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The Power of Market-Driven Diversity

The Power of Market-Driven Diversity

Last updated on: May 6, 2015 at 11:00 am by Acton Institute

The Power of Market-Driven Diversity 2015-05-06T11:00:54-04:00 Acton Institute

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By Anthony Bradley

The story of Chicago-based Supreme Life Insurance Company of America, one of the most venerable black-owned businesses in American history, challenges the prevailing fiction that minority customers need the government to guarantee services for them and is a dynamic reminder of the power of markets as a basis for economic freedom.

Supreme was originally incorporated as the Liberty Life Insurance Company in 1919. An amazing 1969 study of the company by Dr. Robert C. Puth inadvertently dispels all sorts of myths about black businesses and black life during the era of legalized racial discrimination.

For example, the study, “Supreme Life: The History of a Negro Life Insurance Company, 1919-1962,” details the existence of thriving black-owned businesses during that era, a fact of which many are unaware. By 1960 the forty-six firms of the National Insurance Association—a coalition of all black owned, managed, and operated firms—had $1.7 billion of insurance in force and held $300 million in assets. In today’s terms, that is approximately $17 billion and $2.3 billion, respectively. In 1965, Supreme Life had assets over $33,000,000 ($251 million inflation adjusted for 2012). Even though black incomes were very low and blacks worked mostly in unskilled labor, black-owned businesses prospered.

These black-owned firms were successful for several reasons. First, legal segregation created a concentrated market free from competition. As such, there was a surge in the 1920s in black entrepreneurship. Second, especially in the North, blacks gained access to manufacturing jobs through the cessation of immigration during World War I. Third, black families epitomized a culture of saving, even more so than white families, making them desired customers. Lastly, it was normal for leaders at Supreme Life and other black firms to maintain relationships with and gain experience working with white business, civic, and religious leaders.

After surviving the Great Depression, the black insurance industry faced new challenges during and after WWII. Blacks’ incomes began rising more rapidly than whites’ and black mortality rates, which had been low, continued to improve relative to the national average. This change was not only good for black-owned and operated insurance firms but also made their customers attractive to white firms. White firms increasingly broke from racial discrimination norms to serve black customers, including hiring blacks from the black-owned firms to reach an emerging black customer base. While companies were free to discriminate against blacks it was not in their economic interests to do so because, at the end of the day, every company’s favorite color is green.

By the 1950s, five large white firms had increased their black customer based by three times the amount of increases by all black-owned firms combined nationwide. This “invasion” by white firms, as Puth puts it, siphoned off the type of black customer and employee that would have raised the performance of black firms. Blacks firms began to lose their competitive edge because they could not in turn cross the racial divide and draw white clients. Black consumers, meanwhile, benefited because they had wider access to insurance markets at lower prices.

What is most intriguing about this set of developments — growth of black incomes from WWI through the 1950s, increases in black mortality rates, the moral culture of saving and investing among black families, greater access to markets, the increased hiring of black employees by white firms, and lower-priced insurance products for black customers — is that they occurred as a result of competition rather than race-based government policies. Market forces, operating on their own principles, provided greater access for blacks before the Civil Rights Act of 1965 or the race-based preferential business policies of the Johnson and Nixon administrations.

In the end, racial discrimination is no match for the power of competition. The only way companies are protected from the economic consequences of racism is through government policy, like Jim Crow. Otherwise, companies cannot survive. Oddly, this process of market forces eroding the accumulated prejudice of American culture was thwarted by government-supported race-based policies in the 1970s that did not let racists lose their businesses, but propped them up through corporate welfare diversity incentives.

We can only wonder how much more diverse corporate America would be if those who racially discriminated were given two choices: respect the dignity of blacks as customers and employees or fall behind while watching others advance by doing so. Because in a virtuous society, no unethical business is too important to fail.

Originally published at Acton Commentary

Photo credit: Illinois Digital Archives

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