Einstein might have been one of history’s most brilliant men, but even his great mind could not have made socialism work. Unfortunately, he wasn’t smart enough to see that.
Original Article: “A Great Man Cannot Salvage a Bad Idea“
For the past ten weeks, American conservatives have been boycotting Bud Light in response to a beer can featuring transgender figure Dylan Mulvaney. Since then, sales of the beer have been plummeting. However, this week, a new benchmark has been passed: Anheuser-Busch InBev’s Bud Light is no longer the top-selling beer in the United States. Instead, it has been overtaken by Modelo, as the following graph from the Wall Street Journal shows:
Figure 1: Share of beer sales in US retail stores
Source: Wall Street Journal.
However, Modelo taking the top spot has sparked a debate in and of itself as some conservative figures have made the complaint that Modelo is still largely owned by Anheuser-Busch. In America, the company was broken up by an antitrust law; however, outside of North America, Modelo is still owed by Anheuser-Busch. As such, the boycott does not really work. In response to this, other right-wing figures have taken the firm stance that this complaint is cynical and that “Bud Light is suffering massive and sustained losses.”
This raises the economic question regarding whether a boycott of one part of a company is sufficient or if one must boycott the entire company. This answer has two major parts. The first part turns to the concept of economic calculation, which Ludwig von Mises describes by saying:
The preeminence of the capitalist system consists in the fact that it is the only system of social cooperation and division of labor which makes it possible to apply a method of reckoning and computation in planning new projects and appraising the usefulness of the operation of those plants, farms, and workshops already working.
Mises further addresses the fact that there are countless decisions that businesses must make daily. What factors of production should be used? Where should the business be located? What specialized employees should they have? What technology do they need? Which procedures should they use? What investments should be made? Through all these questions, Mises comes to one answer: economic calculation. Businesses make their decisions based off profit and loss, as Mises states later: “Profit is the reward for the best fulfillment of some voluntarily assumed duties. It is the instrument that makes the masses supreme. The common man is the customer for whom the captains of industry and all their aides are working.”
Mises even explains that, while it does not always feel like it, economic calculation even applies to the biggest of big businesses. They must sell what is profitable, and they must abandon what is not. To some, it may seem silly to say something should or should not be profitable over an ad. However, if Bud Light’s ad had been successful and sales had skyrocketed, no one would be saying that the ad did not really affect the product; the company would be bragging about their marketing.
At the end of the day, value is subjective. When making profit and loss decisions, businesses must recognize the subjective values of the consumers, who have clearly spoken regarding their preferences. As Mises explained regarding economic calculation, profit and loss decisions and market prices determine everything from the general location of the factory to the specific employee that is hired. As such, boycotting one specific product of one specific company still forces businesses to recognize in their calculation what the consumers want.
The flip side of this coin is to look at the reductio ad absurdum of the concept that one must boycott all Anheuser-Busch products in order to properly send a message. To this, one could easily ask, “Why stop there?” Those of us in the Austrian school know that the values of consumers do not just impute to the price of the beer but all the way back to the original factors of production. As Murray Rothbard has explained:
Producers’ goods are valued in accordance with their expected contribution in producing consumers’ goods. Higher order producers’ goods are valued in accordance with their anticipated service in forming lower-order producers’ goods. Hence, those consumers’ goods serving to attain more highly valued ends will be valued more highly than those serving less highly valued ends, and those producers’ goods serving to produce more highly valued consumers’ goods will themselves be valued more highly than other producers’ goods. Thus, the process of imputing values to goods takes place in the opposite direction to that of the process of production.
One could claim that by buying beer of any kind, a consumer keeps the factors of production oriented toward beer. If one really wanted to hurt Anheuser-Busch, the consumer could boycott beer in its entirety. This would result in the factors of production fleeing to other markets. As such, Anheuser-Busch would have no ingredients for their beer because wheat would be used instead for the higher-valued good of bread.
Of course, any reader would read this and think, it’s ridiculous to boycott the entire product across the board, even from other companies. Boycotts can be successful with far less than that. Boycotting one single product of a company like Anheuser-Busch—especially their former best-selling product—can still drastically impact their decision-making regarding profits and losses and can still make an enormous difference.
[This article is Chapter 2 of Breaking Away: The Case for Secession, Radical Decentralization, and Smaller Polities. Now available at Amazon and in the Mises Store.]
It is not uncommon to encounter political theorists and pundits who insist that political centralization is a boon to economic growth. In both cases, it is claimed the presence of a unifying central regime—whether in Brussels or in Washington, DC, for example—is essential in ensuring the efficient and free flow of goods throughout a large jurisdiction. This, we are told, will greatly accelerate economic growth.
In many ways, the model is the United States, inside of which there are virtually no barriers to trade or migration at all between member states. In the EU, barriers have been falling in recent decades.
The historical evidence, however, suggests that political unity is not actually a catalyst to economic growth or innovation over the long term. In fact, the European experience suggests that the opposite is true.
Why Did Europe Surpass China in Wealth and Growth?
A thousand years ago, a visitor from another planet might have easily overlooked Europe as a poor backwater. Instead, China and the Islamic world may have looked far more likely to be the world leaders in wealth and innovation indefinitely.
Why is it, then, that Europe became the wealthiest and most technologically advanced civilization in the world?
