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Friedrich Hayek (1899-1992)
Friedrich von Hayek was born into a family of scholars in Vienna. After dropping the aristocratic “von,” he earned doctorates in both economics and political science at the University of Vienna in the early 1920s. He conducted economic research in several countries, including the US, before becoming a professor at the London School of Economics in 1938.
Inspired by Ludwig von Mises’ critique of socialism, Hayek wrote The Road to Serfdom, which was published in 1944. Hayek criticized both the UK and US for moving towards centrally-planned economies, arguing that retaining these extensive controls after World War II could lead to the end of democratic government. He argued that the rule of law and a market economy are essential to preserving both civil and political rights.
Hayek moved to the US in 1950, when he became a professor at the University of Chicago. Joining forces with Milton Friedman, the duo became America’s leading defenders of libertarianism. The Constitution of Liberty, published in 1959, updated his ideas for the postwar world. Hayek was awarded the Nobel Prize in economics in 1974 for his work in demonstrating how price changes communicate information to market participants.
The Constitution of Liberty (1959)
Friedrich Hayek saw isonomia–the requirement of equality under the law–as an essential component of the US Constitution. In The Constitution of Liberty, he sought to show how isonomia reinforced liberties protected by the Bill of Rights to ensure the freedom for all Americans. He agreed with earlier critics that government intervention into the market elevated some interests above others, and thus he opposed actions that favored well-connected businesses. However, he recognized that government action was necessary to ensure that market participants were provided with the knowledge to make meaningful choices, which meant that licensing and inspection were worth the expenditure of tax dollars. He also argued that people in extreme poverty could never receive isonomy unless they were provided with a basic safety net to ensure that they would not perish from hunger, homelessness, and lack of medical care. Hayek’s arguments for a minimal welfare state helped create a consensus among Americans that some level of public assistance was required to make freedom possible for all.
“Isonomia” was imported into England from Italy at the end of the sixteenth century as a word meaning “equality of laws to all manner of persons”; shortly afterward it was freely used by the translator of Livy in the Englished form “isonomy” to describe the state of equal laws for all and responsibility of the magistrates. It continued in use during the seventeenth century until “equality before the law,” “government of law,” or “rule of law” gradually replaced it….
When it first appeared, it described a state which Solon had earlier established in Athens when he gave the people “equal laws for the noble and base” and thereby gave them “not so much control of public policy as the certainty of being governed legally in accordance with the known rules.” Isonomy was contrasted with the arbitrary rule of tyrants and became a familiar expression in popular drinking songs celebrating the assassination of one of these tyrants. The concept seems to be older than demokratia, and the demand for equal participation of all in the government appears to have been one of its consequences….
The spirit of the laws of free Rome has been transmitted to us mainly in the works of the historians and orators of the period… Cicero indeed became the main authority for modern liberalism, and we owe to him many of the most effective formulations of freedom under the law. To him is due the conception of general rules or leges legum, which govern legislation, the conception that we obey the law in order to be free, and the conception that the judge ought to be merely the mouth through whom the law speaks….
Thereafter, for a thousand years, the conception that legislation should serve to protect the freedom of the individual was lost. And when the art of legislation was rediscovered, it was the code of Justinian with its conception of a prince who stood above the law that served as a model on the Continent.
In England, however, the wide influence which the classical authors enjoyed during the reign of Elizabeth helped to prepare the way for a different development. Soon after her death the great struggle between king and Parliament began, from which emerged as a by-product the liberty of the individual….
Ever since a court had laid down in the famous Case of Monopolies that the grant of exclusive rights to produce any article was “against the common law and the liberty of the subject,” the demand for equal laws for all citizens became the main weapon of Parliament in its opposition to the king’s aims. Englishmen then understood better than they do today that the control of production always means the creation of privilege….
[I]t came to be recognized, as Parliament began to act as arbitrarily as the king, that whether or not an action was arbitrary depended not on the source of the authority but on whether it was in conformity with preexisting principles of law. The points most frequently emphasized were that there must be no punishment without a previously existing law providing for it, that all statutes should have only prospective and not retrospective operation, and that the discretion of all magistrates should be strictly circumscribed by law. Throughout, the governing idea was that the law should be king, or as one of the polemical tracts of the period expressed it, Lex, Rex.
