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Friedrich Hayek’s essay “The Use of Knowledge in Society,” published in 1945 in the prestigious American Economic Review, is often hailed as an important contribution to economics. Rightly so, because it provides important “meat” to the price theory “skeleton.” However, Austrian economists often exaggerate its importance in ways that risk undermining Austrian economic theory.

Primary among the exaggerations is the claim that Hayek showed in his essay that the market system offers the solution to the knowledge problem through prices. Specifically, how prices aggregate and make available relevant information about the particulars of time and space. The role of entrepreneurs is then to adjust their production undertakings to price changes. This, then, constitutes the marvel of the market, as Hayek put it: that entrepreneurial production responds to changes without needing to know the specifics of those changes.

While the essay works well as a critique of the “perfect information” assumption in mainstream economics, which was arguably Hayek’s purpose with writing the essay, a Misesian reading makes clear that the argument is at best incomplete. Hayek’s reasoning greatly oversimplifies the economic calculation argument, downgrades entrepreneurship to responsive action, and misconstrues factor prices as bearers of information about the past. While these are listed here as separate errors, they amount to a single core issue: a misunderstanding or misrepresentation of the market process.

Economic Calculation Is a Process

The Misesian economic calculation argument is often misunderstood as the inability of any economy to rationally allocate resources without prices. Market socialists, like Fred Taylor and Oskar Lange, made this mistake. Therefore, as a solution, the market socialists offered a scheme in which socialism could be saved by having a central list of prices that the central planning board’s bureaucrats would update as shortages and surpluses are observed. There are several practical issues with this attempted solution, but the core problem is theoretical: it fails to recognize that the issue is not an inability to aggregate dispersed knowledge but an inability to deal with the uncertainty of the future.

Ludwig von Mises’s economic calculation problem is not merely a matter of gathering and processing information but the issue of meeting the uncertain future in value terms. Investments in production today are necessarily made without knowing whether and to what extent consumers will value the goods and services produced. The issue is not efficiency in the production of specific goods in the present (which is the role of management) but how to decide which investments should be made given unknown future valuations. In other words, today’s factor prices cannot represent information about the past.

Prices Are Future Prices

Factor prices also cannot represent information about the present state of the market because production underway is not intended to satisfy wants already held but wants that consumers will hold in the future. Factor prices also incorporate entrepreneurial judgments about what productions are possible. We can easily observe this when new regulations are put in place that do not affect present production but will have an effect in the future. For example, a ban on gasoline automobiles many years into the future would cause prices of factors used in gasoline automobile manufacturing to fall while prices of factors used in production of substitute goods would go up. This should not be the case if prices represent the present. Instead, it should be obvious that the prices represent expectations about the future.

The Role of Entrepreneurs

The entrepreneur is at the core of Mises’s economic calculation argument. It is not merely a matter of adjusting production to new information, whether it can easily be aggregated and communicated, but a process of price determination. In markets, entrepreneurs seeking to profit from uncertain future market states determine factor prices. As Mises put it in Human Action: “The entrepreneurs, eager to earn profits, appear as bidders at an auction, as it were, in which the owners of the factors of production put up for sale land, capital goods, and labor.”

What is the basis of the entrepreneurs’ competitive bids for factors? The basis is their appraised value of the goods they intend to make available to consumers (discounted using their rate of time preference). In other words, an entrepreneur expecting to produce goods that they envision will be of high value to many consumers will be able to outbid entrepreneurs who appraise their productions to be of lower value or of value to fewer consumers. The estimated future revenue (adjusted for the entrepreneurs’ required returns and time preference rates) determines the prices they can and will offer for factors in the present.

This bidding process weeds out entrepreneurs whose productions are appraised of insufficiently high value. This process also directs resources into more capable hands. However, it importantly also determines factor prices in the present—based on the entrepreneurs’ collective appraisement of the future value of present production. This issue is missing from Hayek’s discussion. It is also what is missing from the market socialists’ attempted solutions to Mises’s calculation problem.

Hayek’s Incomplete Argument

As Hayek puts it in his famous essay:

A rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Read as a critique of the “perfect information” assumption in mainstream economics, Hayek’s argument points to an important problem with how information is (mis)understood. It is not perfect but both imperfect and asymmetric, always incomplete and dispersed.

Reading the essay from a Misesian perspective, however, Hayek not only directs the reader’s attention to a relatively unimportant issue but, in effect, misrepresents the calculation problem and therefore the market process.

The Durham report reminds us it is well past time for a more realistic assessment of the FBI for what it is: a costly, unnecessary, unconstitutional, and incompetent agency. 