Indeed, the fact that Europe had grown to surpass other civilizations that were once more scientifically and technologically advanced had become apparent by the nineteenth century. Historians have debated the question of the origins of this “European miracle” ever since. This “miracle,” historian Ralph Raico tells us:
consists in a simple but momentous fact: It was in Europe—and the extensions of Europe, above all, America—that human beings first achieved per capita economic growth over a long period of time. In this way, European society eluded the “Malthusian trap,” enabling new tens of millions to survive and the population as a whole to escape the hopeless misery that had been the lot of the great mass of the human race in earlier times. The question is: why Europe?1
Across the spectrum of historians, theories about Europe’s economic development have been varied, to say the least.2 But one of the most important characteristics of European civilization—ever since the collapse of the Western Roman Empire—has been Europe’s political decentralization.
Raico continues:
Although geographical factors played a role, the key to western development is to be found in the fact that, while Europe constituted a single civilization—Latin Christendom—it was at the same time radically decentralized. In contrast to other cultures—especially China, India, and the Islamic world—Europe comprised a system of divided and, hence, competing powers and jurisdictions.3
Although modern EU centralizers are attempting it, at no point has European civilization ever fallen under the dominion of a single state as has been the case in China. Even during the early modern period, as some polities managed to form absolutist states, much of Europe—such as the highly dynamic areas in the Low Countries, Northern Italy, and the German cities—remained in flux and highly decentralized. The rise of the merchant classes, banking, and an urban middle class—which began as early as the Middle Ages and were so essential in building industrial Europe—thrived without large states.
After all, while a large polity with few internal borders can indeed lead to large markets with fewer transaction costs, concentrating power in one place brings big risks; a state that can facilitate trade across a large empire is also a state that can stifle trade through regulation, taxation, and even expropriation.
The former vast kingdoms and empires of Asia may have once been well positioned to foster the creation of a wealthy merchant class and middle class. But the fact is this didn’t happen. Those states instead focused on stifling threats to state power, centralizing political control of markets, and extorting the public through the imposition of fines and penalties on those who were disfavored by the ruling classes.
The Benefits of Anarchy
In contrast, Europe was relatively anarchic compared to other world civilizations and became the home of the great economic leap forward that we now take for granted. This isn’t “anarchy” in the sense of “chaos,” of course. This is anarchy as understood by political scientists: the lack of any single controlling state or authority. In key periods of the continent’s development—as now—there was no ruler of “Europe” and no European empire. Thus, in his book The Origins of Capitalism, historian Jean Baechler concludes:
The first condition for the maximization of economic efficiency is the liberation of civil society with respect to the state….The expansion of capitalism owes its origins and raison d’être to political anarchy. (emphasis in original)4
For many years, economic historians have attempted to find correlations between this political anarchy and Europe’s economic success. Many have found the connection to be undeniable. Economist Douglass North, for instance, writes:
The failures of the most likely candidates, China and Islam, point the direction of our inquiry. Centralized political control limits the options—limits the alternatives that will be pursued in a context of uncertainty about the long-run consequences of political and economic decisions. It was precisely the lack of large scale political and economic order that created the environment essential to economic growth and ultimately human freedoms. In the competitive decentralized environment lots of alternatives were pursued; some worked, as in the Netherlands and England; some failed as in the case of Spain and Portugal; and some, such as France, fell in between these two extremes.5
Competition among Governments Means More Freedom
But why exactly does this sort of radical decentralization “limit the options” for ruling princes and kings? Freedom increases because under a decentralized system there are more “alternatives”—to use North’s term—available to those seeking to avoid what E.L. Jones calls “predatory government tax behavior.” Thus, historian David Landes emphasized the importance of “multiple, competing polities” in Europe in setting the stage for:
private enterprise in the West possess[ing] a social and political vitality without precedent or counterpart. This varied, needless to say, from one part of Europe to another.…And sometimes adventitious events like war or a change of sovereign produced a major alteration in the circumstances of the business classes. On balance, however, the place of private enterprise was secure and improving with time; and this is apparent in the institutional arrangements that governed the getting and spending of wealth.6
It was this “latent competition between states,” Jones contends, that drove individual polities to pursue policies designed to attract capital.7 More competent princes and kings adopted policies that led to economic prosperity in neighboring polities, and thus “freedom of movement among the nation-states offered opportunities for ‘ best practices’ to diffuse in many spheres, not least the economic.” Since European states were relatively small and weak—yet culturally similar to many neighboring jurisdictions—abuses of power by the ruling classes led to declines in both revenue and in the most valuable residents. Rulers sought to counter this by guaranteeing protections for private property.
This doesn’t mean there were never abuses of power, of course, but as Landes observed:
To be sure, kings could, and did, make or break men of business; but the power of the sovereign was constrained by the requirements of states…and international competition. Capitalists could take their wealth and enterprise elsewhere and even if they could not leave, the capitalists of other realms would not be slow to profit from their discomfiture.8
Nor was decentralization limited to the international system of separate sovereign states. Thanks to the longtime tug-of-war between the state and the church, and between kings and nobles, decentralization was common even within polities. Raico continues:
Decentralization of power also came to mark the domestic arrangements of the various European polities. Here feudalism—which produced a nobility rooted in feudal right rather than in state-service—is thought by a number of scholars to have played an essential role….Through the struggle for power within the realms, representative bodies came into being, and princes often found their hands tied by the charters of rights (Magna Carta, for instance) which they were forced to grant their subjects. In the end, even within the relatively small states of Europe, power was dispersed among estates, orders, chartered towns, religious communities, corps, universities, etc., each with its own guaranteed liberties.9
Over the long term, however, it was the system of international anarchy that appears to have ensured that states were constrained in their ability to tax and extort the merchant classes and middle classes, who were such a key component of Europe’s rising economic fortunes.10
We Need a Return to Smaller Polities
Even today, we continue to see these factors at work. Small states—especially in Europe and the Americas—tend to have higher incomes and have greater openness. We can see this in the microstates of Europe and in the Caribbean. Small states, seeking to attract capital, often undercut larger neighbors in terms of taxes.
