Hayek's The Constitution of Liberty explained: rule of law, knowledge and the welfare state

Friedrich A. Hayek published The Constitution of Liberty with the University of Chicago Press in 1960, fourteen years before he shared the Nobel Prize in economics with Gunnar Myrdal. Yesterday we set him against Mariana Mazzucato in Mazzucato vs Hayek, using his 1945 essay on knowledge. Today the book itself, because it is a far more interesting work than the Hayek of slogans, and because a programme about an agile Spanish state needs his idea of the rule of law.

The Definitive Edition, edited by Ronald Hamowy in 2011, runs to 688 pages. The publisher describes it as a defence of a free society that casts a sceptical eye on the growth of the welfare state. In Spanish it is Los fundamentos de la libertad, from Unión Editorial. For what follows we lean on the publisher's pages, the Stanford Encyclopedia of Philosophy and Eugene F. Miller's chapter-by-chapter guide for the Institute of Economic Affairs (2010).

Liberty, ignorance and the rule of law

The book has three parts. The first explains why we want liberty and what it does for us. The second looks at the institutions the West built to protect it. The third applies the principles to the economic and social questions of the 1950s: social security, taxation, housing, agriculture, education. A postscript, "Why I Am Not a Conservative", closes it.

Hayek defines liberty narrowly, as the condition in which coercion of some people by others is reduced as far as possible in society. His reason for valuing it is humble. Ignorance, in his account, is unavoidable and universal, and it includes the people in power. Most of what a society knows is scattered across millions of heads, and order grows partly by itself out of people with limited knowledge dealing with each other. He builds on the Scottish Enlightenment here, and sets aside the natural rights and social contract of Locke.

From that comes the core of the book. Government has to stop people coercing each other, and its own coercion has to be limited and made predictable by general rules that apply to everyone, including the people who make and enforce the law. Miller summarises Hayek's rule of law like this: law must be general, known and certain; it must apply equally to all; there must be an independent judiciary; the executive must be bound by rules set by the legislature and the courts; and fundamental rights must be protected. Hayek accepts that government needs a great deal of discretion in managing its own resources. When it coerces a private person, though, the decision must follow from the rules, and an independent court must be able to review it. People have little to fear from general laws, he argues, and much to fear from officials told to carry out a majority's wishes case by case.

The welfare state Hayek accepted

This is where readers who know Hayek only by reputation get a surprise. He writes that the old formulas of laissez-faire give no adequate criterion, and that "it is the character rather than the volume of government activity that is important". He lists jobs the state may legitimately do: a reliable currency, weights and measures, land registration and statistics, support for education, sanitary and health services, roads, urban amenities and public works.

He goes further. Government may assure a minimum of sustenance for everyone, uniform and tied to proven need, and Hayek admits this means some redistribution of income. Because that minimum exists, the state may also oblige people to insure against common risks such as old age, unemployment and sickness, so they do not fall on the public. Education can be compulsory up to a point and paid for publicly, through vouchers if need be, without the state running every school. The Stanford Encyclopedia sums it up: Hayek had no particular objection to public education or the minimal elements of a welfare state.

What he opposed was the state deciding what income each person deserves relative to others. He attacked social insurance organised as a single compulsory state monopoly, and progressive income tax, which he thought broke equality before the law; he argued that every argument for some progression justifies any degree of it, and proposed proportional taxation. He rejected rent control and public and subsidised housing because they make tenants dependent on officials' discretion, while accepting building regulation and land-use planning in principle. And he saw agricultural price supports as a forced transfer from town to country.

In the postscript he refuses the conservative label. Conservatism, he says, cannot offer an alternative to the direction society is moving in, and the chief evil is unlimited government. He calls himself an unrepentant Old Whig.

What Spain can take from it

Hayek's best idea for us is his test: look at the character of what government does. A Spanish reader can apply it straight away. A large welfare state can pass it if its benefits are rights defined by clear rules, paid automatically and reviewable by a court. A small state can fail it if every licence, subsidy or appointment depends on an official's favour. Much of the speech by Democracia 21 we analysed in our overview, on suffocating bureaucracy and clientelism, is a complaint about discretion, which is Hayek's subject.

Our position combines three things. From the left, and from Hayek himself, we take the floor: a guaranteed minimum for everyone, compulsory insurance against the big risks and schools paid for by all, which in Spain means taking the minimum income scheme seriously as a right. From the liberal tradition we take government bound by general rules known in advance, equal for all, with as little case-by-case discretion over citizens as possible. The idea that belongs to neither camp is to treat discretion itself as the thing to design out. Entitlements should be calculated and paid from data the administration already holds, with every refusal reasoned and quickly appealable; licences should be granted by rule, with deadlines after which silence means yes; and where officials must judge, their decisions should be published. That makes the social floor more generous and the state more Hayekian at the same time.

Hayek would argue with us about tax and housing, and that argument is worth having. On the rule of law he is the right guide for anyone who wants Spain's state to be both large enough to protect people and predictable enough to leave them free.