia, or any form of exclusion makes the victims and perpetrators economically worse off. Here's some empirical evidence on why everybody loses.
As if the global pandemic weren’t enough, two other developments in the U.S. this summer have been harrowing and affected a significant number of people globally. First, the death of George Floyd sparked global protests and a once-in-a-generation condemnation of racism. Second, a flurry of draconian restrictions on immigration in the U.S. have left thousands of families, workers, and students in limbo and sparked widespread backlash. Rightly so, a majority of people have reacted with moral outrage against racism and xenophobia.
As a complement to the moral dimensions of these issues, I would like to consider their economic consequences. My main point is simple: the empirical evidence tells us that exclusion is economically stupid. It’s self-defeating because it limits the prosperity of both victims and perpetrators. Let me suggest two empirical studies on innovation that illustrate the point.
Violence Against African Americans and Innovation
In a landmark study, Lisa Cook found that lynchings and riots against African Americans during 1870-1940 reduced the number of patents filed by African Americans inventors by more than 15% annually. The graph below (from the paper) shows a striking pattern: patenting by African Americans decreased when violence flared up, and increased when violence declined.
Over that time period, African Americans inventors successfully filed 726 patents. Had it not been for racist violence, Cook’s model estimates that there would have been over 1,100 more patents filed by African Americans.
Obviously, the economic fortunes of potential inventors in the African American community were severely hurt.
But it’s not only African Americans who were economically hurt by the violence. The entire economy was worse off because of the missing inventions that would have improved everyone’s quality of life. Cook offers a good example. Garett Morgan, pictured below, invented the gas mask and other useful technologies. Due to violence against blacks, he refrained from directly promoting the gas mask and hired a Native American to pretend to be the inventor so whites would purchase his product. When white fire chiefs in the south learned of Morgan’s identity as the true inventor, they stopped ordering his masks.
This was bad for everyone involved! Clearly Mr. Morgan suffered by not making as much money as he could. But better gas masks are good for everyone regardless of skin color. Not having access to them because of racism was economically self-defeating. The story of Mr. Morgan is one in which the invention was actually patented.
Imagine the collective loss from the thousands of good ideas that never made it out of black inventors’ heads in the first place! If you were worried about being hurt or killed, you would direct your energies away from invention too. You wouldn’t have a chance to invent even if you tried. A striking fact: 1899 was the peak year of African American patenting, and it has never recovered to the present day! How many life-improving ideas have we missed out on due to racism?
Lisa Cook’s paper was recently profiled by Planet Money. The podcast also tells the story of Lisa’s struggle to get the paper published because editors and reviewers in the top economics journals struggled to accept the history of racism in the U.S. Thankfully, one journal accepted the paper—after 10 years of effort! It’s an ironic twist for an African American author of a paper on what we all miss out on when minority ideas are suppressed.
Xenophobic Immigration Restrictions and Innovation
A different episode from U.S. history offers the same lesson.
From the founding of the U.S. until the late 1800’s, the U.S. was populated mainly by immigrants from Western and Northern Europe, who were white and protestant. By the early 1900’s, however, the composition of immigrants changed and most entrants were from Southern and Eastern Europe. Many of these immigrants were Jewish or Catholic, and had physical features that differed from the previous wave of entrants.
A coalition of academic and political elites—descendants of the earlier waves of immigrants—worked to create a story that the new immigrants were physically, intellectually, and morally inferior. Aided by the pseudo-science of eugenics and the nationalist fervor created by WW1, the coalition successfully persuaded congress to passed the 1924 quotas act. The law banned all immigration from Asia (which had already been severely limited) and set quotas on immigration from European countries. The quotas were 2% of the number of foreign-born persons that were residing in the U.S. as of 1890. Why 1890 instead of, say, 1920? Because in 1890 there were very few Southern and Eastern Europeans in the U.S. The system ensured that so-called “inferior” people didn’t enter the country.
What effect did such racist quotas have on innovation in the U.S.?
This question is answered in a stunning paper by Petra Moser and Shmuel San. The number of patents filed by U.S. inventors working in areas where scientists form Southern and Eastern Europe used to work declined by 68%. The reduction was caused by both a drop in U.S. scientists working in the affected fields and in the number of patents per active scientist. The graph below (copied from the paper) shows that the productivity of U.S. inventors never recovered: the decline in productivity, compared to the pre-1924 period, persisted well into the 1970s!
The 1924 quotas law was in place for 40 years in the U.S., until it was replaced in 1965 by the existing immigration system. Since then, immigration from all over the world—especially Asia and Latin America—has increased dramatically. And the consequences for innovation in the U.S. have been equally dramatic. For example, this paper shows that “a 1 percentage point increase in immigrant college graduates' population share increases patents per capita by 9-18 percent.”
Why would immigrants play such an outsized part in innovation? Because immigrants are overrepresented in innovative fields (e.g. STEM) and because they are carriers of novel ideas. By virtue of their different experiences and training in their home countries, they bring something that natives don’t have. Further, immigrants do not replace the ideas of native inventors—they make native inventors more productive because their novel ideas get recombined with the existing stock of knowledge of natives. This is shown really nicely in a paper by my colleague Raj Choudhury.
Further, there is incontrovertible evidence that immigrants have helped increase not just innovation, but also the level of capital investment, entrepreneurship, and consumption in the U.S. economy. I summarize that evidence in this short article.
Exclusion = Economic Suicide
This and other empirical research makes a clear point: discrimination hurts everyone economically by suppressing the good ideas and other contributions of people to the economy. The immorality of discrimination is sufficient to fight for its elimination. But the evidence clearly shows that it’s also in everyone’s economic self-interest to do so!