It is true that one of the most economically successful polities in the world today is a large one: the United States. The US’s success, however, can be attributed to the enduring presence of political decentralization internally—especially during the nineteenth century—and to the latent, albeit receding, economic liberalism esteemed by much of its population. Europe, of course, was already rich—and relatively politically free compared to the despotic regimes of the East—long before it began to centralize political power under the banner of the European Union.
Today, however, we are seeing the impoverishing downside of decades of political centralization in both the US and Europe. Government regulations decreed from Brussels and Washington continue to stifle innovation and entrepreneurship. The EU has sought to crack down on low taxes in smaller member states. Both the EU and the US are erecting trade barriers to producers outside their trading blocs.
Unfortunately, those in power, who benefit from the status quo and from holding the reins of large states, are unlikely to relinquish this newly gained power without a fight.
1. Ralph Raico, “The Theory of Economic Development and the ‘European Miracle’,” in The Collapse of Development Planning, ed. Peter Boettke (New York: New York University Press, 1994), p. 39.
2. Chiu Yu Ko, Mark Koyama, and Tuan-Hwee Sng, for example, contend China was forced to centralize due to threats from the Eurasian steppe. (See Chiu Yu Ko, Mark Koyama, Tuan-Hwee Sng, “Unified China and Divided Europe,” EH.net, June 2014, http://eh.net/eha/wp-content/uploads/ 2014/05/Koyama.pdf.
3. Raico, “The Theory of Economic Development and the ‘European Miracle’,” p. 41.
4. Jean Baechler, The Origins of Capitalism (Oxford, U.K.: Basil Blackwell, 1975), pp. 77, 113. Baechler influenced F.A. Hayek in his thinking as well. Hayek quotes this passage in Baechler on “political anarchy” in volume 3 of Law, Legislation and Liberty. See F.A. Hayek, Law, Legislation, and Liberty, vol. 3 (Chicago: University of Chicago Press, 1979). Hayek also writes in The Fatal Conceit: “…the history of China provides many instances of government attempts to enforce so perfect an order that innovation became impossible. This country, technologically and scientifically developed so far ahead of Europe that, to give only one illustration, it had ten oil wells operating on one stretch of the river Po already in the twelfth century, certainly owed its later stagnation, but not its early progress, to the manipulatory power of its governments. What led the greatly advanced civilisation of China to fall behind Europe was its government’s clamping down so tightly as to leave no room for new developments, while, as remarked in the last chapter, Europe probably owes its extraordinary expansion in the Middle Ages to its political anarchy.” F.A. Hayek, The Fatal Conceit: The Errors of Socialism, ed. W.W. Barley, III (London: Routledge, 1988), p. 44.
5. Douglass North, “The Paradox of the West,” in The Origins of Modern Freedom in the West, ed. R.W. Davis (Stanford, Calif.: Stanford University Press, 1995).
6. David Landes, The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present (Cambridge, U.K.: Cambridge University Press, 1969), p. 15.
7. E.L. Jones, The European Miracle: Environments, Economies and Geopolitics in the History of Europe and Asia (Cambridge, U.K.: Cambridge University Press, 2003), p. 118.
8. Landes, The Unbound Prometheus, p. 15.
9. Raico, p. 42. It is important to note Raico does not treat Latin Christendom’s “radical decentralization” as something that “just happened.” That is, I think Andrei Znamenski is reading Raico incorrectly when Znamenski states the framework which stresses the “role of political fragmentation and decentralization as the major factor that allowed Europe to spread its economic wings” is “a well-taken and well-supported one,” but concludes “it leaves unanswered the simple question of how the fragmentation and decentralization came into existence in the first place.” Raico does address this by noting it was specifically Western Europe, which was the most economically successful and non-coincidentally existed under the Latin Church’s opposition to any single civil government becoming the ultimate civil power in Europe. See Andrei Znamenski, “The ‘European Miracle’ Warrior Aristocrats, Spirit of Liberty, and Competitionas a Discovery Process,” The Independent Review 16, no. 4 (Spring 2012).
10. The importance of decentralization within states cannot be ignored, of course. As historian Joel Mokyr notes in “The Enduring Riddle of the European Miracle: The Enlightenment and the Industrial Revolution” (2002), the rise of political and economic liberalism (which he calls “the Enlightenment”) was key in weakening states in their ability to enrich entrenched rent seeking interests at the expense of market producers. This, however, does not undermine our theory of decentralization since decentralization is a key component in sustaining and laying the groundwork necessary for ideological liberalism to thrive. See Joel Mokyr, “The Enduring Riddle of the European Miracle: The Enlightenment and the Industrial Revolution,” October 2002, http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.477.6576&rep=rep1&type=pdf.
In 2023, self-employment has collapsed again with year-over-year self-employment growth dropping by 6.5 percent. That’s the largest drop since December 2007, when the Great Recession officially began.
Original Article: “Yet Another Month of Questionable Federal Jobs Data as 310,000 Fewer People Report Having Jobs“
Recorded by the Mises Institute in the mid-1980s, The Mises Report provided radio commentary from leading non-interventionists, economists, and political scientists. In this program, we present another part of “Ten Great Economic Myths”. This material was prepared by Murray N. Rothbard.