Original Article: “End the FBI”

Volume 1, Number 4 (1977)

New York’s current financial woes have a precedent, and perhaps a solution, in the pages of the distant past. Well back in its history, in the late 1830s, New York State was spending and lending money lavishly. By the early 1840s, the rapidly mounting debt had occasioned a severe financial crisis. To avert the imminent possibility of bankruptcy and default, the state legislature in 1842 passed what was known as “the stop and tax law”, a levy of one mill on each dollar of taxable property. The new revenue helped the state meet its most pressing obligations. But, even more importantly in terms of the future, New York decided to take steps to prevent another such fiscal disaster. Ambitious projects for internal improvements — mostly canal construction and loans for railroad building — were cut back or abandoned unless there was a reasonable expectation that they could be funded from tolls or taxation. And the legislature also issued a call for a constitutional convention. The new Constitution adopted in 1846 placed strict limits on the state’s ability to borrow money. Thus the people of New York, facing problems similar to the state’s later predicament, found the answer in an old-fashioned program of reduced spending and new taxes. What is surprising, however, is that such policies had the popular support of the most democratic and liberal elements in the state.

To understand the unusual sequence of events which culminated in the New York State Constitution of 1846, one must go back in history to the Jacksonian era and the political struggles between the Democrats and the Whigs. In New York the Jacksonian Democrats included a wide-ranging constituency of radical workingmen, Irish immigrants, farmers, intellectuals, and representatives of the new rising business or small capitalist class. The preponderance of the older landed aristocracy and wealthier classes, together with the most English or Anglo-Saxon elements in the population, gravitated toward the Whig Party. The Whigs, united nationally by their opposition to Andrew Jackson’s Presidency, were the ideological heirs in New York State of DeWitt Clinton, five times governor and father of the Erie Canal. Like Clinton, the Whigs supported the generous use of state funds for internal improvements as well as for various cultural, humanitarian, and educational endeavors. The Whigs’ belief in positive government and social reform reflected their paternalistic conception of politics and economics.1

Quite different were the ideas of the Democrats who, in contrast to their Whig opponents, stood for a strict construction of the United States Constitution, limiting the governing power to its least essentials. Both nationally and in New York State, the Jacksonian Democrats adhered to the Jeffersonian agrarian maxim that the least government it the best government. In New York the leader of the Democratic Party was Martin Van Buren, head of the famed Albany Regency which controlled the state governmental machinery through most of the 1830s and ’40s. The most radical Democrats, known as Locofocos, were somewhat to the left of Van Buren and the Regency. They included an interesting collection of intellectuals and politicians who espoused a negative, anti-statist democracy. As against the paternalistic philosophy of the Whigs, the Locofoco Democrats stressed complete laissez faire in government-business relations. For example, the introduction in 1837 to the first issue of the United States Magazine and Democratic Review, organ of the more radical Democrats, defined the party’s belief in democratic republicanism and majority rule. But the editors added:

The best government is that which governs least. No human depositories can, with safety, be trusted with the power of legislation upon the general interests of society so as to operate directly or indirectly on the industry and property of the community. Such power must be perpetually liable to the most pernicious abuse, from the natural imperfection, both in wisdom of judgment and purity of purpose, of all human legislation, exposed constantly to the pressure of partial interests; interests which, at the same time that they are essentially selfish and tyrannical, are ever vigilant. persevering, and subtle in all the arts of deception and corruption.2

Most forthright of the radical Democrats was William Leggett, a Locofoco colleague in the 1830s of such New York Democratic writers as James Fenimore Cooper, William Cullen Bryant, Theodore Sedgwick, and Parke Godwin. Leggett coupled adherence to the Jeffersonian natural rights philosophy with demands for the equal right to property, not its abolition. Governments had no warrant to interfere with individual pursuits by offering financial advantages to any particular class or industry. Specially chartered banks, including the Bank of the United States, were a favorite target of Leggett’s scorn. “Let the banks perish,” he wrote. “Now is the time for the complete emancipation of trade from legislative thralldom.”3

As a part of their general laissez-faire philosophy and opposition to Whig paternalism, the Democrats were also dubious of those social and humanitarian reform movements which infringed upon individual liberty and private property. Thus they were hostile to the abolitionists even though this meant ignoring the question of freedom for the black slave. Imprisonment for debt attracted little attention from either Democrats or workingmen until public interest in the matter became too strong to be ignored. The workingmen’s parties were, however, in a peculiar position because wage earners wanted preferential creditor status through a mechanics’ lien law. Even public schools had difficulty winning Democratic support because their expense involved heavier taxation. Charity schools and use of the Lancastrian system of pupil tutors instead won Democratic favor. A system of statewide public education would also interfere with parents’ control over their children and might undermine religious freedom.4

In Washington, Andrew Jackson, the Democrats’ hero, enjoyed an uneasy and controversial Presidency. His years in office from 1829 to 1837 formed an era in which easy credit, cheap land, and internal improvements all contributed to an inflationary prosperity. At the same time, Jackson’s own inclinations tended toward the limitations on federal spending favored by his friend and political adviser Van Buren. As governor of New York in 1828, Van Buren had secured passage of the Safety Fund System to safeguard the banks and assure the state of a source of credit and wealth to go along with the Erie Canal. The state-chartered New York banks cast doubt on the need for the federal United States Bank, while the state-constructed Erie Canal rebuked the western states’ clamor for federal aid for their own internal improvements. Moreover, the Jeffersonian principle of states’ rights and opposition to federal centralized power, espoused by Van Buren and the New York Locofoco Democrats, was also able to gain national success by Jackson’s Bank of the United States and Maysville Road vetoes.5