Gradually, two crucial conceptions emerged as to how these basic ideals should be safeguarded: the idea of a written constitution and the principle of the separation of powers….
While in his philosophical discussion Locke’s concern is with the source which makes power legitimate and with the aim of government in general, the practical problem with which he is concerned is how power, whoever exercises it, can be prevented from becoming arbitrary: “Freedom of men under government is to have a standing rule to live by, common to every one of that society, and made by the legislative power erected in it; a liberty to follow my own will in all things, where that rule prescribes not; and not to be subject to the inconstant, uncertain, arbitrary will of another man.” It is against the “irregular and uncertain exercise of the power” that the argument is mainly directed: the important point is that “whoever has the legislative or supreme power of any commonwealth is bound to govern by establish standing laws promulgated and known to the people, and not be extemporary decrees; by indifferent and upright judges, who are to decide controversies by those laws; and to employ the forces of the community at home only in the execution of such laws.” Even the legislature has no “absolute arbitrary power,” “cannot assume to itself a power to rule by extemporary arbitrary decrees, but is bound to dispense justice, and decide the rights of the subject by promulgated standing laws, and known authorized judges,” while the “supreme executor of the law … has no will, no power, but that of the law.”… [H]is ultimate aim throughout is what today is often called the “taming of power”: the end why men “choose and authorize a legislative is that there may be laws made, and rules set, as guards and fences to the property of all the members of society, to limit the power and moderate the dominion of every part and member of that society.”…
Until the final break, the claims and arguments advanced by the colonists in the conflict with the mother country were based entirely on the rights and privileges to which they regarded themselves entitled as British subjects. It was only when they discovered that the British constitution, in whose principles they firmly believed, had little substance and could not be successfully appealed to against the claims of Parliament, that they concluded that the missing foundation had to be supplied. They regarded it as fundamental doctrine that a “fixed constitution” was essential to any free government and that a constitution meant limited government. From their own history they had become familiar with written documents which defined and circumscribed the powers of government such as the Mayflower compact and the colonial charters.
Their experience had also taught them that any constitution that allocated and distributed the different powers thereby necessarily limited the powers of any authority. A constitution might conceivably confine itself to procedural matters and merely determine the source of all authority. But they would hardly have called “constitution” a document which merely said that whatever such and such a body or person says shall be law. They perceived that, once such a document assigned specific powers to different authorities, it would also limit their powers not only in regard to the subjects or the aims to be pursued but also with regard to the methods to be employed. To the colonists, freedom meant that government should have powers only for such action as was explicitly required by law, so that nobody should possess any arbitrary power.
The conception of a constitution thus became closely connected with the conception of representative government, in which the powers of the representative body were strictly circumscribed by the document that conferred upon it particular powers. The formula that all power derives from the people referred not so much to the recurrent election of representatives as to the fact that the people, organized as a constitution-making body, had the exclusive right to determine the powers of the representative legislature. The constitution was thus conceived as a protection of the people against all arbitrary action, on the part of the legislative as well as the other branches of the government….
The idea of a constitution, therefore, involves not only the idea of hierarchy of authority or power but also that of a hierarchy of rules or laws, where those possessing a higher degree of generality and proceeding from a superior authority control the contents of the more specific laws that are passed by a delegated authority….
The fundamental distinction between a constitution and ordinary laws is similar to that between laws in general and their application by the courts to a particular case: as in deciding concrete cases the judge is bound by general rules, so the legislature in making the particular laws is bound by the more general principles of the constitution. The justification for these distinctions is also similar in both cases: as a judicial decision is regarded as just only if it is in conformity with a general law, so particular laws are regarded as just only if they conform to more general principles. And as we want to prevent the judge from infringing the law for some particular reason, so we also want to prevent the legislature from infringing certain general principles for the sake of temporary and immediate aims.
