equal opportunity or more opportunity? the good thing - civitas

Equal Opportunityor More Opportunity?

Equal Opportunityor More Opportunity?

The Good Thing About Discrimination

Richard A. Epstein

Commentary by

Simon Deakin

Civitas: Institute for the Study of Civil SocietyLondon

First published March 2002

© The Institute for the Study of Civil Society 2002The Mezzanine, Elizabeth House39 York Road, London SE1 7NQ

email: [email protected]

All rights reserved

ISBN 1-903 386-18-7

Typeset by Civitasin New Century Schoolbook

Printed in Great Britain byThe Cromwell Press

Trowbridge, Wiltshire

v

Contents

Page

Authors vi

ForewordDavid G. Green vii

Human Rights and Anti-discrimination Legislation 1

Age Discrimination and Employment Law 18

Laissez Faire and Anti-discrimination Laws 34

Commentary

Equality, Non-discrimination andthe Labour Market

Simon Deakin 41

A Short Reply to Simon DeakinRichard A. Epstein 57

Notes 65

vi

Authors

Richard A. Epstein is the James Parker Hall Distin-guished Service Professor of Law at the University ofChicago, where he has taught since 1972, and since 2000,the Peter and Kirsten Bedford Senior Fellow at the HooverInstitution. He has been a member of the American Acad-emy of Arts and Sciences since 1985 and a Senior Fellow ofthe Center for Clinical Medical Ethics at the University ofChicago Medical School since 1983. He served as editor ofthe Journal of Legal Studies from 1981 to 1991, and from1991 to 2000 as an editor of the Journal of Law and Eco-nomics. He has been a Member of the California Bar from1969 to the present. His books include Torts (Aspen Law &Business 1999); Principles for a Free Society: ReconcilingIndividual Liberty with the Common Good (Perseus Books,1998); Simple Rules for a Complex World (Harvard, 1995);Bargaining With the State (Princeton, 1993); ForbiddenGrounds: The Case Against Employment DiscriminationLaws (Harvard, 1992); Takings: Private Property and thePower of Eminent Domain (Harvard, 1985); and ModernProducts Liability Law (Greenwood Press, 1980).

Simon Deakin is Robert Monks Professor of CorporateGovernance in the Judge Institute of Management andYorke Professorial Research Fellow in the Faculty of Law atthe University of Cambridge. After studying law at Cam-bridge he was a Bigelow Fellow at the University of ChicagoLaw School and subsequently a lecturer in London andCambridge. He took up his present post in the autumn of2001. His interests lie in the economics of law, and inparticular employment, competition and company law. Hisbooks include Contracts, Cooperation and Competition (withJonathan Michie), Enterprise and Community (with AlanHughes) and Labour Law (with Gill Morris).

vii

Foreword

Professor Richard Epstein argues that human rights laws,especially those designed to eliminate discrimination, domore harm than good. Many people who support lawsagainst discrimination—whether on grounds of race, sex,disability or age—do so out of the best of intentions butEpstein believes they have over-estimated the ability oflaws to alter human conduct without producing unexpectedresults.

The classical liberal case against discrimination is thatpeople should be judged by what they say and do, not theirascribed characteristics such as gender or the colour of theirskin. If an employer is looking for someone to do a particu-lar job, the sole concern should be the ability of candidatesto carry out the expected tasks. With the exception ofpartisans of reverse discrimination, few would disagree.But, Epstein makes a further point that some will initiallyfind shocking, namely that employers should be free todiscriminate when racial or other distinctions are relevantto job performance. In truth, the claim that some discrimi-nation is legitimate is not as shocking as it may seem,indeed it is acknowledged in British law that ethnic busi-nesses, such as Chinese restaurants, can employ onlyChinese waiters because to do otherwise would cast doubton the authenticity of the restaurant.

Epstein believes that there are many complex situationsin workplaces where it may simply be best for everyone ifemployers are allowed to pick new workers who will fit inwith everyone else. This inevitably means that someemployers will favour people from ethnic minorities andsome will not. We spend a lot of our time at work and manyof us naturally tend to mix with people we find congenial.Sometimes such preferences will be based on little morethan sheer prejudice; and often idiosyncratic likes anddislikes will play their part. A wise employer who wants hisstaff to co-operate fully will take such factors into account.Personal animosity within a team can often impair the

EQUAL OPPORTUNITY OR MORE OPPORTUNITY?viii

effectiveness of the organisation. For Epstein, the best wayof handling these infinitely variable complexities is to allowemployers and employees to enter into whatever contractualarrangements they wish.

To impose a legal requirement that treats any dispropor-tionate representation of politically designated groups asevidence of discrimination leads to the making of falseaccusations against people who have done nothing morethan to try to provide friendly working conditions for theirstaff in order to make it more likely they will do a good joband serve their customers well. The absurdities that canoccur are already evident from American experience.

For example, a firm of cleaners in Chicago run by aKorean man largely recruited other Koreans, based on clanloyalty, just as many immigrants to America have relied onmutual aid among their own ethnic or national group. Theowner was prosecuted by the Equal Employment Opportu-nity Commission (EEOC) because of the disproportionaterepresentation of one ethnic group. He was pursued throughthe courts for over eight years at a cost of $200,000. In theend the owner won, but the cost forced the business to close.As a government agency, the EEOC had virtually unlimitedresources and often pursued cases for which there was nolegal precedent, calculating that it could coerce employersinto making out-of-court settlements because they wouldthink it a cheaper option. An innocent bystander could beexcused for wondering whose interests were served by thispolicy.

Laws against racial discrimination are currently the mostcontroversial. No reasonable person would be racist and, ina tolerant country like Britain, no reasonable person wouldwant anyone else even to think they might be racist. Forthis reason we have bent over backwards to accommodatedemands for anti-discrimination laws. But these laws havethe opposite effect from the one claimed for them. They leadto race-conscious employment practices instead of thetreatment of people according to their individual merits asfellow workers. Professor Epstein’s remedy is to scrapcurrent anti-discrimination law and replace it with a new

FOREWORD ix

form of words which recognises the value of legitimatedifferentiation. He suggests the following:

Every individual and group may refuse to contract or associatewith, or to otherwise discriminate for or against any other group orindividual for whatever reasons they see fit, including withoutlimitation, race, creed, sex, religion, age, disability, marital status,or sexual orientation. (p. 11)

The end result of such a reform would be an open society inwhich the common culture emerged from the free play ofopinion. Some rules of life should be enforced by law, but ina free society many should be unenforceable, upheld only bysocial pressure following public discussion and experimen-tation.

Professor Epstein’s study forms part of a wider Civitasproject to encourage discussion of liberal anti-racism and toincrease awareness of the dangers inherent in the authori-tarian anti-racism that currently dominates public policy.Good intentions are rarely enough and Professor Epstein’sstudy makes a compelling case for taking stock of prevailingattitudes.

Finally our thanks are due to three people who worked onthis project as interns during 2001: Janet Ng, Laura Myersand Josie Cluer.

David G. Green

The first two chapters of this book are based on a lecture ‘Restoring Sanctity of Contract in EmploymentRelationships’ given by Professor Epstein in Wellington,New Zealand on 24 March 1999, and later published by theNew Zealand Business Roundtable, 1999.

1

1

Human Rights andAnti-Discrimination Legislation

Human Rights Without Human Duties

It is easy to find strong similarities between British anti-discrimination laws and those in the United States.

Indeed, laws of this type are increasingly popular elsewherein Western democracies, and perhaps throughout the world,so that a comparison of these two systems carries with itwider implications. If I were to summarise my attitude tosuch laws in a single phrase, I would borrow the wordsoriginally used by Thomas Macaulay, perhaps inaccurately,in speaking about the US constitution—‘all sail and nokeel’. Macaulay meant that the constitution pulled peoplepowerfully along, but lacked any countervailing forces toprovide it with stability. If we run a boat on all sail and nokeel, we put ourselves in peril. Anti-discrimination laws ofthe type now in force in Britain expose us dangerously tothis problem—so much so that, in my view, the entirestatutory apparatus should be scrapped.

Each of us is an individual. The rights we are trying toprotect are only those belonging to ourselves. And rightsmatter. Three difficulties in particular are implicit in thegeneral organisation and operation of anti-discriminationlaw.

It is salutary to compare current law with a famous civilrights statute in the United States—not the 1964 Civil

EQUAL OPPORTUNITY OR MORE OPPORTUNITY?2

Rights Act, but the 1866 statute of the same name whichcame after the long Civil War over slavery. The 1866statute gave to all individuals rights such as the right tocontract, to hold property, to convey real estate, to testify incourt, and to sue or be sued. It essentially guaranteed civilcapacity—the right to participate in a social order organisedunder the law of property, contract and tort. It was a civilrights act that primarily dealt with economic rights andliberties. Yet even here one must be careful to recognise anduse ‘economic’ in the broadest sense, so that it covers allproductive forms of human activities; the same principlethat protected the ability to buy and sell wheat also pro-tected the ability of people to marry whom they chose.

My second point follows on closely from the first. The1866 statute, for example, is universal with respect to therights that it affirms in all individuals. It says that everyperson shall have the right to contract, to dispose of prop-erty, and so forth. There is nothing in the statute that limitsits benefits to some classes of individuals. Nor does it favourany side of a relationship by giving protection to one partyand not to the other. It does not favour landlord over tenant,or employer over employee, or vice versa.

In this sense, the US Civil Rights Act 1964 is anythingbut a human rights statute, despite being labelled as such.In this Act, only certain individuals, occupying certain roles,can claim the protection of the statute, while other individ-uals, occupying other roles, are unambiguously subjected bylaw to certain correlative duties. The 1964 Civil Rights Actstarts out by declaring it to be unlawful for an employer toengage in certain forms of discrimination. This places alimitation on an employer. There is no correlative duty orlimitation placed on an employee: he or she can stilldiscriminate in the choice of employer on the basis of any ofthe characteristics that are ruled out of bounds when itcomes to an employer choosing an employee. This stronglysuggests that the appropriate level of generality is foundnot in the modern statutes but in the 1866 statute. Ameaningful human rights statute will surely protect allindividuals equally, and equal protection of the laws (torefer to one clause of the Fourteenth Amendment adopted

HUMAN RIGHTS AND

ANTI-DISCRIMINATION LEGISLATION

3

in 1868 in large part to give constitutional grounding to the1866 Act) can be afforded only through some system offormal equality such as the 1866 Act provides.

There is a third, equally troublesome, feature of themodern statutes. Classical jurisprudence always insistedthat human rights in some people came attached to humanduties imposed on others. Rights were never free goods, butwere paired with correlative duties; we always held a rightagainst somebody else. To the extent that one person’sliberty of action is expanded, the liberty of action of otherindividuals is necessarily limited. In designing a system ofrights, the advantages that we conceive of and create forcertain individuals should more than offset the disadvan-tages thereby imposed upon others. Any comprehensivesystem of rights should thus be couched within a frameworkthat makes explicit the nature and extent of these correla-tive duties. A neutral presentation of a modern humanrights law might entitle it the ‘Human Rights and DutiesAct’, the consequences of which suddenly sound much lessunambiguously positive. Opponents of the Act might evenprefer to call it the ‘Human Duties Act’—a title which doesnot draw our attention to the benefits associated with thestatute, while wrongly suggesting that the Act merely setsout the duties of various individuals.

Once one recognises these three difficulties, certain otherconclusions quickly follow. In particular, if we do notrecognise—explicitly and publicly—the duties associatedwith rights, there will be an inherent tendency to ignore theassociated costs. We will have the happy illusion that theconstraints of scarcity do not really matter—that we will beable to magnify those rights without limitation whilenobody need pay the cost either directly or indirectly. Thatis, of course, a fantasy.

How can such a fantasy take hold? Partly, I believe,through employing the following technique. Instead oftalking in terms of human beings on both sides of therights/duties divide, we depersonalise the nature of theentities on whom the duties are imposed. Individual people


receive the benefits created by the statute, but its burdensare imposed on abstract entities such as corporations,unions, universities and other organisations. This mentalconjuring trick cannot, of course, be justified. The collectiveson which we impose duties are comprised of individuals.Organisations do not act themselves; they act throughindividuals and for individuals, be they shareholders, unionmembers or faculty and students. Consequently, in analys-ing the impact of the statute we must always follow apostulate of methodological individualism. We cannotsimply pair human rights to a set of correlative duties onabstract bodies, hoping thereby to externalise their costs onno one in particular. We must trace the implications of thestatute through the entity to the particular individuals onwhom those duties will be imposed. In politics the sameprinciple applies. It is meaningless to say that the govern-ment has a ‘duty’ to supply benefits to its citizens. Anybenefits created by the government must necessarily bebacked by regulation, taxation or the imposition of liabilityon other individuals. Those burdens must be recognised andweighed against the benefits, if an appropriate balance is tobe obtained. And we can be sure that this balance will notbe obtained if public rhetoric suppresses information on theincidence and expense from the relevant trade-offs.

Moreover, when the cost elements of a modern humanrights statute are allowed to enter into any equation, theyare never placed on the same footing as the rights side. It ischaracteristic of these statutes that the rights are put, so tospeak, in bold 16-point type at the top of the page whileunderneath and on one side in barely legible 8-point typeare the costs. If the costs turn out to be too great, they maynot even feature at all. The almost universal tendency isthus to underestimate the costs, because they do not entersimultaneously into the calculations as an inescapablecorrelative duty. Instead, they are superimposed upon thegeneral system only as an afterthought. We can have‘rights’ that are extraordinarily costly for other individuals,and instead of treating them as infringements of ordinaryliberties we treat them as the price that must be paid to

HUMAN RIGHTS AND


5

enforce some outcome which is seen as self-evidentlydesirable.