In 1836 the United States for the only time in its history was without a national debt; a year later the federal government was briefly in a position to distribute its surplus revenues to the states. But the Jacksonians, despite the President’s efforts to moderate or level out the economic boom, were unable to ward off its financial aftermath in the Panic of 1837. Van Buren, Jackson’s successor in the White House, fell a political victim to the Panic, and in New York in 1838 the Democrats were overturned by the Whigs who elected William H. Seward as governor. Governor Seward, it should be noted, was an admirer of DeWitt Clinton who had earlier helped inaugurate the transportation revolution in New York. Upon completion of the Erie Canal in 1825, he had urged further state expenditures for new canals, turnpikes, and eventually railroads, as well as a generous policy of chartering banks and insurance companies. Now, in 1840, the Whigs under Governor Seward called for the appropriation of four million dollars for ten years to build additional canals and railroads. Henceforth dubbed “the forty million dollar party”, the Whigs to their misfortune had ignored the adverse effects of the Panic of 1837 on the state’s declining credit. Alarmed critics warned that the cost of public works would soon increase the state debt to as much as 75 million dollars with annual interest charges of 4.5 million. Already by 1842, when the Democrats regained control of the legislature and passed the stop and tax law, the state debt which five years earlier amounted to 7 million dollars had grown to 27 million dollars, and state bonds were unmarketable even at a discount of 20%. Instead of continuing to spend money for internal improvements, the Democrats, at a cost of 40 million dollars in principal and interest, proposed to extinguish the state
debt in twenty years. As a result of such conservative fiscal policies, within two months of the stop and tax law the state’s 7% bonds sold at par, while 5% bonds reached that level in 15 month.6

By the 1840s national opinion in regard to state aid for internal improvements was undergoing a change. The former public enthusiasm for heavy state expenditures had run its course. Some of the new states in the West were in default on their bonds. State initiative and responsibility had been necessary earlier for such ambitious undertakings as the Erie Canal, but after the return of prosperity in the 1840s private capital, just beginning to be accumulated by American manufacturing and industry, was available for investment. Railroads were now becoming the most important means of transportation, but railroads with their special rolling stock could not be considered public in the same sense as a canal, a river, or a turnpike. Although railroad builders frequently turned to the states to help raise the large amounts of capital they required, most of their funds in New York came from individual savings and from credit extended by American banks. Accordingly, while there was little foreign investment in, or municipal aid for, New York State railroads until after the Civil War, the New York Central by 1853 had 2331 stockholders.7

The decline of public aid and intervention in economic enterprise was most marked in some of the eastern states where the old colonial concept of the commonwealth fell victim to a surge of anti-government feeling. Although various economic and social groups continued to desire political intervention in behalf of their own self-interests, the fear of more state taxes and increasing state indebtedness blocked heavy public expenditures throughout the 1840s. Instead of continuing to take a positive, direct role in the economy, the state granted its economic powers to private banks and stock companies. For example, the Free Banking Act passed by New York in 1838 abolished the old system requiring special legislation for each bank charter and in effect introduced competition into banking. Under general incorporation laws, state charters were now granted to all manner of enterprises which, in pursuing their own private ends, were largely freed of the public responsibility associated with governmental agencies and the earlier semiprivate corporation. Democratic reluctance to continue the specially chartered corporation for a favored few had dispersed the privilege of incorporation among many stockholders and had separated it from responsibility to the state.8

Legislation for free banking and general incorporation laws accordingly had the support not only of the business community but also of those opposed to all governmental aid and protection for selected enterprises. Locofoco Democrats and workingmen united in the crusade against economic monopoly and special privilege, although labor sometimes identified its own true interest with that of the whole community. In any case, the state was usually too weak in an administrative sense to enforce either its own definition of the public interest, or to give its full support to various private or special interest groups. Thus laissez faire and the cry of equal rights for all and special privileges for none was a more appealing political philosophy in the 1830s and ’40s than any Whiggish notions of a paternalistic and expensive government.9

It was in response to these views that the Democrats pushed ahead with their plans for drafting a new state constitution. William C. Bouck, the conservative or Hunker Democratic successor to Seward as governor in 1843 and 1844, favored a moderate course on internal improvements despite the Democrats’ stop and tax law of 1842. But when Silas Wright, a close friend of Van Buren and the staunchest disciple of Jeffersonian agrarian democracy in New York State, was put forward for the nomination of governor, Bouck and the conservative Hunker faction had to retreat. Wright in his first annual governor’s message in January 1845 praised the stop and tax law for restoring the state’s credit. Three fifths of the state’s debt charged to the General Fund, he pointed out, had been incurred by unwise loans to railroads that had proved unable to pay their obligations. Wright also announced that he favored calling a constitutional convention.10