We have already discussed the reason for this need … that all men in the pursuit of immediate aims are apt—or, because of the limitations of their intellect, in fact bound—to violate rules of conduct which they would nevertheless wish to see generally observed. Because of the restricted capacity of our minds, our immediate purposes will always loom large, and we will tend to sacrifice long-term advantages to them. In individual as in social conduct we can therefore approach a measure of rationality or consistency in making particular decisions only by submitting to general principles, irrespective of momentary needs. Legislation can no more dispense with guidance by principles than any other human activity if it is to take account of effects in the aggregate….
[A] constitutional system does not involve an absolute limitation of the will of the people but merely a subordination of immediate objectives to long-term ones. In effect this means a limitation of the means available to a temporary majority for the achievement of particular objectives by general principles laid down by another majority for a long period in advance. Or, to put it differently, it means that the agreement to submit to the will of the temporary majority on particular issues is based on the understanding that this majority will abide by more general principles laid down beforehand by a more comprehensive body.
This division of authority implies more than at first may be apparent. It implies a recognition of limits to the power of deliberative reason and a preference for reliance on proved principles over ad hoc solutions; furthermore, it implies that the hierarchy of rules does not necessarily end with the explicitly stated rules of constitutional law. Like the forces governing the individual mind, the forces making for social order are a multilevel affair; and even constitutions are based on, or presuppose, an underlying agreement on more fundamental principles…. [A] group of men can form a society capable of making laws because they already share common beliefs which make discussion and persuasion possible and to which the articulated rules must conform in order to be accepted as legitimate.
From this it follows that no person or body of persons has complete freedom to impose upon the rest whatever laws it likes… Constitutionalism means that all power rests on the understanding that it will be exercised according to commonly accepted principles, that the persons on whom power is conferred are selected because it is thought that they are most likely to do what is right, not in order that whatever they should do be right. It rests, in the last resort, on the understanding that power is ultimately not a physical fact but a state of opinion which makes people obey… The Constitution which the new American nation was to give itself was definitely meant not merely as a regulation of the derivation of power but as a constitution of liberty, a constitution that would protect the individual against arbitrary government….
If we consider that the aim of the Constitution was largely to restrain legislatures, it becomes evident that the arrangements had to be made for applying such restraints in the way that other laws are applied—namely, through courts of justice. It is therefore not surprising that a careful historian [C.H. McIlwain] finds that “judicial review, instead of being an American invention, is as old as constitutional law itself, and without it constitutionalism would never have been attained.” In view of the character of the movement that led to the design of a written constitution, it must indeed seem curious that the need for courts which could declare laws unconstitutional should have ever been questioned. The important fact, at any rate, is that to some of the drafters of the Constitution judicial review was a necessary and self-evident part of a constitution….
It is time to try to pull together the various historical strands and to state systematically the essential conditions of liberty under the law. Mankind has learned from long and painful experience that the law of liberty must produce certain attributes. What are they?
The first point that must be stressed is that, because the rule of law means that government must never coerce an individual except in the enforcement of a known rule, it constitutes a limitation on the powers of all government, including the powers of the legislature. It is a doctrine concerning what the law ought to be, concerning the attributes that a particular law ought to possess. This is important because today the conception of the rule of law is sometimes confused with the requirement of mere legality in all government action. The rule of law, of course, presupposes complete legality, but this is not enough; if a law gave the government unlimited power to act as it pleased, all its actions would be legal, but it would certainly not be under the rule of law. The rule of law, therefore, is also more than constitutionalism: it requires that all laws conform to certain principles.
From the fact that the rule of law is a limitation upon all legislation, it follows that it cannot itself be a law in the same sense as laws passed by the legislator. Constitutional provisions may make infringements of the rule of law more difficult. They may help to prevent inadvertent infringements by routine legislation. But the ultimate legislator can never limit his own powers by law, because he can always abrogate any law he has made. The rule of law is therefore not a rule of the law, but a rule concerning what the law ought to be, a meta-legal doctrine or political ideal. It will be effective only in so far as the legislator feels bound by it. In a democracy this means it will not prevail unless it forms part of the moral tradition of the community, a common ideal shared and unquestionably accepted by the majority….