There is a further paradox associated with modernhuman rights legislation. If the specified rights are thosemost fundamental to human liberties, why have they takenso long in historical terms to come on to the forefront of thelegislative agenda? Their introduction dates only from the1960s. They are not the issues over which wars were foughtback in the thirteenth century. Nor are they the factorsmost people would regard as truly fundamental for theirown well-being and security. If I were asked to choose, forexample, between the various modern prohibitions of dis-crimination, and the common law prohibition against theuse of force against other individuals, I have no doubtswhatsoever as to which set of rights I would discard. Iwould allow people to refuse to deal with me in situationssuch as employment, so long as I believed that the state wasaround to protect my bodily integrity. I doubt that in anyreal-world setting one could find even a single person whowould choose differently. Nobody would prefer the risk ofbeing killed—no matter how ‘non-discriminatory’ theslaughter—to a general rule prohibiting the use of force.Such a rule promotes the security of us all, even at theexpense of some liberty which we would all willinglysacrifice for the gains we obtain by demanding like sacri-fices of others.

Yet what about a closer comparison? The modern statu-tory rights that guarantee freedom from discriminationwith those which allow persons to make contracts to disposeof their labour or property? Here a moment’s reflectionshould indicate that the basic right to trade occupies themore fundamental position. That right is critical to survivalno matter what the structure of the marketplace. To denypeople the right to trade is to force them to rely exclusivelyon their own resources and to negate the enormous benefitsof the division of labour. Seen in this light, the anti-discrim-ination norm is heavily parasitic on the basic right to trade.An anti-discrimination norm may be of some assistance in


a world of strict monopolies, but it makes far less sense incompetitive labour markets, where individuals have amultiplicity of options from which to choose. So here againthe basic economic right has, and should enjoy, a priorityover the anti-discrimination rules embodied in the modernlaws.

Aspiration and Performance

The preceding argument put matters as an ‘either/or’proposition. But what about the possibility of recognisingboth the traditional economic rights and the newer anti-discrimination law? Part of the difficulty with that positionis that the two systems are inconsistent with each other, asthe former gives persons the absolute right of choice of theirtrading partners that the latter denies. We can find placeswhere the duty not to discriminate makes sense, mainly inconnection with a monopoly provider of standardisedservices, such as electricity and gas. Here the utter lack ofconsumer choice requires the holder of that franchise totake all comers. But most labour markets, for example, bearno resemblance to this situation, yet it is precisely in thiscontext that they hope to use law to eradicate all vestiges ofdiscrimination.

What the advocates of human rights often overlook,however, is the important distinction between the moralityof obligation and the morality of aspiration. Of course, wewant individuals to treat all other persons fairly and withdignity and respect.

But it hardly follows that legal tools should be used toenforce these higher duties. We should be cautious aboutimbuing the morality of aspiration with near-religiousovertones. We have to worry about the dangers of imple-mentation as well. I do not wish to be vicious, mean or nastyto other people. That is not the object of any of us. But thelegal system should have certain spheres of influence andsocial systems should have others. Typically we start offwith some coercive programme that looks noble and lofty,but by the time we appreciate all of its implications we runthe risk of descending into some form of Orwellian madness.

HUMAN RIGHTS AND


7

The unanticipated friction and dislocation that takes placeas a result of the statute means that the aspirations arenever realised, but rather the opposite occurs.

Let us talk about disability. No one wants disabled peopleto rot at home. But it is implementation that matters. Thereare two ways to handle the disability issue. First, in any jobmarket some employers will be niche firms which willspecialise in hiring people with disabilities. Before theUnited States adopted its anti-discrimination legislation,some employers acquired certain types of facilities such asramps or reading machines (depending on the disabilitythey were dealing with), amortised them across largenumbers of employees with disabilities and traded profit-ably in specialised markets. To spur on that activity, thegovernment could subsidise with block grants firms thathired workers with certain types of disabilities. There is noneed to use command-and-control tactics when theseapproaches are available.

There is no panacea, for even block grants have coerciveelements. These grants must be financed out of taxation.Yet it is possible to choose even among different types ofcoercive legal regimes. Taxation is an explicit, overt burdenwhich can be quantified. Regulations are hidden andunquantifiable, but they often impose a larger tax. If we areforcing employers to hire workers with disabilities we aretaxing right now. The question is whether taxation shouldbe overt or concealed; whether public expenditures shouldbe ‘transparent’ or ‘off-budget’. The academic literature ontaxation and regulation and their substitute relationshiphas been well established for the last 25 years. It is only ina political context that the two are treated as if they are indifferent moral domains. If we understand regulation asimposing a burden upon one group for the benefit of an-other, we can duplicate that by taxing the first group andtransferring the wealth to the second. We can choose eitherto quantify the costs publicly and expose them for respon-sible political debate or to bury them in a form of regulationoverblown by a rhetoric of rights. I opt for the first ap-proach.


There is yet a second vice to the human rights approach.It makes it appear as though our sole concern with disabil-ities should be confined to helping people who already sufferfrom disability. That is too narrow a point of view, for it isalso of evident importance to prevent as many people aspossible from becoming handicapped. One effective way todo that is to raise the general standard of living so peoplewill have more resources to keep out of harm’s way. But wecannot raise standards of living with an economicallycrippling human rights statute: by raising production costsand distorting business decisions, it lowers per capitaincomes. An explicit tax surely has costs in this regard, butprecisely because it is explicit it is less likely to be disrup-tive. And it is less likely to be commandeered by adminis-trative agencies who attach pride of place to their ownmission, disregarding everything else. We should not befooled by an abstract argument that we need such a statutefor a just, kind, and compassionate society. All of us can bejust, kind and compassionate without governmentalinstruction.

An Alternative Approach to Civil Rights

The dangers of the common form of human rights legis-lation should encourage us to develop some alternativeconception of human rights. Here I reveal myself as anunabashed and unashamed classical liberal who believesthe modern definition of human rights is a rhetorical ployand a mistake. Any soundly based system of rights musthave the appropriate level of universality and must recog-nise the dual and correlative nature of rights and obliga-tions. I am confident that we can find a better legal frame-work.

In my own formulation, all individuals are owners ofthemselves, and of those resources they can acquire eitherthrough original possession or through contract andexchange with other individuals. There is nothing peoplecare about which cannot fall under the class of either labouror property, including the crucial right to associate withother individuals, be it for commercial, social or religious

HUMAN RIGHTS AND


9

reasons. This gives us a broad definition untroubled by theambiguity of modern statutes.

Such a system meets our first concern, because it isgeneral and comprehensive. Nor is this system merely aform of class legislation disguised under the veneer ofhuman rights. This is not a statute that guarantees rightsto employees against employers, tenants against landlords,buyers against sellers, or customers against their banks andinsurance companies. It merely gives all individuals theright to dispose of and control their own labour—which istheir personal liberty—and their own property in any way,and under any circumstances, that they see fit, subject tothe exception for monopoly providers noted above. Since itextends to other forms of association and expression, itcovers a broader domain of behaviour than does a humanrights statute geared only to the employment arrangement.Even with its greater scope of influence, it still guaranteesa degree of formal equality that contemporary human rightsstatutes lack. To be sure, formal equality will never guaran-tee perfect social equality. But it is a dangerous illusion tothink we guarantee social equality by a statute whichsystematically violates the requirements of formal equality.We are better advised to promote liberty, without attempt-ing to introduce class legislation. It gives us a system thatis self-contained and universal in the safeguards it providesto all individuals.

When we come to the question of how correlative dutiesare to be incorporated, my classical liberal system alsocompares well with its modern competitor. For any givenright, the obligations on the other side are clearly defined.To the extent that individuals exercise their personalliberties, they must refrain from taking actions thatinterfere with other individuals. This applies to the way inwhich they run their own lives, enter into voluntaryexchanges, and utilise or dispose of their property. And itcarries over to religious and social organisations as well. Mysystem must pass the test as to whether, under thesecircumstances, the security we each gain from the protec-tion of our rights over our own person and property is worth


more to us than the ability to restrict those liberties whenthey are vested in other people.

The answer under these circumstances is unambiguous.To the extent that we create individual rights over personsand property, we have given an initial set of endowments tothe people who most value and know how to use them, be itfor production, consumption or spiritual reflection. Nohuman rights commission can dictate what is relevant tomy own preferences, or to the way in which I think and actin the world. It is a vast mistake to assume that I—oranybody else—have a cache of legitimate information thatallows me, or you, to set the preferences and control thechoices of other individuals. Something is of value to anindividual if it enhances his or her utility, which is subjec-tively determined. In my system, the protection given toother individuals is a powerful one: if they do not agree withmy conceptions of value they can choose to associate ortrade only with other individuals. They can leave me alone,just as I can leave them alone. Under this model there is aseries of initial entitlements which, in a series of voluntaryexchanges, people can use and combine in any number ofmutually advantageous ways: they can deal with one orwith many, and they can engage in short-term exchanges orlong-term exchanges as they see fit. We can then have anindefinite number of such arrangements, relationships andexchanges. Under this system of free contracting and freeassociation we get the best division of labour, and the bestredeployment of human and natural resources for the fullrange of individual and social ends. The system that startsin commerce can easily go beyond it to all forms of personalassociations. In the long run this comprehensive system willgreatly outperform any system of command and control inwhich people are told what they can do and how they can doit. The rejection of the modern approach to human rightsquickly has broader implications.

A Short, Sensible Civil Rights Statute

It is perfectly possible to draft on a single page a statutegiving a comprehensive definition of all rights and dutiesfor all individuals. The statute is designed to cover all the

HUMAN RIGHTS AND


11

employment issues of modern human rights legislation, butto go beyond them to cover questions of freedom of associa-tion more generally. With a little more ingenuity it coulddeal with such matters as monopoly and freedom of expres-sion more generally. And this enactment is not directedtowards the criminal law, including the requirements of ahearing with notice of charges before an impartial tribunal.But over its chosen contractual and associational domain,this statute can be understood by anyone of ordinaryintelligence in a relatively short time. It requires no specialadministrative agencies or elaborate tribunals to enforce itsrules, nor do those rules have an ad hoc quality. Here is thecomplete statute.

Human Rights Act, Revised

S1. Every individual and group shall, in the use anddisposition of property or labour, have the right tocontract, associate or otherwise transact or do busi-ness with any other individual or group whom theychoose on whatever terms and conditions they see fit,and for whatever purposes they see fit, be they com-mercial, social or religious.

S2. Every individual and group may refuse to contract orassociate with, or to otherwise discriminate for oragainst any other group or individual for whateverreasons they see fit, including without limitation, race,creed, sex, religion, age, disability, marital status, orsexual orientation.

S3. (a) Every individual or group may ask of any otherindividual or group any question they see fit, nomatter how offensive, impertinent, illegitimate, super-ficial or irrelevant.(b) Every individual or group may refuse to answerany question, however tactful, pertinent, legitimate,insightful, or relevant.

S4. (a) Every agreement, contract, or association shall beconstrued in accordance with the ordinary meanings


of its terms, as informed by custom and common usagewithin the relevant trade, industry, or social or reli-gious grouping.

(b) No construction or interpretation of any agree-ment, contract, or articles of association shall be madeor influenced by principles of unconscionability,adhesion, inequality of bargaining power, contraproferentem, or any other rule that presumes oneparty to the agreement or contract enjoys a protectedor preferred social status relative to the other.

S5. Every individual or group shall have the right to offertransportation or other services for hire on the publichighways, waterways or in the public airspace, subjectonly to reasonable and nondiscriminatory regulationsimposed in the interest of public safety.

S6. All actions brought to enforce rights under any con-tract, agreement or association shall be commenced inthe County Court. The Commission for Racial Equal-ity, the Equal Opportunities Commission, the Disabil-ity Rights Commission, Employment Tribunals, the ...,the ..., and the ... are hereby abolished.

The Two Approaches Compared

United States anti-discrimination laws give rise to problemsat least as grave as those found in Britain. The Americanlaws have been in place for longer, and our administrativeapparatus has grown in power and influence at every leveland layer of government.

To facilitate our comparison, consider first how informa-tion will be generated and transmitted in any market. Inmy own proposed model the process is quite simple. Oneperson can ask another person any question at all. Thatparty can decline to answer, and thus refuse to give theinformation that the questioner seeks and believes isrelevant. If the questioner receives no reply, she is facedwith a choice: she can simply accept that she does not havethat information, or she can put the same question tosomebody else who may be willing to answer it. By these

HUMAN RIGHTS AND


13

simple interplays between individuals, the right amount ofinformation will tend to be generated about factors that arerelevant to certain long-term contracts, whether they be foremployment or for the sale of property. In this system thereis no external measure of relevance: there is simply aninterchange between two parties to decide what they careabout and how it will be provided.

This system deals much more powerfully than alternativesystems with one of the major criticisms of markets whichare used to justify state action. It is often said that peoplecannot make rational choices where there is incompleteinformation. But anti-discrimination law has the statetaking exactly the wrong approach by forcing people to be‘blind’ about issues that matter to their own welfare. Anti-discrimination law is the complete opposite to a full disclo-sure statute such as we have in securities law (which I alsobelieve to be a mistake because of its mandatory nature).The ‘informed choices’ that we prefer people to makebecome ‘uninformed choices’, because the legislationdeprives people of information they would regard asrelevant, even if the state does not. The conclusion fromstandard theory on markets and information is that thefactors regarded by anti-discrimination as irrelevant fordecision making are in fact highly relevant, indeed critical.British law is heading full bore in the wrong direction.