The financial press now knows enough economics to watch weekly money supply figures like hawks; but they inevitably interpret these figures in a chaotic fashion. If the money supply rises, this is interpreted as lowering interest rates and inflationary; it is also interpreted, often in the very same article, as raising interest rates. And vice versa. If the Fed tightens the growth of money, it is interpreted as both raising interest rates and lowering them. Sometimes it seems that all Fed actions, no matter how contradictory, must result in raising interest rates. Clearly something is very wrong here.
The problem here is that, as in the case of price levels, there are several causal factors operating on interest rates and in different directions. If the Fed expands the money supply, it does so by generating more bank reserves and thereby expanding the supply of bank credit and bank deposits. The expansion of credit necessarily means an increased supply in the credit market and hence a lowering of the price of credit, or the rate of interest. On the other hand, if the Fed restricts the supply of credit and the growth of the money supply, this means that the supply in the credit market declines, and this should mean a rise in interest rates.
And this is precisely what happens in the first decade or two of chronic inflation. Fed expansion lowers interest rates; Fed tightening raises them. But after this period, the public and the market begin to catch on to what is happening. They begin to realize that inflation is chronic because of the systemic expansion of the money supply. When they realize this fact of life, they will also realize that inflation wipes out the creditor for the benefit of the debtor. Thus, if someone grants a loan at 5% for one year, and there is 7% inflation for that year, the creditor loses, not gains. He loses 2%, since he gets paid back in dollars that are now worth 7% less in purchasing power. Correspondingly, the debtor gains by inflation. As creditors begin to catch on, they place an inflation premium on the interest rate, and debtors will be willing to pay. Hence, in the long-run anything which fuels the expectations of inflation will raise inflation premiums on interest rates; and anything which dampens those expectations will lower those premiums. Therefore, a Fed tightening will now tend to dampen inflationary expectations and lower interest rates; a Fed expansion will whip up those expectations again and raise them. There are two, opposite causal chains at work. And so Fed expansion or contraction can either raise or lower interest rates, depending on which causal chain is stronger.
Which will be stronger? There is no way to know for sure. In the early decades of inflation, there is no inflation premium; in the later decades, such as we are now in, there is. The relative strength and reaction times depend on the subjective expectations of the public, and these cannot be forecast with certainty. And this is one reason why economic forecasts can never be made with certainty.
For more episodes, visit Mises.org/MisesReport
The term “rent seeking” is a derogatory term that implies companies and people seek to take more than they earn. It hearkens to some Marxist ideology as well. However, especially when combined with regulatory capture and bureaucratic corruption, rent seeking is a valid concept. What happens when the shoe is on the other foot and people and organizations engage in rent seeking from a social justice perspective? Is it rent seeking or corruption for actions to secure social justice? Does the end justify the means?
Investopedia defines rent seeking as follows: “Rent seeking (or rent-seeking) is an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs.”
Political scientists and economists traditionally apply the term “rent seeking” to capitalists, especially the so-called robber barons from the Gilded Age. However, what the definition does not seem to consider is value creation. Value creation could be a subset of the “contribution of productivity,” but productivity does not mean value creation. We can be highly productive in activities that produce little value or may even destroy value. While the robber barons could be cruel and demanding by virtually any measure, they created the economy and infrastructure that saw the United States through two world wars. The robber barons also provided tremendous social value with the libraries, universities, and museums they funded along with their other charitable activities. These benefits do not excuse their predatory actions, but they created extensive value, which mitigates the amount of rent-seeking behavior.
The term “rent seeking” and its definition hearken back to Karl Marx’s terminology and critique of capitalism. He was most decidedly against any form of rent seeking. Perhaps it is no accident that unions grew and perhaps reached their high point during the Gilded Age. After the Russian Revolution in 1917, the West, particularly the US, turned away from anything resembling communism. The term “rent seeking” is still a charged term and concept however.
The definition of rent seeking says it is often a function of government programs. I have covered this in several blog entries (“Defending the Republic: Scenario 1 Regulatory Capture,” “Defending the Republic: Scenario 2 Policy Domination,” “Regulatory Capture and other Bureaucratic Problems,” “DIE Hydra,” and “Critical Thinking and Policy Development and Analysis”). Organizations use regulatory capture to engage in rent seeking from government programs.
A good example of rent seeking among government programs is a homeowner that builds a house in an area with frequent floods, fires, or hurricanes, yet he does not purchase the appropriate hazard insurance. When disaster strikes, the homeowner expects, if not demands, the Federal Emergency Management Agency (FEMA) to pay the costs to rebuild. FEMA does—why? Is there some deep regulatory capture going on by the home lenders and insurance companies? More study is required, but I suspect so.
Let us now look at a (hopefully) fictitious scenario. Suppose someone you have never met before walks into your house, opens the refrigerator, and starts helping themself to food. Then, they take your ATM card and withdraw half of your bank account. Next, they sleep in your bed. What would you do? Is this theft? Would you offer them the rest of your bank account, food, and shelter, or would you call the police?
In a sense, this is rent-seeking behavior. The person is taking what belongs to you and offers nothing in return. The person does not offer any compensation or services to pay for the food, money, and use of your home.
Now, let us look at a few examples we see in the US today.