In a series of articles analyzing the progress of constitutional reform, which appeared at this time in the Democratic Review, John Bigelow, one of the party’s intellectuals, listed some of the changes which he believed New York and other states should adopt. These included a provision that “The state should have no power to contract debts, or loan its credit, except in case of war, invasion, or insurrection.” In the matter of a general incorporation law, Bigelow urged: “The members of such Corporations, (not excepting those established for education or charity) should be individually liable for the debts, liabilities, and acts of such Corporation, and for the consequences resulting therefrom.” Furthermore: “All laws or regulations interfering with the liberty of trade or industry (such as license and inspection laws) should be abolished, and their enactment for the future prohibited.” Bigelow added as miscellaneous proposals the abolishment of the death penalty and permission for women to control their own property after marriage.11

The New York Constitutional Convention, which met in the summer of 1846, completed its labors in time for the voters to approve its handiwork that same year. Although the anti-statist views of such Jeffersonian Democrats as Bigelow and Wright were subject to some modification and compromise, the New York Constitution of 1846 embodied the laissez-faire position better than any document in the state’s history. Only after all debts were paid through a sinking fund could the state appropriate any surplus for canal improvements and extensions not already mandated by law. Corporations including banks were to be chartered under general laws rather than by special act. Stockholders were made liable to the amount of their shares for all debts and liabilities contracted by their banks. As an epitaph to the anti-rent wars which had reached a climax in 1846, the Constitution abolished all feudal tenures and perpetual leases. Male suffrage was made universal except for Negroes who had to possess an estate of the value of $250, unless the people in a referendum on the question voted otherwise.12 This curious and illiberal provision, which was approved by the voters, retained the clause in the 1821 Constitution in which the property qualification was removed for whites but not for blacks. The Negro vote, traditionally cast in favor of the old Federalist slaveowning class, had continued to be exercised in behalf of Clinton and then the Whigs. Though never a large vote, it was opposed by the Democrats chiefly because of labor’s influence.13

In a retrospectwe article on constitutional government in the Democratic Review, Bigelow reiterated his libertarian views with the warning that “A great source of inequality in the conditions of men in respect of wealth and comfort arises from the action of law. Too much government has a direct tendency to aid one man or one set of men in the ‘pursuit of happiness’, and in the ‘acquiring, possessing, and protecting property’, if not at the expense of the rest, at least without rendering them the like assistance.”14 Unfortunately the Jacksonians, despite their defeat of the Bank of the United States, had not been able to slow the growth of wealth and inequality in New York and some of the larger cities in the East in the era before the Civil War. But their more radical laissez-faire views, as embodied in the stop and tax law and 1846 Constitution, disenchanted the wealthier business class which moved more than ever into the Whig Party. Work on the Erie Canal, which the Democrats had stopped in 1842, was resumed in 1847. Moreover, until 1850 railroads had to pay canal tolls to protect the state’s vested interested in “Clinton’s ditch”. After that, canal tolls were reduced to provide competition to the growing volume of traffic carried by the railroad.15

Historians of a later generation have grown accustomed to interpreting democracy and liberalism in terms of the modern welfare state. The negative democracy of the New York Democrats of the 1840s accordingly wins little contemporary approval. Democracy in the eyes of its later adherents has become synonymous with power, preferably such power as may be exercised by a strong executive in the name of people. Some historians even question whether the negative state can be democratic and reason that laissez faire must automatically favor an aristocracy of wealth.16 But what passes for the welfare state today rewards most of all its largest investors in the military-industrial complex. Beneficiaries of the welfare-warfare state’s largesse would be horrified by a return to the spirit of the 1840s or to any consistent across-the-board application of laissez faire. Meanwhile New York’s Constitution of 1846 remains an interesting, though passing, example of the enactment of Jeffersonian anti-statism into the fundamental law.