Age is a good example. Nobody can doubt that age isrelevant to certain decisions as to whether or not to hire aperson for a certain job. We think about age when wecontemplate marriage, for all the obvious reasons. Similarobvious reasons apply with respect to jobs. An organisationhiring individuals is not just hiring them for the immediateperiod to which the initial contract of employment applies.It is attempting to hire people who will also be with theorganisation years—or even decades—down the track. In sodoing, it will be attempting to amortise the costs of hiringand training a person over the expected period of theemployment relationship. If we are hiring somebody in thecontext of a 20-year time frame, a 58-year-old person (like


me) will clearly expose us to much greater retirement riskand mortality risk than a much younger person. We will beless likely to recover our investment over the life of thecontract. We act rationally when we decide that thisparticular position should be awarded to someone else.

In many circumstances, then, rational decisions about theuse of human capital and long-term employment contractsnecessarily require information about age. When statuteshere and in the United States lay down that age is irrele-vant and prevent mandatory retirement, they are effectivelysaying that somebody in the government knows so muchabout the workings of business that they can tell every firmadopting a contrary practice that they are wrong-headed.The implicit proposition is that all of these firms have failedto understand some hidden moral imperative or practicaleconomic argument in structuring their employmentarrangements. It is one thing merely to be wrong in particu-lar cases. No system, no management team functionsperfectly, no matter what the incentive structure. But it isquite another thing to be wrong system-wide, withoutpossibility of correction, which is what happens when thestatute asserts a monopoly over wisdom, and forces every-body else to follow its dictates against their own betterjudgment.

It would be a mistake to assume that older workers arealways harmed by discriminatory policies. It is easy toidentify other reasons why firms may want to discriminateby age—reasons that run in the opposite direction. A firmmay wish to hire people with experience, or people of acertain age, because they will be more compatible with thefirm’s customer base. Under some circumstances, theperson aged 35 may be unsuitable to the job and the personaged 58 highly desirable. It is mistaken for the law toassume that, if people acquire information on age, they willalways use it toward the end of excluding older people. Thereality is entirely more nuanced and complex. What peopleare looking for has nothing to do with discrimination in theinvidious sense, but with fit. If individuals are allowed topair up on that basis we will see higher employment and

HUMAN RIGHTS AND


15

output, because the matching of people to jobs will be moreappropriate to the tastes and temperaments of individuals.The more one understands about human resource econom-ics, the more apparent it becomes that every single charac-teristic regarded as irrelevant under anti-discriminationlaw may in some settings be absolutely critical for theintelligent deployment of resources. One cannot have a 100per cent error rate by chance. Results that are bad comeonly when the initial premise is itself faulty.

I have thus far argued that anti-discrimination law is somisconceived that it is pointing in precisely the wrongdirection. Relaxing the prohibition on age would not be anattempt to switch the advantage from old to young, or fromyoung to old. It would be a move designed to achieve abetter fit between jobs and the people who fill them. Anyonewho works in management will tell you that fit, morale andcohesiveness are critical to the culture of an organisation.Yet these ‘soft’ features—so important to the operation ofmarkets–are ignored by a blunderbuss statute that para-doxically takes a highly atomistic view of an employee’s‘merit’ that is routinely rejected in market settings. Thattruncated view of fit survives only on the false premise thatsome omniscient being knows how every institution shouldrun, from a small shop to a large manufacturing corpora-tion. The statute is an example of the one-suit-fits-allmentality that is so destructive of productive humanrelationships.

The discordant element in the British anti-discriminationlaw relates to the tendency of enforcement agencies to worryso little about costs relative to benefits. It is simply notplausible to assume that a person who is involved full-timein a business, with incentives to examine every conceivableoption to make the business run better, can overlookmeasures which would be to the advantage of his owncompany, while somebody who looks at it from the outside,without any financial responsibility whatsoever, and withall sorts of implicit biases based upon a different institu-tional agenda, will get it right. I am not arguing that firms


are always right and regulators always wrong. I am arguingthat it is absurd to suggest that a regulator second-guessingthe commercial decisions of a company will do that task aswell, over the long run, as the company itself. We shouldplay the sensible odds.

I believe that my own one-page statute meets, at least asa first approximation, the requirements of a human rightslaw in a much simpler and cheaper fashion than the currentsystem. If somebody does not like this statute, can theyimprove upon it? Can they justify the hundreds of millionsof pounds in foregone economic efficiency that will berequired to run an alternative system? I think not. It isimportant, too, to understand what my alternative statutereally means. It does not say that we like, invite, encourageor celebrate stupid, ignorant, foolish, invasive and impert-inent questions. Rather, it effectively says that if we allowindividuals to choose the questions they are legally entitledto ask, the incentives they face will lead them to ask whatin practice turn out to be the most relevant types of quest-ions. They will tend to discriminate in ways that areproductive rather than invidious. In fact one advantage ofthe statute is that it makes it far easier for people to adoptvoluntary affirmative action programmes if they so choose,without having to explain to others why they choose to doso. In light of this option, we cannot conclude that this is astatute that announces we have no moral sense and nosocial conscience. It merely says that our legal rules shouldbe those that are relatively lean with respect to what werequire of other individuals, and that the set of socialsanctions which are informally developed and articulatedcan, at far lower cost, deal with repugnant forms of conduct.Any contest between the alternative package and my singlepage is like a battle between a 1942 vacuum tube specialand today’s integrated circuits on a chip, in terms of theircapacity to deliver services relative to the cost of theproduct.

I am of course aware that certain recurrent objectionswill be raised against this position. For example, it will besaid that this simple statute presupposes that markets are

HUMAN RIGHTS AND


17

perfect when of course we know that they are not. No oneshould believe that markets, even competitive markets, areperfect instruments of social policy. But the question ofimperfection cuts both ways. If markets are imperfectinstitutions, then legislation is also imperfect. We mustmake an assessment of the relative size of the imperfec-tions, given the incentives under which people operate inboth settings. To the extent that individuals have both self-interest and information about themselves, they arecorrespondingly better judges of their desires, and betterjudges of what they are willing to sacrifice in order to obtainthose desires. Any system of regulation with compassionmust be able to provide people with what they want. Howcan regulators know what people want? Legislation osten-sibly designed to benefit one group can end up harminganother. For example, curb cuts will help people in wheel-chairs, but make it harder for people who are blind. Weneed to be very aware of the situation on both sides beforewe can be sure whether we are helping individuals.

Similarly, self-interest is a force to be reckoned with in alllegal orders from the nightwatchman state to the plannedeconomy. Viewed abstractedly, self-interest may become adestructive force or it may be immensely creative. Whichoutcome dominates generally depends on the incentivestructure that surrounds the self-interest. It is very easy totalk about such things as market failures, monopoly andinformation problems, but it is equally critical to recogniseand discuss candidly the failures of democratic systems:capture, faction, intrigue and special interest. Neverassume away public choice difficulties and the perverseoutcomes that can flow from any ambitious legal prog-rammes.

18

2

Age Discriminationand Employment Law

The topic of discrimination in the law of employment isone of the growth industries of our time. The issue

covers the gamut from race, to sex, disability and age. Thislast category is perhaps the most important because thedogged insistence that age be disregarded or de-emphasisedin employment decisions cuts against the grain of theemployment policy of virtually every well managed privatefirm. As an outsider, I will try to place the overarchingissues in a wider international context. The problemssurrounding anti-discrimination laws are far from uniqueto Britain and afflict many other countries, including theUnited States.

Contrasting Philosophies in the Labour Market

What is the most appropriate form of regulation to governthe employment relationship? It should be stressed that Iam not advocating some anarcho-capitalist system in whichthe law takes absolutely no interest in employment con-tracts. The serious debate has always been between thosewho believe that the primary function of employment law isto respect the contractual terms emerging from a markettransaction and to enforce those terms with the aim ofproviding contracts with greater stability, and those whobelieve that some of the contractual terms emerging fromnegotiations will be distorted or biased in ways that call forlegal redress.

While some anti-discrimination measures are clearlymisconceived, it does not follow that we should proceedautomatically to a system of completely free contracting in

AGE DISCRIMINATION AND EMPLOYMENT LAW 19

the labour market. We might still wish to impose somespecific limitations on contractual freedom. Indeed there arereasons rooted in the common law not to enforce certaincontracts, although most are relatively unimportant in thecontext of labour law. For instance, we need not concernourselves with contracts designed to kill or maim thirdpersons. Nor are we troubled by violations of antitrust orcompetition policy, which almost by definition cannot arisein individual contracts between employers and employees.Thus we face no problems arising from the external effectsof contracts that might lead a legal system to deny theirenforcement.

We might also choose not to enforce a contract if therehas been some defect in the bargaining process. But astriking feature of employment contracts is that they aretypically not tainted by fraud or duress. There are rarelyany hidden or surprising conditions associated with them,and certainly none that requires a system-wide publicresponse. On the contrary, employment contracts aredesigned to facilitate long-term relationships. Peopleundertake their jobs day in and day out. At least after awhile, they have good knowledge of their working cond-itions. In these settings, with fairly full information, wagesand other key terms of employment contracts are not likelyto cause unfair surprise.

To the extent that sudden and unpleasant surprises dooccur and alter the expectations on which a contract isbased, the typical reaction is readily anticipated. Workerswho find themselves short-changed in one job will simplyleave for greener pastures elsewhere. It is this ability toquit—and the consequent cost to a firm of finding andtraining a replacement—which constrains employers in thelabour market so efficiently. It is easy to overlook theadvantages that a contract at will has for employees.

Open Markets Penalise Irrational Discrimination

Adherents to the interventionist philosophical traditionhave attempted to counter the movement towards a moreliberal labour market. One part of their tradition is the


legislation known as anti-discrimination laws in the UnitedStates. These laws are based on the assumption thatemployers are so irrational, so prejudiced and so unwisethat they will turn down well-qualified applicants simplybecause they are blinded by some antiquated prejudice. Inconsidering applications, employers find there are a widevariety of grounds that they are simply forbidden to takeinto account. Criteria such as race or sex have long beenfavourites for legislators in this tradition, while morerecently grounds such as sexual orientation, disability andage have been added to the list.

In reality, the basic argument for freedom of contract isso strong that it leaves no role for anti-discrimination laws.While such a view is easily defended, it is regarded as veryradical in some quarters. On a recent visit to New Zealand,I defended the free contracting position in a debate with thechief human rights commissioner, Pamela Jefferies, in away that she found rather shocking. But when analysingprejudice in employment markets, people such as MsJefferies make the mistake of assuming that markets arelike politics. In politics there is one outcome that applies toeveryone, and it tends to be determined by the attitudesand behaviour of the median voter. But the sentiments of amarket are not uniformly determined by some ‘average’ or‘median’ participant. There may be a market in which largenumbers of people harbour all sorts of irrational andoffensive prejudices. Yet as long as there is some segmentof that market where people can be hired on the strength oftheir qualifications and ability to do a job, wages will not belower in that sector. In economic terms, the importantpersons are those who operate at the margin, not those inthe middle of the pack. Provided there is open entry, anygood worker who is temporarily neglected in one section ofthe market will find alternative employment elsewhere.

Of course, it may take some time before individual firmsrespond to competitive pressures. But ultimately a firm’sprejudices will rebound to harm the firm more than thepeople it refused to hire. After all, it is simply not goodbusiness to refrain from hiring women or blacks on the


basis of some irrational dislike of these groups. Once firmsappreciate that fact, prejudices do not last very long bycutting off access to a low-cost supply of high-quality labour.Thus, if we observe persistent discrimination in some form,we should not automatically assume it is bad. Rather thanbanning it, we should ask ourselves why such discrimina-tion might make sense in terms of the specific employmentrelationship. And before considering the legislative alterna-tive, we should recognise that the rigidities that banningdiscrimination will produce in the end will increase theemployer’s search costs and the switching time for workersand employers alike. The positive search costs that discrim-ination may create are not simply eliminated by an anti-discrimination law, even one that is responsibly adminis-tered. Any ‘for cause’ requirement for hiring and firing willnecessarily slow the time for hiring and force qualifiedapplicants to jump (if not trip) over another set of hurdles.

The Special Case of Age Discrimination

Given these general observations, I think it would be amistake to assume all anti-discrimination laws have anequal impact on the day-to-day operation of the market. Itis worth stressing that the most dangerous of all the humanrights laws is potentially the prohibition on age discrimin-ation. The reason hearkens back to my opening observa-tions. In the absence of any human rights law, very fewfirms would have an explicit policy of saying ‘no womenwelcome here’, or ‘no blacks welcome here’, or ‘no Jewswelcome here’. That is not a clever way to attract business:in attracting a few people, the firm would guarantee thathundreds more would stay away. It would have worked apublic relations wonder in reverse.

But the practice regarding age discrimination is verydifferent. Before the introduction of the anti-discriminationstatutes in the United States, chief executives in theirmid-50s were putting in place mandatory retirementpolicies for themselves and everybody else on their staff,including the senior staff with the greatest economicinfluence and power. If this practice was widespread, why


should we assume collective irrationality in this part of themarket? The answer is not that these business people werestupid and failed to understand the consequences of theirdecisions. The only parties that failed to understand theconsequences were the legislatures that passed thesestatutes. Ironically, it is the defenders of anti-discrimin-ation laws who often accuse me of being out of touch. Timeand again I am told: ‘You cannot talk intelligently aboutlabour relationships, Professor Epstein, because you havenever been in business or managed a workforce. You areonly a university professor, locked away in your ivorytower.’ I fully accept the charge that I am ignorant abouthow many individual business people run their firms. Butthat is precisely the point. Suppose somebody in a legis-lature has actually worked in one job, at one place, at onetime prior to taking public office. They now have (or,perhaps, had) an intimate knowledge of perhaps a handfulof people in a particular business, whether in London orChicago. What makes that person so confident about how tofigure out the best employment policies for everybody elsein Britain, the United States, or anywhere else?