There are demands for the rich to pay “their fair share” of taxes. What is a “fair share”? Does it matter? The National Taxpayer Union wrote,
New data from the IRS find that the top 25 percent of earners paid nearly 89 percent of all income taxes in 2020. This is the highest share of income taxes paid seen in the tax data available going back to 1980. Lower income earners carry little of the overall income tax burden, with the bottom 50 percent of earners owing 2.3 percent of the national share.
Is the bottom 50 percent engaging in rent seeking? Do the rich owe more taxes?
Illegal aliens come into the US and immediately receive food, shelter, and money. They have done nothing to earn it and almost certainly will not pay it back. In addition, schools get crowded and must pay to educate children that are not prepared for their grade level and do not speak English.Standards are lowered to allow people who are otherwise not qualified to get positions or attend programs. People who are qualified may not compete for the positions or a place in the programs.City attorneys do not prosecute crimes. Some say the individuals are entitled to steal to make up for past discrimination.The Biden administration wants to forgive student loans. Students may choose degrees that have little or no relevance to jobs. Then, they cannot get jobs and cannot pay their student loans. Meanwhile, people who chose degrees that are relevant to the job market and can pay their loans, as well as people who pay taxes but never went to college, are required to pay for the student loan forgiveness program.Likewise, the administration wants people who do not need to pay large mortgage origination fees to pay higher fees so people that do not qualify for lower fees can pay lower fees.
These examples all meet the definition of rent-seeking behavior. They also have a corrosive impact on society. They lower standards, reduce personal responsibility, and penalize a large segment of society. However, corrosive acid can be used in valuable applications, such as acid etching.
We still see the value the robber barons created from both their commercial efforts and their charitable/social efforts. It remains to be seen whether we will see value from the social justice movement. One thing is for sure, the corrosive effects of rent seeking eat away at the rule of law, which is a foundation of American prosperity.
Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it.
—Rep. Ron Paul (R-TX), before the US House of Representatives, February 15, 2006
In the mid-sixties, having read about gold in Atlas Shrugged, I decided to find out something about inflation and wrote to the United States Treasury Department to request a brochure that purported to lay inflation out in terms anyone could understand. In reply, they sent me a Peanuts comic book.
Though I didn’t know it at the time, using cartoon stars to promote government viewpoints was nothing new. In 1942, the US Treasury had commissioned Walt Disney to produce a film called The New Spirit in which Donald Duck’s radio tells him it is “your privilege, not just your duty, but your privilege to help your government by paying your tax and paying it promptly.” The following year, the government revoked that “privilege” and imposed Milton Friedman’s withholding idea, an insidious way of reducing the transparency of the income tax while making it easier to raise taxes in the future.
Like Donald Duck a generation earlier, the Peanuts gang attempted to charm people into the state’s bed. According to the comic book, inflation, you see, was a rise in prices. If we want robust economic growth and low unemployment, some inflation is necessary. Inflation was only bad if it got out of hand. However, we needn’t worry because, here in the US, we were privileged to have an agency called the Federal Reserve ready to pounce on inflation if it got too high or too low.
Charlie Brown and company were singing the same tune as my 1967 Armen Alchian and William Allen economics textbook, which states flatly that “Inflation is a rise in the general level of prices.” At that time, World War II was the “good war,” withholding was temporary, and moderate inflation was a good thing—even if, at 3 percent, the dollar loses half its value in fourteen years.
Hazlitt and Mises
A little later, I descended into the catacombs of dissent and discovered authors no one ever talked about, such as Henry Hazlitt and Ludwig von Mises. In particular, I found this astonishing claim on page one of Hazlitt’s What You Should Know about Inflation: “Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit.”
Hazlitt was saying our leaders were in the business of manufacturing money. Later on, he said the cure for inflation was to stop inflating. “It is as simple as that.”
This was during the late 1960s, the guns and butter years of the Johnson administration, when Vietnam and the Great Society were bleeding people literally and financially and when few books challenged the status quo on money and banking. No authoritative voice condemned the government for inflating the money supply to pay for the slaughter overseas and the handouts at home. Inflation was a topic of discussion only because goods and services started to cost more. The blame for that, of course, was placed on business and labor, not government. When seen only as a rise in prices, inflation not only shields the guilty, it places them in the role of the people’s champion.
Discovering Rothbard
Then, sometime in the 1990s, I read Murray Rothbard’s What Has Government Done to Our Money?
Rothbard filled in the gaps. He discussed how money emerged from barter economies as well as how banks came into being and began loaning out its depositors’ money without their knowledge. Rothbard explained how government, always hungry for revenue, came to the aid of the banks whenever their depositors lined up demanding their money. This aid allowed bankers to suspend specie payment, sometimes for years, while letting the banks remain in business. Rothbard talked about how the government imposed a central bank on the economy to safeguard the bankers’ racket of fractional reserve banking, which most of the world accepts as normal and uncontroversial. This allowed the central bank, as the monopolist in control of the money supply, to “buy” government securities in the manner of a child playing make-believe—with money created out of thin air. The government could then use this money to do whatever furthered its own interests. Inflation, Rothbard said, was legal counterfeiting.
As it turns out, legal counterfeiting is indispensable for maintaining the state’s health because it funds war and increases support for the state. In The Case against the Fed, Rothbard explains:
As luck would have it, the new Federal Reserve System coincided with the outbreak of World War I in Europe, and it is generally agreed that it was only the new system that permitted the U.S. to enter the war and to finance both its own war effort, and massive loans to the allies; roughly, the Fed doubled the money supply of the U.S. during the war and prices doubled in consequence.
