The simple economics of diversity, equity and inclusion

Driving in the car listening to the BBC show The Real Story I found myself getting increasingly more angry and frustrated at what I was hearing. An interviewer and three talking heads we're discussing the significance of the recent embrace by corporate America of the new diversity, equity and inclusion, DEI, agenda. The arrogant , self-righteous, ignorance of any semblance of economic understanding was infuriating.

 But then, my more mature rational side asserted itself. Why was I getting so angry? What, after all, was the real significance of the fact that a number of prominent corporate executives had come out in favor of these progressive platitudes? I mean, so what? The talking heads had already pointed out the difference between rhetoric, attitude and action. They were indignantly assertive in demanding that rhetoric was not enough, and that what was needed was significant change in attitude leading to meaningful action. They were oh so proud of their project to forge a new capitalism.

So, there is always the possibility that it is just rhetoric, portending no actual change in business as usual. In which case my talking heads were expending wasted energy. What, however, if it did lead to some sort of concrete change in the way that these corporations do business? In that case, I told myself, I should investigate the possible consequences before allowing myself to get uncontrollably angry. So here goes, what is the basic economics of DEI?

As I see it there are a number of significant possibilities.

First, we must consider what the effects of adopting what for simplicity we will simply refer to as the DEI policy agenda are, whatever that may actually mean (quotas ensuring “adequate” representation of all designated protected racial or ethnic groups in the workforce, ensuring they are paid “equitably” and who the hell knows what “inclusion” is?). Some Progressive champions of DEI would have us believe that it is actually “good for business”, that it actually would boost, not reduce, profits. The believability of this assertion is indistinguishingly close to zero, But, were it true, there would be nothing to worry about. No trade-off involved. Those businesses who played DEI ball would come to dominate the marketplace at no cost in profits earned and everybody would be happy. So much for fantasyland.

In the real world, however, DEI policy will imply an increase in the costs of production, leading to higher prices, lower revenues and, most significantly, lower profits. For Progressives this is a good thing, because profits are a bad thing. Unfortunately, however, those nasty shareholders demand profits in return for investing in production. Lower profits, less investment, less jobs, etc. So the apparent benefits of DEI come at the expense of profits and investment – and also higher prices – which certainly hurts poor people as well as, and probably more than, rich ones, But, assuming, as we must, that DEI has real costs, that there is, indeed, a real tradeoff, what will be its long-term effects?

In particular, there are two polar possibilities.

At one extreme, Case 1, the shareholders and management of the relevant companies and all the current and potential consumers of their products all succumb to the DEI story and change their attitudes, all becoming true believers. In this scenario, no company is punished in the marketplace by consumers for the increase in costs and prices that occurs as a result of adopting DEI. The consumer is boss, and if consumers reward companies for being DEI compliant and punish those that are not, all companies will follow suit. To be sure, costs and prices will rise, production and employment will fall, but, hey, everyone will be happy because they consider it worth it in terms of the social justice benefits conferred by DEI. Who am I to argue with that?

At the other extreme, however, Case 2, suppose that consumers don’t give a fig about DEI, that when it comes to actually making purchasing decisions for valued products, they will choose the lowest price regardless of the company’s DEI credentials; then, regardless  of what the shareholders and management believe, those companies that adopt DEI policies will be at a competitive disadvantage against those that do not, and the latter will soon outcompete the former. The rhetoric may remain, but actual practice (regardless of attitude) will follow the money.

The reality is probably some mix between cases 1 and 2, with some consumers conscious of and prepared to pay more for DEI compliant products and some not. And the larger the latter group (it is likely to be the much larger group) the less likely any real damage from DEI stupidity.

This is very reassuring. It means, even if the corporate executives, managers and shareholders believe the DEI nonsense and try to implement it, unless enough consumers are prepared to bear the cost burden implied, their DEI efforts will be punished and probably abandoned in short order. In fact, since they are not stupid, company policy-makers will have figured this out making any real costly changes more unlikely.

This made me feel much better. But, perhaps only for a moment, because then the realization dawned. This being the case, the determined Progressive social engineers, seeing the hypocrisy of their corporate allies, will seek and obtain overbearing coercive social regulation to enforce and monitor the implementation of DEI policies imposing severe penalties for violations. At the end of the day our virtuous Progressives are brutal dictators after all. That is why this whole thing is so scary. Lets hope it does not come to that.

Because or despite

 Today’s musing minute 

Because or despite. 

The plea to “listen to science” seems both noble and sensible, as in, what to do about covid-19. But the “science” never, by itself, gives us a complete answer about what to do. And that is true even if we are agreed on the objective we want to achieve. This is because the “science”, the facts, never speak for themselves – and that is even if we agree on what the relevant facts are. The reason is facts need to be interpreted, and interpretation is a tricky business – subjective, dependent on prior knowledge and experience, including what one has been taught, what one believes is the correct framework of interpretation. The *framework of interpretation* is key. 

At the heart of the ambiguity is the role of counterfactuals, the “what might/would have been”. The same set of facts in the social world (district from the facts of natural science where controlled experiments are often possible) are often interpreted in diverse, often diametrically opposed, ways. This is the “because or despite” phenomenon. 

Example: What was the cause of the 2008-9 financial crisis? Two popular answers are 1 or 2.

1. Insufficient regulation of financial activities (the counterfactual claim: if speculation and greed and been properly regulated it would not have occurred – it occurred *because* of insufficient regulation). 
2. Too much regulation of financial activities (the counterfactual claim: if mortgages had not been subsidized and capital flows distorted by mortgage regulations to increase homeownership it would not have occurred – it occurred *despite* substantial regulation (and actually *because* of that regulation)). 

Another example: What explains the amazing increase in global wealth 1945 – 2015? Two possible answers are 1 and 2. 

1. The appropriate expanding role of wise government policy (Keynesian economics and “market-failure” regulation) – it occurred *because* of expanding regulation – the counterfactual claim being, absent which it would not have occurred. The regulation is a tailwind.
2. The expansion of world trade *despite* the inhibiting costs of expanding government regulation – absent which it would have been even greater. The regulation is a headwind. 

The vast majority of disagreements about economic policy and public administration are like this. They revolve around opposed interpretive frameworks, in particular, frameworks that see the effects of government policy in opposite ways, and, therefore point to diametrically opposed implications for the appropriate role and scope of government intervention in the economy. Constructive (even civil) conversation is impeded by the difficulty of deciding which of any competing counterfactual claims is the most likely. Sometimes the evidence weighs heavily in favor of one or another, but often not.

A significant example is the very idea of Socialism. The “science” tells us that wherever it has been attempted it has failed miserably (without exception), unless you believe that it actually has never been implemented properly (counterfactual claim: What started in Venezuela, N. Korea, China or Russia as socialism, deteriorated into dictatorship. This need not have happened, and if it had been “done properly” socialism would have been a success. Therefore we conclude the science does not tell us it is doomed to fail. Bravo Bernie! So much for the science.