The whole point about markets is that each of us hasknowledge that only encompasses a very small part of theworld around us. Whenever I hear politicians speak aboutuniversities, I take a deep breath. Indeed my knowledge ofthe University of Chicago does not translate easily into aworking knowledge of its peer institutions. Similarly, ifbusiness people heard me pontificating about how theyshould organise their production lines or computer systems,they would breathe just as deeply. The point is that neithermy views nor those of anyone else should rule absolutely inall factories and offices. If business people decide that amandatory retirement age is not appropriate in their ownbusiness, they can eliminate it voluntarily. If they believesome extremely talented person should be exempt from amandatory retirement rule, they can make that case to theirchief executive. The fact that mandatory retirement ruleshave been in place over long periods of time suggests notthat these policies are silly, but rather that they have a


rationale sufficiently powerful to command broad supportamong businesses operating in a wide range of industries.Our job is to understand what that rationale is.

Naïve Assumptions By the Regulators

The proponent of an anti-discrimination statute typicallycomes forward with a smooth and reassuring speech. ‘Weare eliminating arbitrariness in business’, it goes. ‘Arbitrar-iness is of course bad, and we are replacing it with aprinciple with which everybody agrees. We are simplyrequiring all employers to assess individual workers solelyon their ability to do their job at any given time. Outmodedemployment policies are replaced with merit assessments.Who is against merit?’ Strangely enough, at this pointnobody raises a hand. It is like asking whether anyone isagainst motherhood. The proposal is made to sound soreasonable that anyone who has been doing somethingdifferent is by implication too ignorant to understand thestrength of this progressive new idea.

However, the argument can only take this form if wemake a particularly naïve assumption about social behav-iour: that one change in a legal rule leads to only onechange in social consequences. Thus, if we eliminate themandatory retirement policy by legislation, everything elsein the firm is expected to continue exactly as before. Therewill simply be splendid new merit-based assessments inplace of the old policies, which were arbitrary and worth-less. Businesses will be better off (despite having opposedthe statute) and nobody will be worse off. Who can resistsuch an alluring outcome?

Unfortunately, similar arguments have been made inother contexts and have always been proved wrong. Forinstance, the attention of legislators too often falls on theminimum wage law. For them, raising the minimum wagecan only have one consequence: it will raise to a newminimum level the wages of workers who were below thatlevel, and nothing else will change. In reality, we knowthere will be other consequences. If the price of labour (i.e.the wage rate) rises, the quantity of labour employed by


firms will fall, leading to a rise in unemployment. While theempirical studies show that the employment losses from theminimum wage are not quite as high as simple theorywould predict, this does not mean that the negative conse-quences are not as great as claimed. It merely shows thatthe simple theory failed to incorporate all the other ways forfirms to adjust their behaviour at the margin.

For instance, a firm might continue to employ the samenumber of workers after a rise in the minimum wage, butno longer provide free training. Instead it might requireworkers to enrol in training classes at their own expensebefore being hired. Or a firm that had given its workers theconvenience of single shifts might now demand split shifts.Or it might now require its workers to purchase their ownuniforms or equipment, rather than pay for them itself.There are hundreds of different ways in which the employ-ment relationship can change. The idea that altering asingle variable like the minimum wage will leave all othervariables unchanged simply defies the laws of economics. Itis like a chemist saying that salt can be added to a solutionwithout changing the concentration of sodium and chlorineions. Everything is elaborately interconnected. Any impor-tant perturbation to the system will have powerful conse-quences in many directions over the long term.

Exactly the same logic operates in the case of age-discrimination laws. We must ask ourselves: ‘If we pushhere, where will the bulge appear? What changes will takeplace, and why?’ To answer those questions we need toconsider why many firms had mandatory retirement rulesin the first place. There are a variety of reasons. Someconcern the relationship between the individual employeeand the firm. Others concern the overall composition of afirm’s workforce and its desire to keep its stock of humancapital deployed over time in a reasonably coherent fashion.

Younger Workers Learn Faster

Let us consider first individual workers. An ongoingproblem for any firm is how to train its workers for tasksthey will be performing in the future. It is a great illusion,


to which academics are not immune, to imagine that onlyschools and universities provide education. Firms in factsupply huge amounts of training to their workers in variousways. Sometimes they take their workers for a weekendretreat where they teach them new computer systems.Other times it can be on-the-job instruction. When a firmmakes investments in education and training, two featuresassociated with the return from those investments are ofobvious concern.

One is how quickly the new knowledge is absorbed by therelevant employees. Compared with my sons in their teens,I am a person with ten thumbs when it comes to learningnew computer skills. They are simply much more adept atpicking up modern technology than I am. I am clearly notalone in this predicament: after all the common joke is, ifyou don’t understand your new computer, have your ten-year-old explain it all to you. Thus, when it comes toassimilating new types of information, people shouldrecognise that younger employees can have very powerfuladvantages.

These differential abilities do not pass unnoticed inbusiness. When investing in its workers, a firm facescertain decisions. It wants its older workers to keep per-forming those tasks that they do well. But it will probablynot select those workers for training and development whennew ventures and promising lines of innovation are in-volved. It is one of those truths that everyone knows but fewpeople are prepared to acknowledge: flexibility and plastic-ity diminish with age, not in all cases, but surely on aver-age. A large percentage of older workers are set in waysthat are not easily altered or undone. Employers know frompractical experience that it is true, and the fact that somepolitician dares them to state the obvious should not justifytheir remaining silent. They should plainly point out thatthe ability to learn new tricks is different at different agelevels. This means that, on average, the responses of olderpersons will at some stage, and for some roles, be inferior.

There is a line of cases in the United States involvingairline pilots who had been forced to retire as pilots at age


60 by the Federal Aviation Authority. When the time forretirement arrived, the pilots insisted on their right to betrained as flight engineers. So these 60-year-olds, who hadbeen pilots all their lives, were put on the same trainingcourses as navigation engineers in their mid-20s. It was asthough these 60-year-olds simply could not learn. Theyslowed up the classes, but they could not handle theprocedures; they were absolutely hopeless students. Yetthey had been fine pilots, which demonstrates just howspecific certain skills can be. In this case employees weresimply moved from one seat in the cockpit to another, yet asa group they went from being excellent performers, albeiton a downward slide, to being totally inept. That sort ofproblem can occur in training situations: employers know it,workers know it, and businesses adapt to it. Only thegovernment remains resolutely ignorant of it.

Different Investment Pay-offs and the Problem ofCross-subsidies

Even if we assumed that the performance level of differentage groups was identical, we would still be confronted withthe problem of the anticipated pay-off to a firm for investingin a worker. When a competent company hires a youngworker, it knows how to structure its compensation ar-rangements to maximise its chances of keeping that personfor a lengthy period. If a firm does the job properly, today’sinvestment in human resources might be paid back over aperiod of three or five or seven or ten years. But if a com-pany hires a 65-year-old and makes the same investment,the risk that the person will suffer a health problem soonafter and leave the workforce is obviously greater. The rateof return could fall considerably if the period during whichthe investment is repaid were to be suddenly truncated.

This problem is not confined to firms. It is also a problemconstantly faced by universities now that mandatoryretirement has been removed. No PhD student wants tosign on with a thesis supervisor who is 75 years old. At best,four or five years down the track that person will be 79 or80, while at worst they will be retired in Miami or perhaps


dead. The student will be left high and dry with a thesisthat cannot be completed if another supervisor cannot befound. Of course there are risks with a younger thesisadviser (such as their moving to another university), butthey are much smaller. The same situation occurs in anyother business. If management has any foresight, it willattempt to plan for the long term. Managers must take intoaccount the likelihood of workers quitting or becomingdisabled, and that will increase sharply with age. Here,then, is one area where the new law leads to either irrat-ional investments or to costly attempts to circumvent them.

There are other problems. Wages are typically only partof the total compensation package that a firm provides to aworker. There is also a range of formal and informalbenefits, which can often include health insurance as amajor component. Nobody would claim that the costs ofthese benefit packages are invariant to the age of workers.And if companies must pay the same benefit package tosomebody aged 70 that they pay to somebody aged 40, andif insurance companies are permitted to discriminate, thoseinsurance companies will charge differential rates. If theycannot discriminate, they may be forced to abandon theentire line of business. It just becomes too risky to acceptpeople at rates that do not allow the companies to covertheir costs. Even if insurance companies seek to raise ratesuniformly across the board, they will face a serious adverseselection problem because the younger persons who poselower risks will abandon the system, so that the statedpremium will not cover the more substantial risks of theelder persons who remain.

This jostling over rate structures leads to the question ofwhat counts as discrimination, and here the statutes areenormously, and perhaps deliberately, ambiguous. I wouldprefer to define discrimination as differences in wage levelsthat do not reflect differences in performance or risk levels.But according to one definition of discrimination, onecannot take risk levels into account. All people are entitledto the same formal benefit for the same work. Thus, age-discrimination statutes effectively lead to enormous and


complicated cross-subsidies within a firm. We know whathappens when we create internal subsidies. Those peoplereceiving the subsidies will remain with the firm for a longtime, while those paying the subsidies will quickly leave.This has serious implications for the firm’s long-termviability, not to mention the morale of its workers. It alsofavours newer firms with younger workforces relative toestablished firms with older workforces.

Disrupting the Orderly Transition Between Genera-tions

A coherent firm organises itself by planning what we mightcall an internal firm inheritance. It plans for the transmis-sion of knowledge, skill and managerial talent from onegeneration to another. One of the great merits of a manda-tory retirement rule is that everybody knows roughly whena transition will take place. Younger workers do not sitaround restlessly, waiting for arbitrary decisions to be madeby senior executives to decide when to go. The senior peopleknow they are leaving. Because they have pride in theirbusiness, they apply themselves to training their succes-sors, so that the business can continue to renew itself overtime in an orderly manner. Mandatory retirement ruleseffectively solve the succession problem for businesses inthe way elections solve it for democracies. They ensure anorderly turnover.

Suppose that we now interrupt this transition cycle. Wesay to somebody who is 68 years of age: ‘You do not have toretire. If you stay, you will not be engaged in turning thisbusiness over to somebody who in two years will be 44’. Thetutelage of the younger generation will cease in conse-quence, because there is no longer any reason for it. The 42year old will say: ‘Why should I stay around indefinitely ina subordinate role? I will chance my luck somewhere else.’Typically, established firms will be handicapped relative tonew entrants. New firms will be created by younger peopleopting out, frustrated at waiting behind their more seniorcolleagues. So, if statutory prohibitions of mandatoryretirement are enforced, I confidently predict that it will


shift the balance of advantage between firms. An estab-lished business, which once had an edge through its abilityto transmit information, will now be at an enormousdisadvantage because it will no longer be able to do soefficiently. Most of the people to whom it would haveotherwise transferred the information will simply go out ontheir own. New firms will have an undeserved advantage.It will not result from anything in their human capital orfirm culture, but from the peculiar disruption of successionplanning in their more-established rivals, another unin-tended consequence induced by the statute.

We can now see that statutes banning mandatory retire-ment suffer from two major disadvantages. First, theyadversely affect how a firm deals with individual employ-ees. But perhaps more importantly, they change thedistribution of age, the transmission of information, and thetransmission of control inside the firm in ways that couldthreaten its very stability. And rational business people willclearly take some countermeasures in response to thislegislative intrusion.

A newspaper article written by a thoughtful commentatorrecently described the new dynamics operating in his bus-iness with performance reviews. Under mandatory retire-ment, if an employee was a year or two within the age ofretirement, deterioration in performance was generallyoverlooked because all parties knew that person would soonbe leaving. At present if a manager finds a slight deficiencyin performance that enables them to dismiss somebodyapproaching normal retiring age, that manager will takeadvantage of it, because the dignified exit afforded bymandatory retirement is no longer available. The statutehas given employers a new inducement to find fault withtheir employees. With automatic retirement, it was notnecessary to build up a specific dossier for requiring anemployee to leave. But with the mandatory retirementoption closed off, an employer has incentives to gather allthe dirt on a person in a big folder, and use it to justify adismissal. Undignified and inhumane procedures substitutefor a graceful exit.


All of this must be regarded as an industrial relationscatastrophe in the making. And there is no reason for it:that is why we had mandatory retirement policies in thefirst place. Companies did not have individual case-by-casereviews because everybody understood that the politicsinvolved in deciding exactly how long one person stayed andwhen another person would go are very ugly. A companywould rather see both people go at the same age. Then, ifone of them was competent while the other wasn’t, thatperson could be re-hired after retirement. If one firm had apolicy of not re-hiring its former employees, some other firmwould seize the opportunity. And the firm that releasedthese employees could hire people who were released undermandatory retirement by some other firm.

A firm’s mandatory retirement rule is simply a contrac-tual policy. It is not an industry-wide ban on certainindividuals. Paradoxically, that rule prolonged the usefulworking life of people. If workers approaching retirementwanted to continue working, they had a powerful incentiveto perform well in their last years at the firm. They wereanticipating going back to the market, which meant keepingtheir skills high. Now that situation is completely reversed.

In universities, the market for older academics has beenvery important. After the second world war, the Universityof California essentially built its reputation as a first-rateinstitution by hiring staff from eastern universities whowere in their early-60s and who faced retirement. Theychose the best people they could obtain, gave them five-yearcontracts, and asked them to start a department and hirethe next generation of academic staff. These days, if univer-sities employ somebody for a year they may be forced tokeep that person for a lifetime. The market for olderacademics is now dead. This obviously means that universi-ties have to sack non-performers, and that firing people isoften fraught with litigation.