Rothbard’s Wall Street, Banks, and American Foreign Policy covers this episode much further, explaining how “World War I came as a godsend” for the financially-troubled Morgan empire and how the Morgan-dominated Fed played a crucial role by creating the money needed to keep the slaughter going and the profits rolling.
The Era of Greenspan
This ongoing increase in the money supply continued into the era of Alan Greenspan. In the years since his insightful defense of gold in 1966, Greenspan had fallen in love with political power. Commenting on Greenspan’s nomination as Fed chairman in 1987, Rothbard noted that
Greenspan’s real qualification is that he can be trusted never to rock the establishment’s boat. He has long positioned himself in the very middle of the economic spectrum . . . he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply.
What did Greenspan actually do during his tenure? By the close of 2001, he had increased the money supply by $4.5 trillion as measured by the late M3, more than twice the amount of all other Fed chairmen combined. In late 2002, Nobel laureate Milton Friedman praised Greenspan for having “the best record of any Fed chairman in history.”
Friedman, the alleged champion of free markets, blamed the Great Depression on the Fed for not printing enough money and for not forbidding bank runs. No one ever complained of insufficient “accommodation” under Greenspan’s watch, and it’s no surprise that a man who saw inflation as a necessary element of a modern economy had such praise for Greenspan’s printing press.
Innocent Blunder or Great Hoax?
In a speech on December 19, 2002, Greenspan admitted the Consumer Price Index had gone ballistic in the half century following Franklin D. Roosevelt’s gold confiscation order. However, Greenspan continued by saying that, in recent decades, central bankers had shown they could “contain the forces of inflation” by maintaining more “prudent” monetary policies.
In a similar vein, if anyone should wonder about all those trillions flying off the presses during the 1990s, it was justified by the “New Economy,” in which globalization and information technology would create permanent gains in productivity much like electricity had done during the early decades of the twentieth century. For almost a decade, the technology-dominated NASDAQ index offered living proof of this proposition, soaring from 500 in April 1991 to 5,132 in March 2000. Most importantly, the New Economy, with its innovative inventory and productivity management, had seemingly eliminated the boom–bust cycle, the demon that had haunted capitalism since the advent of the Industrial Revolution. For the first time ever, it seemed the good times were here to stay.
A Sober Voice
However, these good times may be too good to be true. Seventy-five years ago, Garet Garrett wrote:
There is a long history of monetary experience. It tells us that government is at heart a counterfeiter and therefore cannot be trusted to control money, and that this is true of both autocratic and popular government. The record has been cumulative since the invention of money. Nevertheless it is not believed. (my emphasis)
Given the federal influence on education, media, and just about everything else, should we be surprised that no one is center stage calling the government a counterfeiter?
However, exposing the fraud, as Garrett said, results in disbelief. People can handle corruption. They can’t handle blatant government theft. That sounds too much like a conspiracy theory, which the public has been taught to ignore.
There are those who see the damage that counterfeiting causes, but they claim the reason is the Fed’s sin of being privately-owned, discounting the government’s role in appointing the Federal Open Market Committee voting majority and other aspects of the system. These same people call for moving the printing presses to some pristine government agency responsible to state bureaucrats, as if the US would be better off if the Fed were run like the Securities and Exchange Commission, the Food and Drug Administration, or the Federal Emergency Management Agency.
It’s hard to imagine the insouciant public not acquiescing in whatever government does to them, but maybe the woke world that has been thrust on us will serve as shock therapy. Perhaps the public will start asking: How can we establish a system of sound money and free banking? The guys running the show certainly won’t ask it for the public.
Investor sentiment is clearly bullish. The CNN Fear and Greed Index for June 18th, 2023, stood at 82, which signals “extreme greed”. This is a drastic optimistic move after closing at “greed” (56 over 100) a month before and “extreme fear” (17 over 100) only one year ago. However, in the same period, the Citi global economic surprise index has declined twelve points, with the euro area component collapsing 123 points. The US economic surprise index has also declined by thirteen points.
The disastrous performance of the euro area, which fell into recession in the first quarter, is also happening while this economic region enjoys significant tailwinds: Declining energy and commodity prices have supported the euro area’s GDP, boosting the external component thanks to meaningfully lower imports. Furthermore, the euro area should benefit from the expected positive impact of the massive EU Next Generation stimulus plan. None of those effects have helped, which proves yet again that massive government stimulus plans hardly boost growth and productivity and are often directed to politically favored sectors with little real impact on jobs or growth.
This is hardly a surprise, as the Juncker Plan and the Growth and Jobs Plan of 2009 also failed to deliver any multiplier effect. The euro area is a chain of government stimulus plans that yield no real economic return as productivity growth continues to be exceedingly poor, the unemployment rate is twice that of the U.S., and growth simply does not take off.
It is important to understand that the negative trend in economic surprise comes in the middle of two gigantic stimulus plans, in the euro area and the U.S., and with the benefit of lower imports due to falling commodity prices and rising exports thanks to a robust China re-opening, which may have come below consensus estimates but is still the driving force of global growth alongside India.
Many blame rate hikes for this decline in macroeconomic figures relative to estimates. However, few seem to blame the insanely negative real rates and monster stimulus packages for this poor economic return. Think about this for a moment: The world “invested” close to 20% of its GDP in public and monetary stimuli in 2020 to deliver a strong recovery that never happened and only received high inflation and poor growth in return.