• 1. Useful general interpretations include: Dixon Ryan Fox, The Decline of Aristocracy in the Politics of New York, 1801–1840, ed. Robert V. Remini (1st pub. 1919; New York: Harper Torchbooks, 1965); Edward Pessen, Jacksonion America: Society, Personality, and Politics (Homewood, Ill.: Dorsey Press, 1968); Glyndon G. Van Deusen, “Aspects of Whig Thought in the Jacksonian Period,” American Historical Review, Vol. 63 (January, 1958). pp. 305–322.
• 2. “Introduction,” United States Magazine and Democratic Review, Vol. 1 (October, 1837), p. 6.
• 3. On Leggett, see his A Collection of the Political Writings, ed. Theodore Sedgwick, Jr. (2 vols.; New York: Taylor & Dodd, 1840); and the studies by Richard Hofstadter, “William Leggett: Spokesman of Jacksonian Democracy,” Political Science Quarterly, Vol. 58 (December, 1943), pp. 581–594; Marvin Meyers, The Jacksonsian Persuasian: Politics and Belief (Stanford, Calif.: Stanford University Press, 1957), chap. 9; Edward K. Spann, Ideals & Politics: New York Intellectuals and Liberal Democracy, 1820–1880 (Albany: State University of New York Press, 1972).
• 4. Herbert Ershkowitz and William G. Shade, “Consensus or Conflict? Political Behavior in the State Legislatures during the Jacksonian Era,” Journal of American History, Vol. 58 (December, 1971), pp. 591–621, reinforces the view of the age of Jackson as essentially one of laissez Faire. See also Peter J. Coleman, Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607–1900 (Madison: State Historical Society of Wisconsin, 1974).
• 5. New York and Van Buren’s influence on Washington and Jackson is discussed in Bray Hammond, Banks and Politics in America from the Revolution to the Civil War (Princeton, N.J.: Princeton University Press, 1957), p. 352.
• 6. Charles Z. Lincoln, The Constitutional History of New York (5 vols.; Rochester, N.Y.: Layers Co-Operative, 1906), Vol. 2, pp. 76, 81–84, 91ff., 165; Steward Mitchell, Horatio Seymour of New York (Cambridge, Mass.; Harvard University Press, 1938), p. 53.
• 7. Fox, Decline of Aristocracy, pp. 405–408; Carter Goodrich, “The Revulsion Against Internal Improvements,” Journal of Economic History, Vol. 10 (November, 1950), pp. 145–169; Harry H. Pierce, Railroads of New York: A Study of Government Aid, 1826–1875 (Cambridge, Mass.: Harvard University Press, 1953), pp. 8. 16.
• 8. Oscar and Mary Flug Handlin, Commonwealth: A Study of the Role of Government in the American Economy (1st pub. 1947; rev. ed. Cambridge, Mass.: Belknap-Harvard University Press, 1969), pp. 106ff., 160–161, 191.
• 9. Compare Walter Hugins, Jacksonian Democracy and the Working Class: A Study of the New York Workingmen’s Movement, 1829–1837 (Stanford, Calif.: Stanford University Press, 1960) and Douglas T. Miller, Jacksonian Aristocracy: Class and Democracy in New York (New York: Oxford University Press, 1967).
• 10. John A. Garraty, Silas Wright (New York: Columbia University Press, 1949), pp. 292, 235.
• 11. “The Progress of Constitutional Reform in the United States,” United States Magazine and Democractic Review, Vol. 18 (June, 1846), pp. 408–412, 420.
• 12. New York State Constitution of 1846, Article I, Section 12; II, 1; VII, 1, 2, 3; VIII, 1, 4 7.
• 13. Fox, Decline of Aristocracy, p. 269.
• 14. “Constitutional Governments,” United States Magazine and Democratic Review, Vol. 20 (March, 1847), p. 202.
• 15. Edward Pessen, Riches, Class, and Power before the Civil War (Lexington, Mass.: D.C. Heath, 1973); Frank Otto Gatell, “Money and Party in Jacksonian America: A Quantitative Look at New York City’s Men of Quality,” Political Science Quarterly, Vol. 82 (January, 1967), pp. 235–252; Don C. Sowers, The Financial History of New York State from 1789 to 1912 (New York: Columbia University Studies, 1914(, pp. 75, 85, 87.
• 16. See, for example, Arthur M. Schlesinger, Jr., The Age of Jackson (Boston: Little-Brown, 1945), pp. 512–514, 519–521; Lee Benson, The Concept of Jacksonian Democracy: New York as a Test Case (Princeton, N.J.: Princeton University Press, 1961), pp. 220ff.

The Bureau of Labor Statistic (BLS) released new jobs data on Friday. According to the report, seasonally adjusted total nonfarm jobs rose 339,000 jobs in May, well above forecasts. The unemployment rate rose slightly from 3.4 percent to 3.7 percent (month over month).

Headlines in the mainstream media declared the headline employment data to be evidence of very strong job growth and economic success. According to Politico, the latest jobs numbers are evidence of a “remarkable resilience of President Joe Biden’s economy” and NPR declared the job market to be “sizzling hot.” 

Yet, May appears to be yet another month in which it seems nearly every economic indicator except the payroll jobs data points to an economic slowdown. 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. 

So how do we square all this with yet another jobs report that claims to tell us that the job market is the best it’s been in decades? 

Well, a lot of the jobs data isn’t actually very good. The headlines have focused on the so-called Establishment Survey which is a survey of employers and shows only the number of positions, not the number of employed persons. The Household survey, on the other hand, surveys people. 

The Household survey over the past two years has not shown nearly as much job growth as the Establishment Survey. 

Specifically, we find that since 2022, the Establishment Survey and the Household Survey have ceased to follow a similar trend, with a sizable gap forming between the two surveys. In fact, over the past two years, the two surveys show a gap of 2.2 million: 

Moreover, in May, while the Establishment Survey showed a gain of 339,000 jobs month-over-month, the Household Survey showed a loss of 310,000 employed persons. That’s a gap of more than 600,000. Looking at month-to-month changes, we can also see how the two surveys have diverged since April 2022. 

Part of this growing gap may be due to the fact that the number of responses to the Establishment survey has dropped off in recent years, suggesting that the survey is waning in its reliability as an indicator of the overall economy. The Household Survey, meanwhile, has not seen as large a drop off in responses. 