Courtroom Follies and Escape Routes

In the United States it is extremely difficult for an employerto win age discrimination cases. Generally they must


demonstrate some incompetence in the employee. But anemployer typically has two factors in mind when assessinga specific worker’s future. One factor is overt instances ofincompetence. The other, which the employer knows but isnot permitted to articulate, is the tendency for a person’sskills to ebb slowly as they age. It happens to baseballplayers, to computer programmers and even to law profes-sors. If this is indeed a general tendency, the attitude of anemployer will simply be to dismiss an employee, perhapswith a pension or an elaborate send-off, before their skillsdeteriorate too far. They would rather obviate the problemthrough an orderly transition.

But when such a dismissal case ends up in court, and theemployer offers evidence that on average the productivity ofa 72-year-old male is only, say, 84 per cent of that of a66-year-old male, the employer will lose. All evidence mustrelate to the specific individual in question, and thisrequirement leaves employers with a huge problem.Typically it is not spectacular under-performance that leadsan employer to want to release a worker. It is the em-ployer’s general understanding of the path on which thatperson is travelling. The courts and statutes essentially saythat not everything that is known about the situation canbe used. For example, the general trends in employmentmarkets are deemed irrelevant. Only facts about aging withrespect to a specific worker are legally relevant. Reliance ongeneral trends is assumed to indicate irrational prejudice.

In other words, anybody who is a good probabilisticcalculator, or who simply has learnt the lessons fromlong-term experience, must disregard this entire class ofevidence. Instead, any evaluator must concentrate on asingle employee in isolation on the grounds that everyworker is potentially an exception to any general rule. Butit will never be the case that the longshots will always comehome, or that the exceptions will prove more importantthan the rule. Cognitive psychologists remind us constantlyof the dangers of disregarding base rate evidence. The agediscrimination laws, far from countering that bias, reinforceit.


Notwithstanding this bleak picture, there are three raysof hope, at least in some businesses, for offsetting the worstside-effects of the age discrimination law. First, workerssometimes wish to retire early. To the extent that there isvoluntary agreement on retirement, the problem is nolonger the age-discrimination statute. Rather, it is the costof the superannuation schemes that will be incurred, eitherpublicly or privately, to fund an ever-longer retirement. Ifother things are held constant, any worker demand for earlyretirement should ease the pressures on the firm.

Secondly, in some countries anti-discrimination statutescontain exemptions for senior employees. In the UnitedStates, accruing a sufficiently large pension entitlementallows a person to be forced to leave the firm at a given age.The costs to the firm of the wrong person remaining in aposition are much higher with top management than withordinary employees. For that reason, a board of directorswill be more eager to retain their capacity to replace theirchief executive at age 65 than to remove other employees.This standard industry practice demonstrates the mythicalnature of the common contention that labour markets arecharacterised by inequality of bargaining power. In thiscase, a chief executive does not have the power to obtain intheir contract an element that is possessed by the employeeon the most lowly salary. The obvious explanation: effi-ciency motivations drive ordinary contractual negotiationsat every level in the firm.

A third response is to buy off employees by paying theirpensions twice. In the United States, employees are some-times given large sums of money on the understanding thatthey will go quietly and waive any claims under the law forunjust dismissal. The legal validity of many of theseagreements is unclear. If an employer wishes to avoid acharge of coercion, much will depend upon the correcthandling of all the formalities, and the structure of thesedeals is now a major issue. Inevitably, a policy of providinga buy-out at the end of a person’s working life will impacton a firm’s ordinary pension scheme. Since employerscannot simply conjure up new funds out of thin air, the new


level of bargaining will inject an element that could leavemany employees with less income security than they wouldhave had under the previous contractual regime.

Conclusion: Do Not Tinker

Government tinkering with the employment relationssystem is fraught with pitfalls, no matter how benevolentthe intentions of legislators are to improve the lot ofworking individuals. Legislators cannot change just oneelement of a system that they regard as irrational, leave allelse untouched, and expect everything to go on as before. Aswith every other type of contract subject to governmentinterference, quite the opposite occurs. Changing a singleterm that is central to a long-term employment relationshipwill lead to private adaptations that will change much elseas well. The problem may be especially hard to see becausethe new changes could take place in dimensions thatpreviously were regarded as settled: offices, training, trips,or perks of all sorts could be called into play for no apparentreason, as employers and employees seek to establish a newequilibrium while subject to the legislative command.

The basic moral is that people in all walks of life optimisesubject to constraints, even when they are not consciouslyaware of what they are doing. If a constraint changes ordisappears, then the patterns that result from the processof optimisation will also change. This is learnt in theworkplace, as a reality confronting managers every day oftheir professional lives, and not just espoused by academiceconomists as an interesting theoretical possibility.

Regrettably, in today's climate of opinion, it takes courageto articulate this view publicly. It is senior executives whomust fight this policy, yet they are the very people who inthe short run are most likely to benefit from anage-discrimination law. That is a great irony. I hope Britishbusiness people will prove stronger at opposing this lawthan their counterparts in the United States.

Based on a speech made by Professor Epstein at a conference ‘The Regulation of the Workplace: Has It GoneToo Far?’, jointly organised by Civitas and the ManhattanInstitute at The Armourers’ Hall, London, 10 July 2001.

34

3

Laissez Faire andAnti-discrimination Laws

There is today a widespread consensus in favour of anti-discrimination laws. That consensus makes it both odd

and necessary to ask this question: do anti-discriminationlaws create more injustices than they solve?

In order to answer that question it is necessary to havesome sense of the landscape, which in broad outline is muchthe same in the United States as in the United Kingdom,even if the terminology differs in the two places. The ‘easy’case of discrimination goes by the name of disparatetreatment in the United States, and is called, less informa-tively, ‘direct’ discrimination in the United Kingdom andthe European Union. The ‘hard’ case of discrimination goesunder the name ‘disparate impact’ in the United States and‘indirect’ discrimination on the Eastern side of the Atlantic.The former involves cases, where from good motive or fromill, a different standard of treatment is applied to men andwomen, or to individuals of different races, ages andnationalities, where the ground of discrimination is re-garded as invidious or illegitimate, especially againstmembers of a protected class. Disparate impact cases resultwhen neutral laws have a larger and more adverse impactagainst the members of one group compared with another.

The disparate treatment laws are regarded as theparadigmatic cases of wrongdoing for which it is notpossible to find any social justification. The disparate

LAISSEZ FAIRE AND ANTI-DISCRIMINATION LAWS 35

impact standard is meant to backstop the disparate treat-ment standard by allowing the legal system to piercethrough the ostensible rationale for some distinction (e.g. aheight requirement for police officers) to show that it is adisguised effort, without justification (e.g. safety), to dis-criminate, even imperfectly, against members of one group(such as women) for the benefit of men. Clearly, the benefitsof striking down neutral standards are smaller than thosefrom knocking out explicit standards if only because somemembers of the under-represented class will meet or exceedthe standard: some women will be taller than 5 foot 10inches. Yet at the same time knocking out the distinctionwill be more costly because the requirement may well helpall workers to do their jobs more effectively (e.g. a policeofficer may be able to see over crowds for traffic control).

The key question is whether this edifice makes sense. Inorder to show that it does not, I shall move along the hardroad. I shall argue that disparate treatment theories ofdiscrimination are misguided, at which point disparateimpact standards fall of their own weight. In America anti-discrimination laws stress ‘disparate impact’ on ethnicgroups. The same doctrines are behind the UK’s ‘direct’ and‘indirect’ discrimination. The philosophical justifications arethe same.

My criticisms are somewhat unconventional. When Iwrote Forbidden Grounds1 I concluded that the UnitedStates 1964 Civil Rights Act—which many feel embodies agenuine liberal position—was a mistake and should berepealed. The common law provides a better frameworkbecause it allows people freely to enter into mutuallyacceptable bargains. The argument is simplicity itself. Thegreatest protection that any prospective worker or customerenjoys comes from the ability to choose his or her tradingpartners. The law deals best with discrimination by increas-ing the number of active players in the market. At thispoint it does not matter whether many or even most peoplewish not to deal with a given person. The prices and wagesin the market place are determined by the contracts madeby those, working at the margin, who are eager to deal.


Open markets are consistent not only with invidiousdiscrimination, but also with colour-blind behaviour, andwith various outreach and affirmative action programmes.It is decentralised control that creates this richness ofopportunity, from which all can benefit.

Let me go back to a larger question. How do we figure outthe boundaries between public and private action? What arethe limits of state coercion? On that question I am anunreconstructed defender of laissez faire. That is not anargument for anarchy, but what do I mean when I say that?The argument starts with a (rebuttable) presumptionagainst government interference in the setting of the termsand conditions of private contracts.

We should be reluctant to invoke state power for twomain reasons. First, it is costly for the state to direct actionsagainst people. Second, the state has monopoly power whichcannot easily be overcome, short of civil war. This power canbe abused.

But the presumption is not conclusive. When can it beoverridden? To defend laissez faire is not to defend anarchy.Yet since the presumption is not conclusive, areas of statepower remain. Some people use private force at the expenseof others. This is not tolerable and we are all generallybetter off living under rules requiring the mutual renuncia-tion of violence. Laissez faire is a system of social relations,not a system which asserts the rights of the individual overeverything else. It tries to suppress private activity whichcoerces others and to encourage voluntary actions andvoluntary co-operation which make all of us better off. It isnot a reckless type of ‘possessive’ individualism in whicheveryone is free to do whatever they want.

What behaviour can rightly be controlled? Certainly theuse of force comes first on the list, but also right after itcomes fraud or deception. The underlying insight is thatwhen individuals enter into voluntary exchanges bothparties benefit or the exchange would not be entered into atall. This is a distinctly social conception of right and wrongconduct that does not square with greedy or selfish behav-iours.


That said, voluntary exchange falls short in two mainareas: infrastructure and private monopoly. Take infra-structure: a road may need to be built across a piece of landand one owner can hold out for a very high price at theexpense of everyone else. In such cases compulsion may benecessary, which may be used so long as reasonable com-pensation is paid so that all taxpayers benefit and thepublic gain does not force one person to bear the brunt ofprogress by sacrificing his own property for the good of thewhole.

Monopoly is a transactional nightmare, so that stateaction to limit monopoly power is justified. But what aboutthe employment relationship? There is no monopoly here;only a set of management imperatives. An employer mustworry about the morale and motivation of employees. Theemployment relationship is complex partly because theemployer is also the agent of other workers. For example:should a minority of smokers be allowed to smoke in a roomshared by many non-smokers?

In the light of these one-on-many interactions, thecommon model of the dominant employer and the haplessemployee does not represent reality. Employers recognisethat the interests of the firm are best advanced by happyworkers. The employer has the power to discipline, butemployees can leave when discipline is misdirected. Thisexit option is a real threat, which is made more crediblewhen other jobs are open. There is no forced labour. Wherethere is a free choice of workplace the government’s roleshould be confined to enforcing contracts, not to forcingassociations that may not work because of the reluctance ofone side to pair up with the other.

What of the criticism that contracts may not root outdiscrimination? In some cases the point has force. Discrimi-nation creates trouble when a firm possesses monopolypower. Consequently the state should not create or sanctionany kind of monopoly. Among the great mistakes of recenttimes has been the encouragement of labour trade-unionmonopolies—in such cases governments are forced tointroduce a new set of safeguards in order to control thevery peril that they have created.


Nor is there any reason to intervene because most formsof bad employer behaviour are self-limiting. An employerdoes not want to get a bad reputation for discrimination.Reputation is thought to be a weak regulator but its effectscan be huge. A company with a bad reputation will not last.Losses will be suffered by shareholders and there will be areluctance by consumers to buy its products. What ifMcDonalds announced that it would have no women in itssenior management? How long would it be before it wasunable to attract able men to work for it? Market pressurestend to encourage non-discrimination. But there will beoutliers—perhaps fundamentalist employers who want allworkers to take part in morning prayers. Why should we beso confident of our judgement that we feel entitled to shutthem down? There is a powerful degree of intolerancebehind the wish to use force so freely. There is nothingglorious about using state power to prevent the continuedexistence and viability of fringe groups.

But you may retort: Epstein, you are naïve! What aboutextremists? If there is no anti-discrimination law, all thosemotivated by hatred will get away with it. But what is likelyto happen? There will be workforce segmentation; they, thebad apples, will tend to concentrate in one place. Myargument is that, whether the motives of the outliers arenoble or base, workplace segmentation will be less harmfulthan the use of force to outlaw it. What, for example, if theenforcement agency itself becomes intolerant and does notrepresent the majority view? The point here is far from idlebecause there are no competitive forces to constrain theoperations or the excesses of equal or fair employmentcommissions. Lord Acton’s dictum about absolute power canbe as true of government agencies today as it was of monar-chies when he wrote.

What about promotion at work and the place of qualifica-tions? One argument is that all promotions should be basedon independent tests of merit. Examinations allow people toshine regardless of their accent or physical appearance.Such tests are useful and employers should, of course, beallowed to rely on them as necessary if they see fit: after allthey have no incentive to give these tests inordinate weight


if they are imperfect predictors of future success. However,when you are putting together an institution, abstractmeasures of merit are not enough. How do people interact?What about the highly-qualified rotten apple? A personwith the highest qualifications may be a poisonous presencein an office. When an employer looks at people, he needs tofigure out all the intangibles. Regulators merely enforcetheir own view, but they do not have the ultimate responsi-bility to make the organisation work. Matters such asmorale, which are evident in the workplace, will oftenescape their attention.

Workplaces vary. In one market it may be best if theworkforce is all female, or all male, or all one race or highlycosmopolitan. Knowledge of what works best is likely to befound in local managers, not external regulators. The bestoutcomes will result when the state enforces contracts onlyand lets people make their own arrangements.

