One of the sad ironies of the rioting in Ferguson in the aftermath of the decision by the grand jury not to indict is that the destruction that occurred is ultimately directed at African-American communities.  As Henry Hazlitt put so well in his book Economics in One Lesson, it is the mark of a good economist to see the indirect results–anyone can see the direct results.  The near-term harm to Ferguson is immediate and obvious; the property owners of McDonalds, Auto-Zone, liquor stores, grocery stores, etc., which this report suggests are often minority owned; but these owners harms are small in comparison to the social harm that will follow.

The 2nd Law of Economics is incentives matter.*  If you are a business owner in Ferguson, what incentive have you learned?  The expected costs of doing business in Ferguson just rose.  The heart of entrepreneurship is speculative action, which necessarily relies heavily on expectations of future market conditions–both future costs and future revenues.  But our future expectations arise in large part based on our reflections of the past.  In this case, entrepreneurs everywhere that are considering investments in African-American communities have just adjusted their probability distributions of expected future costs such that costs are higher.  They will therefore demand a higher profit margin, if the business will operate at all. Economics predicts that fewer businesses will rebuild in Ferguson after this is over, property values that remain will fall, and non-violent people will increasingly leave, (as happened in LA after their riots). There will be a significant increase in “red-lining,” by those that the government cannot regulate.  There will be pressure on some large chains to rebuild to help the community, and some may.  But if they currently aren’t there, the likelihood of them building in Ferguson just went down.  What does this do to job opportunities for young African-Americans?  Just went further down in Ferguson. This is simple economics; we could wish that it were not so, but wishing doesn’t make it so.   Many of those sympathetic to the rioters will say those demanding law and order care only about the rich property owners, and not the people of Ferguson.  For at least this Berean, the case is almost the opposite:  we must protect private property to help the poorest people in Ferguson.  Free markets depend on private property rights, and free markets provide the social cooperation process to serve one another.  What Ferguson rioting will result in is much less social cooperation.  In the end, costs will rise for the people that remain as they’ll have to go further to shop for their needs, and the city that remains is likely to be uglier–more storefronts with bars over the windows.  And their will be less job opportunities for the residents that remain.  And many more will “vote with their feet” and leave the community.  If the police won’t protect their property, the owners will attempt themselves, ultimately leaving if necessary.

This outcome is not likely limited to Ferguson; as I said in a previous post, there are potential Fergusons waiting to explode everywhere.  Expected future costs have risen.  Somewhere, there is a entrepreneur who was just on the edge of deciding to open a business in a community that serves minorities (what economists call the marginal supplier) and she may now have tipped away from going forward.  And no one will ever see this cost to both the entrepreneur and the community she may have served.   So if you care about the poor and marginalized in Ferguson, you care about the property damage that is ongoing.

* I often say the first law of economics is scarcity, and the 2nd Law of Economics is incentives matter.  This is my enunciation of what I consider the most important fundamental issues in economics, but the other day in discussing these with a former student, she was surprised, and I think felt like I had conned her by calling these fundamental laws, when I’m the only one saying it (to my knowledge). Yet its fun to say, and I believe it to be true.  I’ll keep on saying it.  Maybe more economists will follow.