Another factor is the fact that the Establishment Survey does not track self-employed workers, and self-employment has been a significant factor in employment trends over the past three years. Self-employment collapsed in April 2020, but surged by April 2021 to historic highs. It is unknown, of course, how many of these workers were actually replacing lost income from covid-related job losses in this period. By 2023, however, self-employment had collapsed again, and year-over-year self-employment growth dropped by 6.5 percent in May. Excluding the covid lockdown period, that’s the largest year-over-year percentage drop since December 2007, when the Great Recession officially began. 

We might also note that overall, the total number of payroll jobs, as shown in the Establishment Survey, is now up by 3.7 million jobs since the previous peak in March 2020 peak. The Household survey, on the other hand, shows total employed persons up by only 1.9 million persons over the same period. That’s a gap of 1.7 million. 

The fact that the two different employment reports tell two different stories has led some economists to wonder about the media’s rosy jobs narrative. As reported by Yahoo Finance last week, economist Ian Shepherdson noted

“This is the strangest employment report for some time… [R]ight now the data suggest that economic growth is stronger than is indicated by most other monthly data. The downward trend in job growth since the summer of 2021 now appears to have flattened-off, though that could change with revisions.”

And economist Paul Ashworth pointed out: 

“The bigger-than-expected 339,000 increase in non-farm payroll employment in May will dominate the headlines, but the employment report was not all positive — with a big drop in the household survey measure of employment driving the unemployment rate up to a seven-month high of 3.7% and average weekly hours worked edging down to a three-year low.”

We might also note that the year-over-year gain in average hourly earnings in May (according to the Household Survey) fell to a 25-month low. If the Cleveland Fed’s “Nowcast” is right about inflation for May, then May will have been another month of falling real wages.

Part of the confusion and contradictory date no doubt arises from the fact that “jobs” are not at all homogeneous and employment trends can differ greatly across different industries and regions. This is the natural outcome of fact that monetary inflation is not at all neutral as it enters the economy—as the Austrian School has long pointed out.  The current trend of rapidly decelerating monetary growth will have sizably different effects across the economy. The Establishment Survey is especially inept at capturing these trends in real time.  

We are familiar with the five stages of grief. However, it is not a stretch to apply those stages to what is happening to the banking system. Right now, we are in the second stage: anger.

Original Article: “The Five Stages of Bank Failure Grief”

A “soft landing” is impossible unless the government cuts both taxes and government spending at the same time interest rates are rising. This won’t happen, so get ready for a hard landing. 

Original Article: “Crowding Out: The Fed May Be Killing the Private Sector to Save the Government”

In an excellent display of how US foreign policy can be used as a means of pandering to domestic interest groups, the Biden administration has threatened to impose sanctions on Uganda as punishment for that regime’s adoption of new laws criminalizing some types of homosexual behavior. 

While it is abundantly clear that this move from the Ugandan state presents absolutely no threat to any vital US interest, the Biden administration apparently believes the situation requires immediate action by the US regime.

According to Axios, the Biden Administration’s proposed actions

includ[e] whether the U.S. will continue to safely deliver services under the U.S. President’s Emergency Plan for AIDS Relief and other forms of assistance and investments. … Biden administration officials will also review Uganda’s eligibility for the African Growth and Opportunity Act, which provides eligible sub-Saharan African countries with duty-free access to the U.S. market for hundreds of products.

What exactly are these new laws that require the State Department to get involved in the internal affairs of a country 8,000 miles away? According to The Hill, 

The new anti-gay law would impose the death penalty in cases of “aggravated homosexuality” and would impose a life sentence for engaging in gay sex. The state defines “aggravated homosexuality” as homosexual acts carried out by those infected with H.I.V. or homosexual acts that involve children, disabled people, or those drugged against their will. 

Or put another way, the death penalty will be imposed in many cases on those found guilty of engaging in sex with children and with people unable to consent. Even in those cases, these are pretty harsh penalties, and certainly few Americans—from any part of the political spectrum—would support such measures. 

The proposed method of punishing Ugandans is rather curious, however. Note that the sanctions being discussed include—ironically—cutting off AIDS relief dollars, plus dollars that the regime has long insisted are absolutely vital to economic development and poverty relief in the developing world. If that’s true, then the US regime proposes trying to impoverish ordinary Ugandans as punishment for acts of the Ugandan regime. 

It is also notable that the US regime appears to now be fixated on such laws in Uganda when similar laws already exist on the books of several US allies. For example, the death penalty can be imposed for various homosexual acts in Saudi Arabia, Qatar, and the United Arab Emirates. “Death by stoning” is also inflicted on alleged homosexuals in US ally Pakistan. Moreover, after 20-years of US occupation, Afghanistan imposes similar punishments. Those are just the places where the death penalty is potentially imposed. Homosexual acts are criminalized in a variety of countries that retain friendly relations with the US including Egypt—the top recipient of US foreign aid—plus Iraq, Jordan, South Sudan, and Nigeria. Homosexual sex between males can bring life imprisonment in Tanzania. 

So why is Uganda now so much in the crosshairs while Saudi Arabia escapes notice? 