The law bans disparate treatment, and it also bansneutral treatment which has a disparate impact. As I notedbefore this expansion of the law comes with higher costsand lower benefits, even when tested against the anti-discrimination norm that underlies disparate treatmentcases. It cannot be assumed that regulations will always hitthe intended target. Often they do not. If you wish to createopportunity the best rule is: don’t worry about equalopportunity if that quest will reduce overall opportunity. Itwill make it harder in some cases for members of protectedclasses to be hired, because it is harder to fire them once onthe job. So avoid the pitfalls. Concentrate on eliminatingbarriers in order to create opportunity for all.

Once that is done, it could well be that some employers,for a variety of reasons, will choose to adopt affirmativeaction programmes. Well and good. But again, misguidedpublic policy is the upshot if a good practice is convertedinto a state command. No one quite knows what an affirma-tive action policy is. Laws can ensure free entry, but not aguaranteed access position. When they aim too high, theyfail to hit their target. As in all walks of life, good intentionsdo not a sound programme make.

41

Equality, Non-discrimination, andthe Labour Market: a Commentary

on Richard Epstein’s Critique ofAnti-discrimination Laws

Simon Deakin

1. Introduction

In his book Forbidden Grounds and in a number of relatedpapers, Richard Epstein mounts a powerful case against

anti-discrimination legislation. The essence of his case isthat discrimination is best dealt with by the market.Legislation which interferes with freedom of contract in thename of equality will simply end up blocking market forcesand making matters worse. This is not an argument for thestate doing nothing. Governmental action to suppressprivate coercion and encourage voluntary cooperation maywell be legitimate. The state also has a role in attackingmonopoly. However, in Epstein’s view, none of this justifiesthe range of anti-discrimination legislation which wecurrently see in the USA, Britain, and most of mainlandEurope. On the contrary, this legislation is part of theproblem, which governments would address if they wereserious about supporting the market.

In this commentary, I wish to focus on the relationshipbetween equality laws and the market. Contrary to Ep-stein’s argument, I aim to show that the non-discriminationprinciple supports the market. For individuals to partici-pate in the market, it is necessary that they should have thecivil capacity to hold property and enter into contracts.However, these classic liberal rights are not sufficient toensure effective economic participation. In themselves, theycannot prevent forms of inequality and social exclusion


which diminish the scope of the market and threaten itsexistence. A market which benefits only a minority ofsociety cannot ultimately be sustained. That is why thedebate about anti-discrimination law has such resonance inour societies today. It is precisely the spread of the marketprinciple in societies such as Britain and the USA whichhas led to demands for the expansion over time of anti-discrimination law. This process has not consistentlybrought about the desired results; indeed, anti-discrimina-tion legislation may not always be the best means of dealingwith social exclusion. However, we are more likely to makea reasoned assessment of the advantages and disadvan-tages of anti-discrimination legislation, and of its possibil-ities and limits, if we understand that it operates in a closerelationship to the market, rather than being fundamen-tally opposed to it.

I develop my argument as follows. Section 2 is concernedwith the kinds of legal institutions which are needed ifmarkets are to function. Here I argue that while Epsteinrightly concedes that markets do not operate in a legalvacuum, he has not offered us convincing reasons to believethat a minimal, private-law system of contract and propertyrights is enough for them to operate effectively. This isbecause a system of private law is compatible with thepersistence of forms of inequality and exclusion which willultimately undermine the market. The non-discriminationprinciple addresses this issue by providing for substantivemarket access, going beyond the idea of formal marketaccess which is found in private law. Section 3 examines ina wider context the case for and against freedom of contractin employment relations. There I suggest that the presenceof externalities and market failures often provides alegitimate basis for legislation regulating the employmentrelationship, and that such legislation, rather than denyingthe market, often works in conjunction with market mecha-nisms, such as reputation and exit, to enhance economicwelfare. A number of examples from employment anddiscrimination law are discussed. Section 4 concludes.

EQUALITY, NON-DISCRIMINATION, AND THE LABOUR MARKET

43

2. Markets, Institutions and Inequality

It is worth briefly restating the case in favour of allowing asubstantial role for the market in allocating resources inrelation to employment and other spheres of social activity,if only because the case often goes by default. One way ofputting it is to say that the market, through free exchange,allocates scarce resources to their most highly valued uses.This is said to be efficient in the sense of satisfying thesubjective preferences of market actors to the greatestextent possible. If we take society’s welfare to consist of theaggregate of the welfare or well-being of all its members,the allocation achieved through exchange under conditionsof perfect market competition cannot be improved on. Tothat extent, it is an objective to be aimed for, with thesupport of the law where necessary.

This rather technical explanation, derived from welfareeconomics, is perhaps something of a diversion from the realissue, which is about decentralisation and individualautonomy versus centralised direction. The market isthought to be advantageous because individual actors knowbest what their own preferences are. When individualstrade, they generate information about their own wants andendowments which is then available to others. In this sensethe market is a mechanism for releasing information andresources which are privately held, in such a way as tobenefit all those who participate in the process of trade. Theinformation and resources which are generated this way areimmensely more rich than those which would be availableto a central planner charged with the task of distributingresources on the basis of assumed needs or political prior-ities.

Thus, as Epstein says, a market is a form of social order.The right to participate in it is basic to the well-being ofindividuals; those excluded are fundamentally disadvan-taged. At the same time, the more individuals take part inthe market system, the greater the overall wealth and/orwell-being of the society in question. There is therefore acoincidence between the self-interested behaviour of marketactors, and the common good.


However, the conditions for this coincidence cannotnecessarily be guaranteed. The market contains elementsof spontaneous order or equilibrium, but it rests on instit-utions which may well not be spontaneous, and whoseexistence cannot be taken for granted. In the words ofRonald Coase, ‘if self-interest does promote economicwelfare, it is because human institutions have been de-signed to make it so’.1

What then are the institutions on which the marketrests? Epstein rightly points to the importance of the law ofproperty, contract and tort, or private law. Here he iswriting in a long tradition, traceable to the work of Hayekand, before that, of Hume. The argument can be para-phrased as follows. Private law respects the autonomy ofindividual action. Property rights ensure that returnsaccrue to those responsible for making the relevant invest-ments. Contracts vitiated by force, fraud and deception willnot be granted legal support, but, otherwise, agreementswill be enforced according to their own terms. Tort lawserves to protect existing property and contract rightsagainst interference, thereby further supporting the systemof exchange. The guarantee of equal protection under thelaw, and in particular access to civil capacity to enter intocontracts and hold property rights, ensures that marketsare open to those who wish to trade in them. Privatemanipulation of markets should be dealt with by antitrustlaw so as to maintain the integrity of the competitiveprocess.

Those who make the case for a private law system of thiskind do not deny that it may lead to inequalities of wealthand well being. However, this is not necessarily a problem.The market provides its own solution since inequalitiesincentivise those who, by misfortune or otherwise, fail toprofit from the system. Even if certain gains and lossesaccrue by chance, leaving some with what Hayek calls‘undeserved disappointments’,2 the law should not inter-vene, ex-post, to redistribute resources, since this wouldblunt incentives for individuals to invest in their own skillsand efforts.


45

In my view, it is right to see markets as resting on legalfoundations—or, at least, to see markets and the legalsystem as linked components of a wider social order basedaround the division of labour and voluntary co-operation.But the close association made in classical liberal thoughtbetween the market order and private law usefully high-lights certain inherent limits of the market. The market isgood at meeting one particular type of objective, namelysatisfying those wants or preferences which can be encapsu-lated in property rights. Conversely, the market will notprovide well in relation to those wants or preferences forgoods for which no property rights exist. In particular, itfails to work well in relation to so-called ‘non-excludablepublic goods’ or ‘indivisible commodities’, which as a resultoften end up being supplied by the state or by a non-marketsource such as a private monopoly.

Equally, the argument for markets is affected by theexistence of externalities, or unwanted third party effects.The market enables individuals to make mutually-agreedexchanges with others; but this only satisfies wants ingeneral if each transaction affects only those who are partyto it. If there are externalities, then transactions betweensome parties affect the opportunities of others to satisfytheir wants. While it is not obvious that state interventionis always the answer, as the ‘Coase theorem’ recognises,3 itshould be acknowledged that there may well be some scopefor intervention, given that the market is not necessarilyself-correcting.

But we can go further than this. For the market tooperate as a socially useful institution, it is necessary notsimply to have a system of property rights, but for individu-als to have endowments in the sense of items of value whichare tradable—as Robert Sugden puts it, ‘the market has astrong tendency to supply each person with those things hewants, provided that he owns things that other people want,and provided that the things he wants are things that otherpeople own’.4 In other words, the market has no inbuilttendency to satisfy the wants of those who do not havethings that other people want.


The implications for our understanding of the relation-ship between inequality and the market are considerable.Persistent inequalities mean that groups and individualsmay lack the resource endowments to enter the market ina meaningful way. In an extreme case, the market willdestroy itself unless these negative effects are counter-actedby non-market institutions in the form of regulation andredistribution. In a less extreme case, the market order willcontinue to function, but will fail to provide adequateeconomic opportunities for an increasingly large segment ofthe population. Even if the market survives in this atten-uated form, society as a whole is worse off than it would beif access to the market were widened.

Perhaps this is not a problem, since the market is doingnothing more than reflecting the inherited endowments ofthe individuals concerned. If they have nothing to bring tothe market in terms of skills and aptitude for work, noamount of redistribution will improve the terms of tradeavailable to them. However, observation strongly suggeststhat the ability to trade in the labour market depends onmore than the simple genetic endowments of individuals.Access to education, training, and membership of widersupport networks, including family ties, are also among therelevant factors. Unequal access to the resources whichindividuals need in order to enhance their human capitalcan have a self-reinforcing effect, worsening the position ofthe disadvantaged to the point where they are excludedfrom active participation.

In this context, social rights can be seen as the institu-tional form of those capabilities which Amartya Sen arguesare the condition for the effective mobilisation by individu-als of the resources at their disposal. Sen refers to ‘theconcept of “functionings” [which] reflects the various thingsa person may value doing or being. The valued functioningsmay vary from elementary ones, such as being adequatelynourished and being free from avoidable disease, to verycomplex activities or personal states, such as being able totake part in the life of the community and having self-respect.’ Within this context, a ‘capability’ is ‘a kind of


47

freedom: the substantive freedom to achieve alternativefunctioning combinations’.5

Capabilities, therefore, are a consequence not simply ofthe endowments and motivations of individuals, but also ofthe access they have to the processes of socialisation,education and training which enable them to exploit theirresource endowments. By providing the conditions underwhich access to these processes is made generally available,mechanisms of redistribution may be not just compatiblewith, but become a precondition of, the operation of thelabour market.

An example may illustrate this point. A conventionaleconomic view of laws which protect women against dis-missal on the grounds of pregnancy6 would be as follows.From the viewpoint of enterprises which would otherwisedismiss pregnant employees once they become unable tocarry on working normally, such laws impose a private cost.These enterprises may respond by declining to hire womenof child-bearing age who will, as a result, find it moredifficult to get jobs. If this happens, there may be an overallloss to society in terms of efficiency, because resources aremisallocated and under-utilised, as well as a disadvantageto the women who are unemployed as a result.

An alternative way of thinking about discriminationagainst pregnant workers is as follows. In the absence oflegal protection against this type of discrimination, womenof child-bearing age will not expect to continue in employ-ment once (or shortly after) they become pregnant. It is notnecessary for all market participants to make a precisecalculation along these lines; rather, a norm or conventionwill emerge, according to which pregnant women expect tolose their jobs and their employers expect to be able todismiss them without any harm attaching to their reputa-tion. The overall effect is that investments in skills andtraining are not undertaken, making society worse off as aresult. Women workers will have an incentive not to makerelation-specific investments in the jobs which they under-take. In an extreme situation, they may withdraw from


active participation from the labour market altogether, andnorms may encourage this too—as in the case of the ‘mar-riage bar’ norm, according to which any woman whomarried was expected thereupon to resign her position. Thisnorm was widely observed in the British public sector up tothe 1950s and, in the case of some local authorities, waseven enshrined in legally binding regulations.

What is the effect of the introduction of a prohibition onthe dismissal of pregnant women under these circum-stances? In addition to remedying the injustice which wouldotherwise affect individuals who are dismissed for thisreason, a law of this kind has the potential to alter incentivestructures in such a way as to encourage women employeesto seek out, and employers to provide training for, jobsinvolving relation-specific skills. The demonstration effectof damages awards against employers may over time leadto a situation in which the norm of automatic dismissal isreplaced by its opposite. Stigma attaches to those employerswho flout the law. As more employers observe the new normas a matter of course, it will tend to become self-enforcing,in a way which is independent of the law itself. Conversely,more women will expect, as a matter of course, to carry onworking while raising families, in a way which may have awider destabilising effect on the set of conventions whichtogether make up the ‘traditional’ household division oflabour between men and women.

Pregnancy protection laws, therefore, can be seen as aform of institutionalised capability. In other words, theyprovide the conditions under which, for women workers, thefreedom to enter the labour market becomes more thanmerely formal; it becomes a substantive freedom. Thisexample illustrates the effect which social rights may havein terms of widening market access.

3. Competition and Regulation as Forces Shaping theEmployment Contract

A possible response to the claim just made is that it is notin the interests of employers to engage in socially wastefuldiscrimination. The market system punishes employers who


49

discriminate, by harming their reputation. Moreover, em-ployees have economic power, in the form of the right to exitthe employment relationship where they perceive them-selves to be subject to unfair treatment. Richard Epsteinmakes these points as part of his argument for freedom ofcontract in employment relations in general and for thecommon law institution of ‘employment at will’ in particu-lar.