It is equally important to remember that the rule of law restricts government only in its coercive activities. These will never be the only functions of government. Even in order to enforce the law, the government requires an apparatus of personal and material resources which it must administer. And there are whole fields of government activity, such as foreign policy, where the problem of coercion of the citizens does not normally arise….
In current practice, everything is called “law” which has been resolved in the appropriate manner by a legislative authority. But of these laws in the formal sense of the word, only some—today only a very small proportion—are substantive (or “material”) laws regulating the relations between private persons or between such persons and the state. The great majority of the so-called laws are rather instructions issued by the state to its servants concerning the manner in which they are to direct the apparatus of government and the means that are at their disposal….
[A]lthough government has to administer means which have been put at its disposal (including the services of all those whom it has hired to carry out its instructions), this does not mean that it should similarly administer the efforts of private citizens. What distinguishes a free from an unfree society is that in the former each individual has a recognized private sphere clearly distinct from the public sphere, and the private individual cannot be ordered about but is expected to obey only the rules which are equally applicable to all….
The second chief attribute which must be required of true laws is that they be known and certain. The importance which the certainty of the law has for the smooth and efficient running of a free society can hardly be exaggerated. There is probably no single factor which has contributed more to the prosperity of the West than the relative certainty of the law which has prevailed here… [T]he degree of the certainty of the law must be judged by the disputes which do not lead to litigation because the outcome is practically certain as soon as the legal position is examined. It is the cases that never come before the courts, not those that do, that are the measure of the certainty of the law….
The essential point is that the decisions of the courts can be predicted, not that all the rules which determine them can be stated in words… Many of the legal principles on which the conclusions depend will only be implicit in the body of formulated law and will have to be discovered by the courts. This, however, is not a peculiarity of legal reasoning. Probably all generalizations that we can formulate depend on still higher generalizations which we do not explicitly know but which nevertheless govern the working of our minds. Though we will always try to discover those more general principles on which our decisions rest, this is probably by its nature an unending process that can never be completed.
The third requirement of true law is equality. It is as important, but much more difficult, to define than the others. That any law should apply equally to all means more than that it should be general…. A law may be perfectly general in referring only to formal characteristic of the persons involved and yet make different provisions for different classes of people…. It must be admitted that, in spite of many ingenious attempts to solve this problem, no entirely satisfactory criterion has been found that would always tell us what kind of classification is compatible with equality before the law. To say, as has so often been said, that the law must not make irrelevant distinctions or that it must not discriminate between persons for reasons which have no connection with the purpose of the law is little more than evading the issue.
Yet, though equality before the law may thus be one of the ideals that indicate the direction without fully determining the goal and may therefore always remain beyond our reach, it is not meaningless… [o]ne important requirement that must be satisfied [is] that those inside any group singled out acknowledge the legitimacy of the distinction as well as those outside it….
The ideal of the rule of law requires that the state either enforce the law upon others—and that this be its only monopoly—or act under the same law and therefore be limited in the same manner as any private person. It is this fact that all rules apply equally to all, including those who govern, which makes it improbable that any oppressive rules will be adopted.
It would be humanly impossible to separate effectively the laying-down of new general rules and their application to particular cases unless these functions were performed by different persons or bodies. This part at least of the doctrine of the separation of powers must therefore be regarded as an integral part of the rule of law. Rules must not be made with particular cases in mind, nor must particular cases be decided in the light of anything but the general rule—although this rule may not yet have been explicitly formulated and therefore have to be discovered. This requires independent judges who are not concerned with any temporary ends of government….
The rule of law requires that the executive in its coercive action be bound by rules which prescribe not only when and where it may use coercion but also in what manner it may do so. The only way in which this can be ensured is to make all its actions of this kind subject to judicial review….