The spectacular failure of these enormous stimulus plans is almost never analyzed in academic papers because it seems that some academics have decided to avoid any study that mildly questions governments and their bloated spending. Stimulus plans fail, and all we seem to hear when the recovery is weak is that the problem is the normalization of rates, not the inexistent multiplier effect of these giant government plans that leave an unsustainable trail of higher debt and, now, inflation.
Social programs have also failed. The latest Eurostat figures show that in 2022, 95.3 million people in the EU will be at risk of poverty or social exclusion, equivalent to 21.6% of the EU population. In 2018, it was 109.2 million people, or 21.7% of the population. This is an almost insignificant improvement considering the enormous social spending, more than two trillion euros of stimulus, and the increase in population. Resorting to the old “it could have been worse” argument makes no sense. There is plenty of evidence of better uses of public money all over the world.
Rate hikes have not caused the weakening of the eurozone economy; giant government spending plans have. There is no discernible improvement in productivity or job creation other than the return of tourism, and certainly no fiscal multiplier. The growth trend is simply back to where it was in December 2019, with the eurozone on the verge of recession but with a significantly larger debt burden.
The balance sheet of the G4 central banks has just declined by a small 9.5% after soaring 78% in 2020–2021. Rate hikes have only corrected the economic aberration of negative rates. Normalization of monetary policy is happening slowly, and central banks remain hugely accommodative. Some investors may expect a mirage bounce from government programs that have proven to generate no real improvement numerous times, but it will not happen.
The carbon capture pipeline is the result of the latest gift to rent-seeking “titans of industry” and interestingly, may be used on some existing projects that came to be, years ago, due to rent seeking. More on this below.
As we’ve heard for years and years now, sometimes delivered in memorable ways, the continuing elevation of atmospheric levels of carbon dioxide, and other greenhouse gases, and the rising global temperatures that follow, is the defining issue of our time. Apparently, these couple of metrics are all we need to know to understand the fate of humanity and the future of life on Earth (even though that’s obviously false).
However, as governments often do, never let a simple, catastrophic concept go to waste, especially when it means that further state intervention can be achieved. A carbon capture pipeline is just one example of how policy is used to generate projects that hope to reduce greenhouse gases. So, what is a carbon capture pipeline? Simply put, it’s a series of pipes and other equipment that are plugged into facilities that emit greenhouse gases, which are then sequestered deep within the Earth.
In this case, I’m referring to the Summit Carbon Solutions five-state pipeline in the Midwestern US. The pipeline will be connected to more than thirty corn ethanol biofuel plants, ultimately transporting carbon dioxide and other gases to North Dakota for burial deep underground. As I’ve documented on this site, corn ethanol plants likely would not exist, at least in the current forms, without substantial support from government. It’s yet another case of state intervention causing unintended consequences, which are used to justify further state intervention.
With the current pipeline project, opposition by some landowners and farmers has been dealt with, at least in South Dakota, using the Public Utilities Commission. According to state law, any company that has requested a permit from the Commission does not need the permission of the landowner to conduct a survey, which involves the use of heavy equipment on farmers’ crops, with the potential of disrupting drainage tile below the soil. Apparently the same concept exists in Iowa, but interpretation has differed based on county. Also, the definition of “surveying” is different for different people because during one recent incident in South Dakota, surveyors entered the home and workshop of a farmer, terrifying the man’s wife and prompting some sort of response (the accounts of what happened differ dramatically) from the farmer himself. Perhaps this is why the surveying teams now have armed guards with them as they legally intrude across the land. Not allowing the pesky concept of private property rights to get in the way, there are currently about eighty eminent domain lawsuits underway in South Dakota, initiated by what is in theory a private company (at least when the money rolls in, anyway), but which also defines itself a “public carrier.”
It’s worth discussing the dismal history of carbon capture projects. Despite backing from the US Department of Energy, several projects never started or stalled out along the way. Some projects failed due to technical complications, including one pipe rupture event that dumped enough carbon dioxide onto a small town to make residents struggle to breath (forty-five were hospitalized) and internal combustion engines stop working. The Petra Nova project in Texas managed to survive a mere three years amid technical and financial problems, while never achieving the carbon capture targets laid out at the beginning. Indeed, it’s been estimated that a wind farm project, at a cost of less than half of the Petra Nova project, would have achieved the same carbon reduction goals.
So, why the interest, including the use of armed guards to keep the surveying projects moving forward, in this new carbon capture pipeline? The revised Section 45Q tax credit policy, which recently went into effect, provides enhanced incentives for these types of carbon-reducing projects. Among the changes are increases in the credits provided per metric ton of sequestered carbon dioxide, with continued increases through 2026 (more than doubling the original amount); reduced requirements for annual capture (in some cases, a reduction from five hundred thousand metric tons to only twenty-five thousand); and a requirement that construction begin before the start of 2026.
The claim period can now run for twelve years once a facility is operational. Previously, only the first sequestered seventy-five million metric tons qualified for these credits. As is often the case with artificially incentivized projects like this, what happens after twelve years is unknown, except that an aging five-state pipeline, and other equipment that need maintenance, will be sitting around for decades to come.
It’s one other feature of the new carbon capture projects (apparently not for the Summit Carbon Solutions’ pipeline, but to be sure, corn ethanol fuel use should expand in the future) that is perhaps the most telling. The new Section 45Q tax policy will triple the amount of credits given per metric ton carbon dioxide that is injected into oil fields. This process, known as Enhanced Oil Recovery, or EOR, uses carbon dioxide to increase the overall pressure within an oil reservoir, forcing oil toward productive wells. A great process for increasing the productivity of oil extraction, to be sure, but what eventually happens to the newly extracted oil? Sooner or later, it becomes fuel that is used for productive purposes, and also, emits more carbon dioxide and greenhouse gases into the atmosphere.
