This July marks the 50^th anniversary of President Lyndon Johnson’s signing of the 1964 Civil Rights Act (CRA), arguably the watershed moment of the civil rights era. Almost immediately, the economic condition of African Americans began improving: the wage gap between the races narrowed considerably in the decade following the CRA,[1] as did the employment gap,[2] and employers became more racially integrated.[3] Unsurprisingly, those gains were concentrated in the formerly segregationist South.[4]

But there’s a puzzle about the CRA and its benefits: federal discrimination charges were relatively rare until the early 1970s, federal enforcement actions were not authorized until subsequent legislation in 1972, and federal antidiscrimination agencies had small budgets and staffs until the mid 1970s.[5] Yet once those agencies began work in earnest, black economic progress slowed—even as the number of enforcement actions and civil rights suits soared.[6] That is, the CRA seems to have done the most good when actual federal activity under the act was modest, but once activity increased, the CRA’s benefits lessened. Solving that puzzle sheds light on an important but little-known story of the civil rights era.

Racial discrimination is morally reprehensible. It’s also bad business. Excluding people because of race, gender or some other irrelevant characteristic deprives businesses of prospective customers and workers.[7] Businessmen are a greedy lot—or so we’re constantly told—and thus have a strong financial incentive not to discriminate. With respect to Adam Smith, it’s not from the justice of the butcher, the brewer or the baker that we get inclusion, but from their regard to their own interest.

For that reason (and perhaps more high-minded ones), a number of Southern businesses—especially national chains—disliked segregation.[8] But many of them were unwilling to integrate unilaterally for fear of being visited by white-robed fire-bombers intent on destroying their shops and factories—or worse. The businessmen also feared running afoul of state and local laws and customs buttressing segregation. Instead, some Southern businessmen challenged segregation by quietly lobbying federal policymakers for civil rights legislation. That whispering campaign was just one of many important contributors to the passage of the CRA and other antidiscrimination laws.

Once the CRA was in place, Southern businesses had political cover to desegregate—and many did so quickly. They were soon rewarded with new customers and employees, which gave them advantage over competitors who wanted to defy federal law and continue Jim Crow practices. That economic incentive helps to explain why Southern blacks achieved such economic progress in the years immediately following the CRA, despite relatively little federal antidiscrimination action. Black economic progress was simply the product of Southern society responding to long pent-up demand for more customers and workers.

This little-known story offers insight into when government should become involved in diversity issues. As noted, there is strong economic incentive for businesses not to discriminate. That incentive will lead to less discrimination so long as the market can “clear”—that is, so long as businesses can follow their self interest in dealing with prospective workers and customers. Self interest thus provides positive incentives for inclusion, leading to peaceful social change. In those cases, government intervention is unnecessary—and may be ill-advised, engendering social backlash. But if the market can’t clear, then government may need to intervene, as it did with the CRA.

Keep this distinction in mind when you think about diversity controversies today, whether involving gay marriage, the appropriateness of the Redskins’ team name, or the Supreme Court’s recent (and wildly misunderstood) Hobby Lobby decision. In which controversies are markets obstructed? In which cases are social and market forces already at work undermining irrelevant discrimination? And in which cases does government itself promote prejudice by creating obstacles to the market clearing?

Thomas A. Firey is a senior fellow with the Maryland Public Policy Institute and a Washington County native.