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African-Americans have experienced high levels of residential segregation from the racial majority for at least a century (Massey and Denton 1993, Cutler, Glaeser, and Vigdor 1999). Over the same time period, black socioeconomic outcomes have persistently lagged behind those of the majority, even as other initially disadvantaged ethnic and racial groups have experienced convergence (see Figures 7.1 and 7.2). Social scientists have developed and tested two causal explanations linking the former trend with the latter. First, the spatial mismatch hypothesis, proposed by John Kain in 1968, posits that residential segregation introduces a physical separation between blacks and centers of employment, which in turn adversely affects black outcomes. Empirical tests of this hypothesis (see Kain 1992, Ihlandfeldt and Sjoquist 1998 for recent reviews) have provided varying degrees of support for the hypothesis. Second, recent literature emphasizing the importance of neighborhood effects, peer groups, and social interactions proposes that segregation negatively affects blacks by separating them from positive role models, high-quality local public goods, or other important inputs into the human capital production function (Wilson 1987, Case and Katz 1993, Cutler and Glaeser 1997).
A natural question to ask upon examining this previous research is whether residential segregation per se has negative effects on socioeconomic outcomes, or whether the relationship between segregation and outcomes depends on specific factors, such as the proximity of ghettos to employment centers or the collective human capital of the segregated group.
Everyone knows that economists have always studied prices, trade, markets, and money. Not everyone knows that they are now also researching topics like marriage, fertility, religion, politics, fads, crime, and punishment. These areas might seem intrinsically non-economic, and so inaccessible to economists. They are part of the field, however, when we have a broad and complete understanding of what economics is.
Contemporary economists believe that economics is not defined by its subject matter but by its method. Economists try to understand and explain the world by assuming that the phenomena they observe are the outcomes of people's purposeful decisions. Individuals try to achieve their objectives, given their limitations — limited time, money, and energy — that is to say, they optimize. The interactions of individuals will determine aggregate social outcomes — that is, market equilibrium.
This broader approach needs a more comprehensive definition of prices, goods, and markets. Markets are places where goods are exchanged and prices for those goods are paid. For economists, goods are just things we want to obtain. They can be resources like oil, manufactures like cars, or intangibles, such as esteem of one's colleagues, peaceful relations between countries, or a quiet evening at home. Some goods cannot be “purchased” only with money.
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