The fact is the US regime is threatening sanctions on ordinary Ugandans because it can.  Given that there is no sizable or electorally powerful Ugandan population in the US, it costs the administration nothing to denounce Uganda while also virtue signaling to extremely powerful and well-funded domestic LGBT interest groups. Denouncing the Saudis or the Qataris, on the other, hand might bring geopolitical “complications” and thus you won’t hear much about Saudi or Qatari punishment of homosexual acts in the US media or in Washington. 

The US’s Moralistic and Imperialist Impulses 

Moreover, Washington’s willingness to immediately begin threatening sanctions against some faraway country has been part of the overall imperialist impulse that has prevailed in Washington since the end of the Cold War. This was when the US shifted toward become an ever-more-aggressive world morality police that would attempt to globally “protect right” in vague mimicry of how the federal government—via the federal courts and threats of cutting off federal funding—dictates to the states what counts as acceptable law.

This new scheme was apparent by 1994 when Murray Rothbard wrote a sarcastic article suggesting that the US be prepared to invade any foreign country where the local regime has not sufficiently embraced the American regime’s cultural ideals. The key, Rothbard contends, was to define every foreign “deviation” as a threat to US national security. Rothbard noted that even by the mid 1990s, American interventionists such as the neoconservatives had already “cunningly redefined ‘national interest’ to cover every ill, every grievance, under the sun.”

This naturally would lead, Rothbard suggested, to the need to intervene in nearly every foreign country on earth:

Is someone starving somewhere, however remote from our borders? That’s a problem for our national interest. Is someone or some group killing some other group anywhere in the world? That’s our national interest. Is some government not a “democracy” as defined by our liberal-neocon elites? That challenges our national interest. Is someone committing Hate Thought anywhere on the globe? That has to be solved in our national interest. …And so every grievance everywhere constitutes our national interest, and it becomes the obligation of good old Uncle Sam, as the Only Remaining Superpower and the world’s designated Mr. Fixit, to solve each and every one of these problems. For “we cannot stand idly by” while anyone anywhere starves, hits someone over the head, is undemocratic, or commits a Hate Crime.

And so, since no other countries shape up to U.S. standards in a world of Sole Superpower they must be severely chastised by the U.S., I make a Modest Proposal for the only possible consistent and coherent foreign policy: the U.S. must, very soon, Invade the Entire World! Sanctions are peanuts; we must invade every country in the world, perhaps softening them up beforehand with a wonderful high-tech missile bombing show courtesy of CNN. 

The good news in the Uganda case is that at least we’re not hearing any calls for actual regime change or “boots on the ground” in Uganda (so far). 

Fortunately, many Americans haven’t yet bought into the idea that every objectionable act by foreign regimes can be defined as a threat to US national interests. This is why even today, when Washington targets some foreign regime for “regime change” or economic sanctions or a volley of cruise missiles, the American interventionists usually try to at least suggest that the target regime is some kind of threat to US “national interests.” 

Experience suggests that if the regime really wants to get the American public riled up about a new war, Washington has to make the case for something beyond mere “humanitarian” intervention. This is why the Bush administration felt it had to trump up accusations of “weapons of mass destruction” in Iraq. It’s why President Obama claimed the US has a “national security interest in … ensuring that we’ve got a stable Syria.” It’s why those who wanted a US war with Bosnia insisted that conflict in the Balkans in the mid 1990s provided a threat to “vital” US interests such as “European stability” and NATO unity. 

Sometimes, though, some foreign countries are so obviously not a threat to the US that “humanitarian” meddling through military action isn’t politically viable. In those cases, the regime usually falls back on “sanctions.” 

This strategy has been around a long time. Murray Rothbard noticed this trend in 1994 as well, and he listed just some of the real-life suggested sanctions that could be employed to whip foreign regimes into line:

In recent weeks, in addition to humanitarian troops, there had been escalating talk of American “sanctions”: against North Korea of course, but also against Japan (for not buying more U.S. exports), against Haiti, against the Bosnian Serbs… Jesse Jackson wants the U.S. to invade Nigeria pronto, and now we have Senato[r] Kerry (D., Mass.) calling for sanctions against our ancient foe, Canada, for not welcoming New England fishermen in its waters.

Uganda is just one of a great many regimes targeted in this fashion in recent decades. 

Yet the landscape has changed considerably since 1994. In 2023, the US obsession with sanctioning dozens of countries has backfired and begun to isolate the US more and more from the developing world and from any regime that doesn’t enjoy taking orders from Washington. This includes the regimes in some of the world largest economies, including China, India, and Brazil. The US’s tendency to incessantly turn to sanctions to make a political point—and the apparent capriciousness with which the US regime is willing to do so—only motivates the world’s regimes to insulate themselves from the US, whether through minimizing dollar transactions or forming tighter alliances with potential allies outside the US orbit. We may soon find Uganda looking for a similar way out. 

Read More:

• “Thanks to Sanctions, the US Is Losing Its Grip on the Middle East“
• “Will Biden Sanction Half the World to Isolate Russia?“
• “Why Sanctions Don’t Work, and Why They Mostly Hurt Ordinary People” 

The eminent economist Edmund Phelps is a “liberal” in the modern sense, not a libertarian, but in his recent book My Journeys in Economic Theory (Columbia University Press, 2023), he makes a number of points that those of us who are libertarians will find useful.

