Ayn Rand's 1963 essay on Racism in the Virtue of Selfishness (VOS) is enormously powerful and speaks wonderfully of her sense of justice and freedom. I strongly encourage you to read it for it sets out clearly why racism is wrong: the very idea of generalising about a person's capabilities based only on the chemicals in his body is the ultimate insult to humanity (this, by the way, is also a powerful indictment of Indian casteism which is clearly a form of stereotyping, closely related to racism. This is also why reservations are wrong, including for women.).
[Note: Ayn Rand's bold and clear arguments was published closely on the heels of Martin Luther King's August 29, 1963 speech: "I have a dream". It was almost certainly written before Martin Luther King's speech. It is, in my view, worthy of being read on par with Luther King]
Racism is the lowest, most crudely primitive form of collectivism. It is the notion of ascribing moral, social or political signiﬁcance to a man’s genetic lineage—the notion that a man’s intellectual and characterological traits are produced and transmitted by his internal body chemistry. Which means, in practice, that a man is to be judged, not by his own character and actions, but by the characters and actions of a collective of ancestors.
The respectable family that supports worthless relatives or covers up their crimes in order to “protect the family name” (as if the moral stature of one man could be damaged by the actions of another)—the bum who boasts that his great-grandfather was an empire-builder, or the small-town spinster who boasts that her maternal great-uncle was a state senator and her third-cousin gave a concert at Carnegie Hall (as if the achievements of one man could rub off on the mediocrity of another)—the parents who search genealogical trees in order to evaluate their prospective sons-in-law—the celebrity who starts his autobiography with a detailed account of his family history—all these are samples of racism, the atavistic manifestations of a doctrine whose full expression is the tribal warfare of prehistorical savages, the wholesale slaughter of Nazi Germany, the atrocities of today’s so-called “newly-emerging nations.”
Just as there is no such thing as a collective or racial mind, so there is no such thing as a collective or racial achievement. There are only individual minds and individual achievements—and a culture is not the anonymous product of undifferentiated masses, but the sum of the intellectual achievements of individual men.
A genius is a genius, regardless of the number of morons who belong to the same race—and a moron is a moron, regardless of the number of geniuses who share his racial origin. It is hard to say which is the more outrageous injustice: the claim of Southern racists that a Negro genius should be treated as inferior because his race has “produced” some brutes—or the claim of a German brute to the status of a superior because his race has “produced” Goethe, Schiller and Brahms.
These are not two different claims, of course, but two applications of the same basic premise. The question of whether one alleges the superiority or the inferiority of any given race is irrelevant; racism has only one psychological root: the racist’s sense of his own inferiority.
To ascribe one’s virtues to one’s racial origin, is to confess that one has no knowledge of the process by which virtues are acquired and, most often, that one has failed to acquire them. The overwhelming majority of racists are men who have earned no sense of personal identity, who can claim no individual achievement or distinction, and who seek the illusion of a “tribal self-esteem” by alleging the inferiority of some other tribe. Observe the hysterical intensity of the Southern racists; observe also that racism is much more prevalent among the poor white trash than among their intellectual betters.
There is only one antidote to racism: the philosophy of individualism and its politico-economic corollary, laissez-faire capitalism.
It is not a man’s ancestors or relatives or genes or body chemistry that count in a free market, but only one human attribute: productive ability. It is by his own individual ability and ambition that capitalism judges a man and rewards him accordingly.
It is capitalism that gave mankind its ﬁrst steps toward freedom and a rational way of life. It is capitalism that broke through national and racial barriers, by means of free trade. It is capitalism that abolished serfdom and slavery in all the civilized countries of the world. It is the capitalist North that destroyed the slavery of the agrarian-feudal South in the United States.
Men who deny individual rights cannot claim, defend or uphold any rights whatsoever. It is such alleged champions of capitalism who are helping to discredit and destroy it.
The “liberals” are guilty of the same contradiction, but in a different form. They advocate the sacriﬁce of all individual rights to unlimited majority rule—yet posture as defenders of the rights of minorities. But the smallest minority on earth is the individual. Those who deny individual rights cannot claim to be defenders of minorities.
This accumulation of contradictions, of short-sighted pragmatism, of cynical contempt for principles, of outrageous irrationality, has now reached its climax in the new demands of the Negro leaders.
Instead of ﬁghting against racial discrimination, they are demanding that racial discrimination be legalized and enforced. Instead of ﬁghting against racism, they are demanding the establishment of racial quotas. Instead of ﬁghting for “color-blindness” in social and economic issues, they are proclaiming that “color-blindness” is evil and that “color” should be made a primary consideration. Instead of ﬁghting for equal rights, they are demanding special race privileges.
They are demanding that racial quotas be established in regard to employment and that jobs be distributed on a racial basis, in proportion to the percentage of a given race among the local population. For instance, since Negroes constitute 25 per cent of the population of New York City, they demand 25 per cent of the jobs in a given establishment.
“The white leadership must be honest enough to grant that throughout our history there has existed a special privileged class of citizens who received preferred treatment. That class  was white. Now we’re saying this: If two men, one Negro and one white, are equally qualiﬁed for a job, hire the Negro.”
Consider the implications of this statement. It does not merely demand special privileges on racial grounds—it demands that white men be penalized for the sins of their ancestors. It demands that a white laborer be refused a job because his grandfather may have practiced racial discrimination. But perhaps his grandfather had not practiced it. Or perhaps his grandfather had not even lived in this country. Since these questions are not to be considered, it means that that white laborer is to be charged with collective racial guilt, the guilt consisting merely of the color of his skin.
No man, neither Negro nor white, has any claim to the property of another man. A man’s rights are not violated by a private individual’s refusal to deal with him.
RACISM NOT TO BE PROSCRIBED BY LAW
Racism is an evil, irrational and morally contemptible doctrine—but doctrines cannot be forbidden or prescribed by law. Just as we have to protect a communist’s freedom of speech, even though his doctrines are evil, so we have to protect a racist’s right to the use and disposal of his own property. Private racism is not a legal, but a moral issue—and can be fought only by private means, such as economic boycott or social ostracism.
In conclusion, I shall quote from an astonishing editorial in The N. Y. Times of August 4 —astonishing because ideas of this nature are not typical of our age:
“But the question must be not whether a group recognizable in color, features or culture has its rights as a group. No, the question is whether any American individual, regardless of color, features or culture, is deprived of his rights as an American. If the individual has all the rights and privileges due him under the laws and the Constitution, we need not worry about groups and masses—those do not, in fact, exist, except as ﬁgures of speech.”