But how effective are extra-legal sanctions in inhibitingemployers from acting opportunistically? The option ofquitting is not necessarily available to employees who havevaluable economic assets—‘firm specific human capi-tal’—tied up in their jobs. Jobs are not always interchange-able, and searching for an alternative may be costly. Labourand skills cannot be stored, so that few employees canafford to be without employment for long. As a result, forreasons recognised long ago by Adam Smith:

it is not difficult... to see which of the two parties must, upon alloccasions, have the advantage in the dispute and force the otherinto compliance with his terms... Many workmen could not subsista week, few could subsist a month, and scarce any a year, withoutemployment. In the long run, the workman may be as necessary tohis master as his master is to him; but the necessity is not soimmediate.7

Nor is it clear that employers who act harshly or unfairlyto employees will suffer adverse reputational effects. Thereare often severe problems over the quality of informationsurrounding dismissals, and difficulty in verifying theconflicting claims made by the parties to employmentdisputes.

This is one reason why we see legislative intervention inthe employment relationship. In many jurisdictions,including Britain (although not the USA), employmentprotection laws offer solutions to some of the very problemsof ineffective sanctions and imperfect information which lawand economics scholars identify with legal regulation ofemployment. Unfair dismissal law,8 for example, is asym-metrical, in the sense that while it circumscribes the


employer’s sanction of dismissal, it in no way limits theemployee’s right to quit. If, as Epstein suggests, the em-ployee’s right to quit is an important means of controllingemployer abuse, this possibility is not affected in any wayby the enactment of a just cause standard for dismissal. Atthe same time, unfair dismissal litigation can be a highlyeffective way of generating information about employeropportunism. Employers with reputations to lose may thinktwice about acting in breach of commonly-accepted stan-dards when the effects of doing so will be ventilated in atribunal hearing.

Similar considerations apply in the context of the non-discrimination principle. The conventional economic under-standing is that the market itself provides the cure forsupposed discrimination. Employers with a ‘taste’ fordiscriminating, in hiring and employment decisions, on thegrounds of sex or race, will incur a cost in terms of theirreduced ability to hire and retain the most efficient work-ers. Other employers will see an opportunity to hire womenand/or members of ethnic minorities at rates of pay whichmore accurately reflect their true productivity. Over time,these more productive firms will either prevail over theircompetitors in the market for services or products, or thelatter will switch their strategy. In a free market, then,market forces will ensure equal pay for work of equal valueprevails without the need for intervention.

However, in practice employers cannot costlessly makereliable estimates of the productivity of individuals beforehiring them; nor can they costlessly observe individualeffort and link it to output once the employment relation-ship has begun, thanks to the team-production nature ofmany tasks. This is one reason why employers tend to usegender and race ‘proxies’ for individual productivity. Thistendency is reinforced if the practice of differentiation onsuch grounds becomes widespread. Conventions of jobsegregation, once they arise in this way, can become locked-in and resistant to change even when it is obvious toemployers that they may be essentially arbitrary. It maynot be in the interests of any one employer to depart fromthe convention, given that they expect all other employers


51

to follow it. If this is the case, there can be no expectationthat spontaneous market forces will necessarily bring aboutthe elimination of social discrimination.

Numerous empirical studies of occupational segregationhave identified ‘crowding’ effects, as the jobs which are‘conventionally’ done by women tend to be separated offfrom those seen as jobs for men, with similar effects operat-ing at the level of discrimination between different ethnicand racial groups. Using the very same job evaluationtechniques which employers introduced, initially, as part ofthe bureaucratic management and control of labour,academic studies and, from the 1980s in Britain, investiga-tions by experts appointed by employment tribunals, havetime and again shown that the ‘objective’ content of jobs isvery incompletely correlated with the comparative pay andemployment conditions of those who hold them.

Richard Epstein nevertheless argues that the mostresistant forms of discrimination are those practiced byemployers in a monopoly or near-monopoly position, inparticular public bodies and utilities. It is certainly truethat defendants in a number of landmark discriminationcases have been governmental bodies or public utilities. Asproduct markets are deregulated and opened up to competi-tion, even within the core of the public sector itself, can weconfidently expect the scope for persistent employmentdiscrimination to diminish?

In my view, there are good reasons to believe thatcompetition alone will not succeed in shifting deeply rootedassumptions and perceptions of the comparable worth ofparticular workers based on their sex and race. Often, thecauses of inequality are ‘endogenous’ to the market in thesense of arising from the impossibility of perfect contractingover the terms of the employment relationship, rather thansimply being imposed from outside by artificial conditionsof monopoly or by collusion between employers and pro-tected groups.

The root of unequal treatment between men and womenin the labour market remains the uneven division ofhousehold labour. In households where the large part of


(unpaid) domestic work is undertaken by women, a positiveexternality is created for society as a whole which alsoshapes, for the worse, the conditions in which women enter(or re-enter, after childbirth) paid employment. This is theorigin, in turn, of practices which tend to undervalue femalelabour. Legal intervention based on the equality principleis necessary to destabilise institutionalised forms of dis-crimination which would otherwise remain well entrenched.In practice, this may involve the law working with the grainof market mechanisms such as reputation; litigation is agood way of imposing reputational costs upon employersreluctant to give up discriminatory practices.

The principle of ‘disparate impact’ or ‘indirect discrimina-tion’ which can be traced back to the decision of the USSupreme Court in the Griggs case9 is of paramount impor-tance, since it enables a court to open up to scrutinypractices whose effects may be long-lasting and far-reachingbut which are all the more difficult to challenge becausethey have the appearance of neutrality. In the USA, theprincipal context for the application of the ‘disparateimpact’ principle has been race discrimination; in the ECand UK context, it has been sex discrimination. TheEuropean Court of Justice’s judgment in the Bilka-Kaufhaus10 case in 1986 was a turning point for UK law inthat it expressed a wide view of indirect discrimination andincorporated a proportionality test which not only shiftedthe burden of justification on to the employer but set a highhurdle in terms of the need to show that a particularpractice served a legitimate objective while entrenching aslittle as possible on the equality principle. The seed plantedin Bilka Kaufhaus blossomed in the House of Lords’decision almost a decade later in 1994 in R. v. Secretary ofState for Employment, ex parte EOC.11 Here the House ofLords decided, firstly, that the rule which required part-time workers to be employed for eight or, in some cases, 16hours a week, before they could begin to qualify for statu-tory rights in respect of termination of employment, wasindirectly discriminatory, since over 80 per cent of part-timeworkers adversely affected by the rule were women. Sec-ondly, it was held that no effective justification defence had


53

been offered. The government had been content to argue aconventional economic defence to the effect that to includepart-time workers in protective legislation would increasethe cost of hiring and reduce employment opportunities forthis group. This argument was rejected in the House ofLords on the grounds than inadequate evidence had beenpresented for it, reversing a Court of Appeal ruling in thecourse of which one judge simply commented that thegovernment’s position was ‘logical’.

Equally significant was the House of Lords 1995 decisionin Ratcliffe v. North Yorkshire County Council.12 Here theCouncil’s direct service organisation cut the pay of a groupof employees in order to enable it to place a low bid to carryout work which was being put out to competitive tenderunder the Local Government Act 1988. The Court of Appealaccepted a view that:

the ‘material factor’ which led to the lower rates of pay ... was theoperation of market forces resulting from the statutory requirementin the 1988 Act that [the employer’s] tender could not succeedunless it took full account of those forces.13

However, in the House of Lords Lord Slynn argued that theemployer was not entitled to make cuts in pay simply inorder to compete with an external contractor, which wasapparently able to set wages at rates below those set bynational collective bargaining by employing only women todo the work in question. While ‘conscious of the difficultproblem facing the employers in seeking to compete with arival tenderer’, he concluded that to reduce the women’swages below those of their male comparators was ‘the verykind of discrimination in relation to pay which the [1970]Act sought to remove’.14

In retrospect it would seem that these two decisions werethe high point in the UK (to date) of the use of discrimina-tion law to undermine institutionalised inequality in thelabour market. Almost as the House of Lords was decidingex parte EOC, the ECJ was hinting, in the Kirshammer-Hack case,15 that there was a margin of discretion for jobcreation arguments of the kind relied on by the governmentin ex parte EOC, and in a series of later rulings this position


hardened to the point where the chances of challengingworking hours thresholds which have this exclusionaryeffect are much diminished.16 In brushing aside the conven-tional economic argument for hours thresholds in the wayit did, the House of Lords failed to engage with the economiccase which might have been made against the thresholds.This is unfortunate, since the economic argument forintervention deserves closer attention.

The implicit thinking behind the ‘job creation’ argumentput forward by the UK government in ex parte EOC is thata subsidy is needed to encourage the hiring of part-timeworkers. This could be because there is a greater adminis-trative burden involved in employing two part-timers ratherthan one full-timer; if so, a strict approach to the justifica-tion defence would require this to be quantified. The morelikely explanation is an assumption that part-timers areless productive than full-timers. This, however, seemsunlikely; in many cases their productivity is likely to behigher as a result of the reduced hours they work. At theend of the day, the argument that employers need incen-tives to hire part-time workers on low-hours contracts islittle more than a revival of stereotypical assumptionsabout the comparative worth of male and female labour,assumptions which it is the very purpose of the indirectdiscrimination principle to expose and challenge.

None of this rules out a role for market forces in eradicat-ing discrimination. My point is simply that we should notplace our faith in competition alone. There are many waysin which the law can, and should, aid and where necessaryadjust the competitive process. The application of theindirect discrimination principle can unravel persistentforms of discrimination, and may go some way to rightinghistoric wrongs. However, it is reactive in the sense that itcan only act on existing practices. A more proactive mecha-nism for promoting competition in the labour market isaffirmative action. It is surprising that this form of inter-vention has not won more support from law and economicsscholars, since it directly encourages competition bybreaking down barriers to entry to privileged jobs on the


55

part of groups previously excluded by the effects of conven-tional or stereotypical views.

Quotas and preferential hiring policies to aid disadvan-taged minorities are currently outlawed in the UK, sincethe principle of direct discrimination (the UK equivalent of‘disparate treatment’) is very strictly defined and requiresemployers to treat individual applications strictly on theirmerits. In the USA, by contrast, private-sector voluntaryaffirmative action programmes are permitted where theyare designed to remedy conspicuous racial imbalances in anemployer’s workforce, they are temporary in nature, andthey disproportionately interfere with the interests of themajority group of employees (particularly in the sense ofpreserving accrued seniority rights). In the public sector,employers are frequently required to take affirmative actionto recruit, hire and promote women and racial minoritieswhere they had previously been ‘under-utilised’ in theemployer’s workforce; these requirements have given rise toan extensive litigation aimed at questioning their constitu-tionality. In the European context, the ECJ held in Mar-schall v Land Nordrhein Westfalen17 that a form of affirma-tive action under which, in a situation of under-representa-tion of female employees, an equally well qualified femaleapplicant would be given preference over a male, did notcontravene EC law, as long as the following conditions weremet: first, the employer made provision for a ‘saving clause’under which it could take into account objective factorswhich were specific to an individual male; and the criteriainvolved in such a process were not such as to discriminateagainst the female candidates. The basis for the Court’sruling, significantly, was that affirmative action wasacceptable where it was aimed at counteracting ‘the prejudi-cial effects on female candidates’ of stereotypical attitudesand behaviour relating to the roles and capacities of womenin working life. Both the Framework Directive on Discrimi-nation and the Race Directive18 now contain a provisionaccording to which ‘[w]ith a view to ensuring full equality inpractice, the principle of equal treatment shall not prevent


any Member State from maintaining or adopting specificmeasures to prevent or compensate for disadvantageslinked to’ the ground of discrimination in question. This isa significant step forward, and one which the UK shouldconsider taking advantage of.

4. Conclusions

In this commentary I have argued that the non-discrimina-tion principle has an important role to play in opening uplabour markets to disadvantaged groups, thereby extendingthe scope of the market in such a way as to benefit allmarket participants. The market is a powerful force forpromoting greater equality and for mobilising society’sresources, but the market is not self-constituting. It rests ona number of non-spontaneous institutions, of which thelegal order is one. While the classical liberal notion ofequality—equal civil capacity under the law—is necessaryto the elimination of institutionalised disadvantage, it is notsufficient. That is why we have seen an increasing focus onlegal notions of equality which stress substantive, and notsimply formal, market access. Modern anti-discriminationlegislation is the most concrete manifestation of this idea;it is no accident that it has flourished in market economieswhich stress the importance of labour market participation.

While my conclusion could not be more clearly opposed tothat offered by Richard Epstein, the method I have used isessentially the same as his. We both reject the ‘anarcho-capitalist’ position which sees no need for a legal order ofany kind to support the market, and we both see a role forlegal institutions in supporting market mechanisms ofreputation, exit and choice. The disagreement lies in theview we take of the difficulties posed by informationalsymmetries and market failures, on the one hand, and theproblems of special pleading and interest-group activities inframing legislative intervention, on the other. In my view,the search for an appropriate ethical basis to the labourmarket—one which will enhance voluntary co-operation andan extensive division of labour—is on balance assisted, andnot impeded, by modern anti-discrimination law.

57

A Short Reply to Simon Deakin

Richard A. Epstein

Ihave just read Simon Deakin’s thoughtful comments onmy earlier criticism of the anti-discrimination laws as

they operate in the United States and the United Kingdom,and take this opportunity to comment on the similarities,and differences, in our two positions. Starting with theformer, neither Deakin nor I believe that a system of well-functioning markets could arise solely out of the operationof what Hayek has called the ‘spontaneous order’. To besure, it is possible for some markets to operate wholly in theabsence of any legal coercion whatsoever, but the generalhistory of commercial endeavours speaks more emphaticallytowards a different truth. Markets work best when propertyrights are secured by the state, when contracts are enforced,when fraud and duress are held in check, when monopoliesare constrained, and when social infrastructure is available.All this activity takes government action; to create, asCoase suggests, the correct incentives to get the best out ofindividual self-interest. Within this general legal frame-work, the role for spontaneous order1—a phrase that leavesme uneasy—should be best understood as demanding onlythat the state take no role in deciding (a) who shouldcontract with whom, and (b) what the terms and conditionsof their agreements should be.