Don’t be fooled by the newest interesting technology to reduce atmospheric levels of carbon. Indeed, a worldwide program of planting trees could remove about two-thirds of all emissions that have been pumped into the atmosphere by human activities. This and other projects like are nothing more than state-backed investments under the guise of combatting climate change.
Money supply growth fell again in April, plummeting further into negative territory after turning negative in November 2022 for the first time in twenty-eight years. April’s drop continues a steep downward trend from the unprecedented highs experienced during much of the past two years.
Since April 2021, money supply growth has slowed quickly, and since November, we’ve been seeing the money supply repeatedly contract—year-over-year— for six months in a row. The last time the year-over-year (YOY) change in the money supply slipped into negative territory was in November 1994. At that time, negative growth continued for fifteen months, finally turning positive again in January 1996.
During April 2023, the downturn accelerated even more as YOY growth in the money supply was at –12.0 percent. That’s down from March’s rate of –9.75 percent, and was far below April’s 2022’s rate of 6.6 percent. With negative growth now falling near or below –10 percent for the second month in a row, money-supply contraction is the largest we’ve seen since the Great Depression. Prior to March and April of this year, at no other point for at least sixty years has the money supply fallen by more than 6 percent (YoY) in any month.
The money supply metric used here—the “true,” or Rothbard-Salerno, money supply measure (TMS)—is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of money supply fluctuations than M2.
The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits and retail money funds).
In recent months, M2 growth rates have followed a similar course to TMS growth rates, although TMS has fallen faster than M2. In April 2023, the M2 growth rate was –4.6 percent. That’s down from March’s growth rate of –3.8 percent. April 2023’s growth rate was also well down from April 2022’s rate of 7.8 percent.
Money supply growth can often be a helpful measure of economic activity and an indicator of coming recessions. During periods of economic boom, money supply tends to grow quickly as commercial banks make more loans. Recessions, on the other hand, tend to be preceded by slowing rates of money supply growth.
Negative money supply growth is not in itself an especially meaningful metric. As shown by Ludwig von Mises, recessions are often preceded by a mere slowing in money supply growth. It is not necessary for the money supply to actually shrink to trigger the bust period of a boom-bust cycle. But the drop into negative territory we’ve seen in recent months does help illustrate just how far and how rapidly money supply growth has fallen. That is generally a red flag for economic growth and employment.
The fact that the money supply is shrinking at all is so remarkable because the money supply almost never gets smaller. The money supply has now fallen by $2.6 trillion (or 12.0 percent) since the peak in April 2022. Proportionally, the drop in money supply since 2022 is the largest fall we’ve seen since the Depression. (Rothbard estimates that in the lead up to the Great Depression, the money supply fell by 12 percent from its peak of $73 billion in mid-1929 to $64 billion at the end of 1932.)1
In spite of this recent drop in total money supply, the trend in money-supply remains well above what existed during the twenty-year period from 1989 to 2009. To return to this trend, the money supply would have to drop at least another $4 trillion or so—or 22 percent—down to a total below $15 trillion.
Since 2009, the TMS money supply is now up by nearly 189 percent. (M2 has grown by 143 percent in that period.) Out of the current money supply of $19.2 trillion, $4.8 trillion of that has been created since January 2020—or 25 percent. Since 2009, $12.5 trillion of the current money supply has been created. In other words, nearly two-thirds of the money supply have been created over the past thirteen years.
With these kinds of totals, a ten-percent drop only puts a small dent in the huge edifice of newly created money. The US economy still faces a very large monetary overhang from the past several years, and this is partly why after eleven months of slowing money-supply growth, we are not yet seeing a sizable slowdown in the labor market.
Nonetheless, the monetary slowdown has been sufficient to considerably weaken the economy. The Philadelphia Fed’s manufacturing index is in recession territory. The Empire State Manufacturing Survey is, too. The Leading Indicators index keeps looking worse. The yield curve points to recession. Even Federal Reserve staffers, who generally take an implausibly rosy view of the economy, predict recession in 2023. Individual bankruptcy filings were up 23 percent in May. Temp jobs were down, year-over-year, which often indicates approaching recession.
Money Supply and Rising Interest Rates
An inflationary boom begins to turn to bust once new injections of money subside, and we are seeing this now. Not surprisingly, the current signs of malaise come after the Federal Reserve finally pulled its foot slightly off the money-creation accelerator after more than a decade of quantitative easing, financial repression, and a general devotion to easy money. As of June, the Fed has allowed the federal funds rate to rise to 5.25 percent. This has meant short-term interest rates overall have risen as well. In June, for example, the yield on 3-month Treasurys remains near the highest level measured in more than 20 years.
Without ongoing access to easy money at near-zero rates, however, banks are less enthusiastic about making loans. This is not uniform across the economy, however, and the credit crunch is most acutely felt among smaller businesses and middle-class households. In the latest Senior Loan Officer Opinion Survey from the Federal Reserve, researchers found that bankers believe lowered expectations for economic growth coupled with deposit outflows will lead to banks tightening lending standards. Banks have found that demand for loans has weakened as interest rates have increased and economic activity has slowed.
1. Murray Rothbard, America’s Great Depression (Auburn, AL: Ludwig von Mises Institute, 2005) pp. 92, 302