Opponents of rights-based libertarianism like Andrew Koppelman in his book Burning Down the House say that without government welfare programs, the poor would perish. This outcome is fine with libertarians, Koppelman thinks. Those who can’t take care of themselves deserve to die. Supporters of the free market respond, however, that private charity would not be lacking in a free society.

Phelps points out that people voluntarily donate substantial amounts of money to charity:

Standard economic theories fail to account adequately for the gift-giving, donations, and philanthropic investing that people occasionally do with the money that comes from their income and capital gains after meeting their needs to spend and save, as well as with the time they have, after meeting their needs to work. This phenomenon became increasingly widespread as more and more people had money and time to spare. In fact, people from mid-nineteenth century to the mid-twentieth century could increasingly afford to exercise altruism and display ethical standards to the extent they had these qualities—more so the greater time and money they had for these acts.

Some people may object to the word “altruism,” thinking that this calls for sacrifice of one’s own well-being for others, but this isn’t what Phelps has in mind. His point is that people’s preferences often include desires to help others. If that is true, helping them does not go against their own well-being.

As I mentioned, Phelps doesn’t favor the unhampered market, but he raises some useful cautions about some popular egalitarian approaches to helping the needy. He is especially interested in the work of John Rawls, who was a friend of his, and he stresses points about Rawls’s theory of justice that are frequently ignored.

First, as is well known, Rawls’s “difference principle” calls for maximizing the welfare of the least well-off class in society. To do this, the government must tax the better off and distribute the proceeds to the least well-off, to the maximum extent that doing this will benefit them. But if the government does so, this raises a problem for “liberals.” They want the government to spend money on all sorts of other things, but to the extent that the state follows Rawls’s theory of justice, it can’t do this.

Phelps was aware of this problem for redistributionist theories even before Rawls’s ideas became prominent. In a meeting he had with Betty Friedan and a few other people,

a congenial member of Congress . . . raised the matter of the lopsided income distribution in the country and started discussion of a big plan to redistribute incomes. In a chat with Betty in the parking lot later that day, I said she should be aware that such a scheme would require a huge amount of tax revenue, so its adoption would leave little money, if any, to spend on other initiatives of great value to this country.

Liberals who support Rawls’s theory have to confront what for them are uncomfortable choices.

Phelps tightens the pressure on contemporary egalitarians with another point. When Rawls talks about helping the least well-off class, he means the working poor, not those who are so badly off that they can’t work at all. People in his “original position” are trying to arrive at principles to benefit from the gains of social cooperation. Those who don’t contribute at all aren’t included. But Phelps notes that Rawls’s book was “understood by most if not nearly all of the essayists invoking his name as a call for huge tax revenue to be spent on all sorts of welfare programs with little or no concern for the disadvantaged workers.”

Some egalitarians would respond to this point about Rawls’s theory by abandoning it or modifying it: Let’s help others besides the working poor, they would say. Phelps raises a problem for them as well. Specifically, he strongly rejects proposals for a universal basic income (UBI) that would give people money regardless of whether or not they worked:

Unfortunately, the institution of a UBI in a country, although it would be one way to provide the poor with the income with which to live, would do nothing to pull up wages of low-wage workers so they can support themselves—an ability that, in the Western nations at any rate, people need so that they can support their self-esteem. (A cascade of indirect effects might raise wages a little for a while but would slow the growth of wages over the near future.) UBI would draw people away from work, thus causing them to miss the dignity, sense of belonging, self-respect, self-help, and job satisfaction that come only from work . . . the UBI would entice people and their children away from meaningful work and thus from a sense of involvement in the economy—society’s central project. It is disappointing that UBI has not received widespread opposition.

Phelps has first put pressure on Rawlsians and then on UBI defenders. He says to the first group, “If you concentrate only on low-income workers, you will have to give up other projects” and to the second, “If you institute a UBI, you won’t be doing justice to low-income workers.” But the pressure isn’t equal: Phelps is much more favorable to helping workers than to a position that favors the poor in general without giving workers priority.

Phelps asked Rawls about aid to the nonworking poor:

I wrote a letter to Jack [Rawls] in mid-April 1976 from Amsterdam urging him to explain again that his theory is about helping the least advantaged, not the poor in general. Years went by, though, without a response. At last he responded in his paper “The Priority of Right and Ideas of the Good”. . . . In that paper he wrote, “Those who surf all day off Malibu must find a way to support themselves and would not be entitled to public funds.” I felt my understanding of [A Theory of] Justice was vindicated.

We may be grateful to Phelps for showing that those who want to take away people’s money through taxation have to face tough choices. We should instead leave the choices of which people to help to the voluntary decisions of people in the free market.

Per Bylund joins Bob to discuss his new paper at the QJAE, which points out several flaws in the MMT claim that money is valued in order to pay taxes.

Per’s QJAE article: Mises.org/HAP398a