The anti-discrimination laws in employment take deadaim at both point (a) and point (b). In an ideal world, I seelittle place for their use. Labour markets are very difficultto monopolise given the possibility of free entry. Onecommon justification for an anti-discrimination principleapplies to common carriers—that is, to such operations asrails and waterways, or other network industries such asgas and power, where a supplier enjoys some form of


monopoly status. In those contexts, use of the anti-discrimi-nation norm is rightly justified, as has long been recognised,as a counterweight to monopoly power. Unregulated labourmarkets, in contrast, offer few possibilities for monopolisa-tion. Ironically, therefore, it is only when the governmentaffords unions monopoly power over their own workers thatthe anti-discrimination principle—which in the UnitedStates travels under the name of the duty of fair-represen-tation2—comes into play. Otherwise, the simple logic of themarket will outperform any effort by the state to limit thefirst of the two principles of market order set outabove—the ability of each person or firm to decide withwhom to enter into a contract of employment, and on whatterms.

Deakin is wise enough in his critique of markets not topretend that they have no advantages in the allocation ofsocial resources. Rather, he tries to demonstrate thatcertain real imperfections remain in markets even after weacknowledge the government role in supplying public goodsand constraining force, fraud and monopoly. With a nod toSen’s theory of ‘capacity’, he articulates this position bynoting that markets may guarantee legal rights toparticipate in economic activities, but that they do notnecessarily supply effective rights of participation (pp. 41and 46 ).3 Stated otherwise, legal capacity is not socialcapacity, and the guarantees of formal market access do notcarry with them guarantees of substantive market access.

This philosophical claim is far too facile for its own good.One difficulty is that neither Deakin nor, as far as I can tell,anyone else, has supplied any definition of what counts asan effective right of market participation above and beyondthe ability to hold property and enter into contracts. Surelythat term does not carry with it the sense that marketsshould be deemed to fail unless all individuals are able tosecure some form of living wage as measured by someexternal and objective standard. In any large population,some portion of the population will fail in economicactivities, no matter what legal régime is in place. Itbecomes, therefore, something of an impossibility for

A SHORT REPLY TO SIMON DEAKIN 59

anyone to make operational a test for when participation iseffective, for when people with full legal capacities haveadequate social capacities.

Worse still, there is no costless way to secure effectiveparticipation or substantive market access. Thus anysystem of subsidies, regulations or prohibitions will nothave just the single intended effect of allowing some peopleto enter into markets from which they were otherwiseexcluded. A decision, for example, to require any given firmto pay state-designated minimum wages will not just raisethe wages of all employed persons who are below thatstipulated level, leaving all other features of the economicsystem unchanged. Some fraction of them may lose theirjobs entirely, and others will find that other terms ofemployment (e.g. levels of job training) are shifted in waysthat work to their disadvantage. The overall system ofregulation, moreover, could lead to a reduction in thenumber of jobs made available at all levels by reducing thewillingness of firms to enter markets in the first place. Wecannot repeal the law of unintended consequences. Effortsto secure effective participation in job markets are oftenlittle more than disguised barriers to entry that can easilylead to a reduction in the total amount of opportunities thatare available. If one is concerned about the provision ofminimum levels of subsistence, as writers like Hayek andMilton Friedman are,4 then one should think in terms ofguaranteed minimum income levels and progressivetaxation, even if these are themselves fraught with politicaldifficulties.5 There is no reason to experiment with anegative income tax to meet that objective.

Deakin spends little time worrying about the fit of theanti-discrimination laws with any perceived failure ofmarket institutions. But, to his credit, he is not content torest with this broad criticism of market institutions. He alsotries to identify some concrete ways in which open marketsmay well lead to a cycle of inequality and exclusion. Henotes that individuals without education will be consignedto the bottom rungs of the market economy, if they can geta toehold at all. However, he does not explain why the anti-


discrimination laws are the appropriate antidote. And hisselective account of the operation of markets ignores thevast amount of education that firms do provide for workerswith whom they have formed effective long-term relations.Internal promotion is one of the keys for organising asuccessful firm. The number of errand-boys and secretarieswho have risen to higher positions within the firm is toonumerous to count. We pay a high social price when wechop off the bottom rung of the ladder in the name ofgreater access to market institutions, for the folks who donot get on the ladder at all cannot rise step by step.

The same critique applies to the anti-discrimination laws.Deakin notes that employers who rely on stereotypes oftencommit a double sin: they disable themselves and theymake it harder for members of certain groups to gain accessto the market (pp. 50-51). Unfortunately, he misses theexplanation as to why there is a greater reliance on thesestereotypes than there ought to be: the anti-discriminationlaws with their preoccupation with indirect discrimination(the American disparate impact) have made it more costlyfor firms to acquire particular information about individualworkers by barring the use of standard tests that helpproject the potential career paths of their workers. Oncedenied this information, there is a rational reason to turnto stereotypes. But the cure goes in the opposite direction:it is to allow the full range of employee testing to take place,and then for the market to sort itself out on the strength ofthose results. If the tests are unreliable, then they will bedisregarded with time. But if they are reliable, then therefusal to sanction their use will result in large distortionsthat will undermine Deakin’s stated goal of effectiveparticipation in labour markets.

A similar analysis applies to Deakin’s argument in favourof state intervention against discrimination on grounds ofsex and pregnancy (pp. 47-48). On the larger issue, Deakinstarts with the obvious point that even today there is an‘uneven division’ in the level of household labour. Women domore work within the home and men do less. Yet by thesame token men work longer hours in the workforce than do


women. It is wrong, however, to draw from these truismsany inference that this distribution of tasks creates somepositive externality for society as a whole which isunacknowledged in a market system. Most obviously, thedirect beneficiary of a woman’s household labour is thewoman herself and her family. To be sure, society benefitsfrom well-ordered households, but that includes all thecontributions of both parties to the marriage. So long ashusband and wife agree on the allocation of family tasks,the uneven contributions within the household is no socialproblem. It represents a welcome division of labour withinthe family that increases the overall productivity of thefamily unit as a whole. There is no misallocation to becured.

Deakin holds similarly odd views on the question ofpregnancy. Initially, it appears that he does not attach anyindependent value to the contribution that women make totheir families and society by shouldering the bulk of thework in rearing children. Nor is he able to show any marketdistortion that justifies a prohibition against pregnancydiscrimination within the market place. At no point does heacknowledge that, in some circumstances at least, theemployment of pregnant women will constitute a cost forthe firm. Yet by the same token he does not acknowledgethat in some instances firms will be willing to bear thesecosts. He stresses that some firms might well dismisswomen once they are pregnant, but he remains regrettablysilent about the huge number of firms that routinely makeaccommodations to keep pregnant women, or women withyoung children, on the job: part time hours; job splits; workfrom home; childcare and the like. None of this is requiredby the current set of pregnancy discrimination laws, and yetit is offered by firms who are reluctant to lose some of theirablest employees. Clearly we have to chalk theseinnovations up to market forces.

By the same token, these accommodations might not beavailable for all pregnant women in all positions. Norshould they be. Some jobs do require people to work 24/7,and, if so, then a vibrant labour market is one that allows


women to shift jobs, and not one that tries to tether them totheir existing firm when that shift is appropriate. There isreally no case of distortion in investments in human capitalin an unregulated labour market: once it is clear whichopportunities will be available, then women who intend tohave children can tailor their career plans to take intoaccount their dual objectives. The pregnancy laws onlyintroduce an undesirable set of cross-subsidies in which allother workers—not only men, but many women aswell—are forced to subsidise the decisions of the law’sbeneficiaries. Their willingness to invest in human capitalwill be reduced if the promised returns are limited by theanti-discrimination law that favours one fraction of theworkforce over another. Once we recognise that it is notpossible to form any responsible generalisation about theimpact of pregnancy on job performance, it becomes at bestmischievous to impose a legal rule that requires allemployers to retain pregnant workers against their will.

There is yet another sense in which Deakin is wide of themark in his endorsement of the status quo in labourmarkets: his misplaced reliance on Adam Smith (p. 49).Smith clearly did say that workers have necessities in theshort-run while employers have them only in the long run,so that the advantage in negotiations lies with theemployer. But on this occasion, I think that we have to saythat Smith erred. One constant theme of the labourliterature is the worker who threatens to walk off the jobwhen the crops are ready to be harvested unless he receivesa fat wage increase. At this point the advantage runsdecidedly in the opposite direction, unless an employmentcontract binds the worker. Short-term hold-up problems arenot a function of wealth, but of the level of disruption thata strategically designed walk-out can effectuate. Thesituation is only worse when there is a collective refusal todeal. It is no wonder that unions typically seek to have theircontracts terminated when they will cause the firm themaximum amount of disruption.

Nor does Smith’s argument take into account the changein relative positions brought about by the greater prosperity


of modern times. Higher wage levels imply that workersoften have savings and unemployment benefits. Manyfamilies have access to credit that can tide them over in theshort run, or have both spouses working so as to insulatethem from some of the adverse consequences of the lay-offfor one. Improved capital markets have aided the positionof workers as a class. At the same time, dot.coms by thescore failed because they could not get that next infusion ofventure capital. It is a hard world out there for all playerson both sides of the market. But employers in competitivelabour markets are not exempt from heavy pressures inboth the long and the short term. There is no systematicadvantage for one side over the other. Nor is there anyreason to think that an anti-discrimination law providesany antidote to whatever bargaining imbalance that mightexist. Quite the contrary, the people who are most hard-pressed, such as single-mothers with little education, willfind that the anti-discrimination laws operate as a barrierof entry to them. Ironically, some form of a privateaffirmative action programme (of which there are many inthe United States) might provide some form of a difference,but here, as Deakin reminds us (pp. 54-55), the rules of theEU tend to preclude the private voluntary responses thatmight have some legs in the long run. Deakin may be rightthat many law and economics scholars have not seen thepotential gains of affirmative action programmes. But Ihave long championed the right of private firms to engagein affirmative action, not because I am convinced that it isthe right thing for all firms to do, but because I think thateach firm should be free to decide for itself whether to do itor not.6 The negation of the principle of freedom ofassociation that is found in the anti-discrimination lawoperates as a constant thorn in the side of privateaffirmative action programmes.

In the end, therefore, I see nothing that alters theanalysis that I gave earlier of the anti-discrimination laws.The most troublesome problem we have today is that thelevel of education offered to individuals from disadvantagedmarkets will not allow them to take advantage of the


information economy. But there is nothing that an anti-discrimination law can do to solve this problem unless ittreats qualifications as an invidious form of discrimination.To answer that question we have to address candidly theissue of what system of education works best. Why any onewould think that a state-run monopoly offers the bestsolution to this issue eludes me, but that is a topic foranother day.

65

1 Epstein, R.A., Forbidden Grounds: The CaseAgainst Employment Discrimination Laws,Cambridge: Harvard University Press, 1992.

Simon Deakin

1 Coase, R.H., The Firm, the Market and the Law,Chicago: University of Chicago Press, 1988, p.134. (Coase here paraphrases an argument madepreviously by A.C. Pigou).

2 Hayek, F.A.,The Mirage of Social Justice, London:Routledge and Kegan Paul, 1976, p. 127.

3 Coase, The Firm, the Market and the Law, 1988.

4 Sugden, R., ‘Spontaneous order’, in Newman, P.(ed.), The Palgrave Dictionary of Economics andthe Law, Vol. III, London: Macmillan, 1998, p.492.

5 Sen, A., Development as Freedom, Oxford: OUP,1999, p. 75.

6 The relevant protection in UK law is contained inthe Employment Rights Act 1996, s. 99, andrelated provisions.

7 Smith, A., An Inquiry into the Nature and Causesof the Wealth of Nations, Book II, (first published1776) London: Nelson, 1886, p. 26.

8 As contained in the Employment Rights Act 1996,Part V.

9 Griggs v. Duke Power Co. 401 US 424 (1971).

10 Case 170/84 Bilka Kaufhaus v. Weber von Hartz[1986] IRLR 317.

11 [1994] IRLR 176.

12 [1995] IRLR 439.

13 [1994] IRLR 342, 363.

14 [1995] IRLR 439, 443.

15 Case 189/91 [[1994] IRLR 185.

Notes

Richard A. Epstein


16 See Deakin and Morris, Labour Law, 3rd edn,Butterworths, 2001, pp. 579-80.

17 Case C-409/95 [1998] IRLR 39.

18 Directive 2000/78, Art 7 and Directive 2000/42,Art 5, respectively.

A Short Reply to Simon Deakin

1 For a discussion see Robert Sudgen, ‘Spontaneousorder’, in Newman, P. (ed.), The PalgraveDictionary of Economics and the Law, London:Macmillan, Vol. III,1998, referred to by Deakin.

2 See, Steele v. Louisville & Nashville Railroad Co.,323 U.S. 192 (1944).

3 See Sen, A., Development as Freedom, Oxford:OUP, 1999, p. 75.

4 Hayek, F., The Constitution of Liberty, London:Routledge & Kegan Paul, 1960, pp. 285-305;Milton & Rose Friedman,M. And Friedman, R.,Free to Choose, London: Penguin; New York:Harcourt Brace Jovanovich, 1980, pp. 149-55.

5 See, for my views, Epstein, R.A., HayekianSocialism, 58 Maryland L. Rev. 271 (1999).

6 For discussion, see Epstein, R.A., ForbiddenGrounds: The Case Against EmploymentDiscrimination Laws, Cambridge: HarvardUniversity Press, 1992, pp. 412-37.

equal opportunity or more opportunity? the good thing - civitas

Documents