It is evident that not all the acts of government can be bound by fixed rules and that at every state of the government hierarchy considerable discretion must be granted to the subordinate agencies. So long as the government administers its own resources, there are strong arguments for giving it as much discretion as any business management would require in similar circumstances….
The problem of discretionary powers as it affects the rule of law is not a problem of the limitation of the powers of particular agents of government but of the limitation of the powers of government as a whole. It is a problem of the scope of administration in general… It is only when the administration interferes with the private sphere of the citizen that the problem of discretion becomes relevant to us; and the principle of the rule of law, in effect, means that the administrative authorities should have no discretionary powers in this aspect.
In acting under the rule of law the administrative agencies will often have to exercise discretion as the judge exercises discretion in interpreting the law. This, however, is a discretionary power which can and must be controlled by the possibility of a review of the substance of the decision by an independent court. This means that the decision must be deducible from the rules of law and from the circumstances to which the law refers and which can be known to the parties concerned….
“[I]n spite of the inevitable incompleteness of any bill of rights, such a bill affords an important protection for certain rights known to be easily endangered. Today we must be particularly aware that, as a result of technological change, which constantly creates new threats to individual liberty, no list of particular rights can be regarded as exhaustive….
If bills of rights are to remain in any way meaningful, it must be recognized early that their intention was certainly to protect the individual against all vital infringements of his liberty and that they therefore must be presumed to contain a general clause protecting against government’s interference those immunities which individuals in fact have enjoyed in the past….
We have up to this point represented those guaranties of individual freedom as if they were absolute rights which could never be infringed. In actual fact they cannot mean more than that the normal running of society is based on them and that any departure from them requires special justification. Even the most fundamental principles of a free society, however, may have to be temporarily sacrificed when, but only when, it is a question of preserving liberty in the long run, and in the case of war… [I]f the rule of law is to be preserved, it is necessary that such actions be confined to exceptional cases defined by rule, so that their justification does not rest on the arbitrary decision of any authority but can be reviewed by an independent court, and second, it is necessary that the individuals affected be not harmed by the disappointment of their legitimate expectations but be fully indemnified for any damage they suffer as a result of such action….
[T]he general argument for economic freedom … rest[s] on the fact that the great majority of government measures that have been advocated in this field are, in fact, inexpedient, either because they will fail or because their costs will outweigh their advantages. This means that, so long as they are compatible with the rule of law, they cannot be rejected out of hand as government intervention but must be examined in each instance from the viewpoint of expediency….
In other words, it is the character rather than the volume of government activity that is important. A functioning market economy presupposes certain activities on the part of the state; there are some other such activities by which its functioning will be assisted; and it can tolerate many more, provided that they are of the kind which are compatible with a functioning market. But there are those which run counter to the very principle on which a free system rests and which must therefore be altogether excluded if such a system is to work….
[T]he rule of law provides the criterion which enables us to distinguish between those measures which are and those which are not compatible with a free system. Those that are may be examined further on the grounds of expediency… [T]he observation of the rule of law is a necessary, but not yet a sufficient condition for the satisfactory working of a free economy….
In so far as the government merely undertakes to supply services which otherwise would not be supplied at all (usually because it is not possible to confine the benefits to those prepared to pay for them), the only question which arises is whether the benefits are worth the cost….
A great many of the activities which governments have universally undertaken in this field and which fall within the limits described are those which facilitate the acquisition of reliable knowledge about facts of general significance. The most important function of this kind is the provision of a reliable and efficient monetary system. Others scarcely less important are the setting of standards of weights and measures; the provision of information gathered from surveying, land registration, statistics, etc.; and the support, if not also the organization, of some kind of education.
All these activities of government are part of its effort to provide a favorable framework for individual decisions; they supply means which individuals can use for their own purposes. Many other services of a more material kind fall into that same category…. To this latter group belong all the services which are clearly desirable but which will not be provided by competitive enterprise because it would be either impossible or difficult to charge the individual beneficiary for them. Such are most sanitary and health services, often the construction and maintenance of roads, and many of the amenities provided by municipalities for the inhabitants of cities. Included also are the activities which Adam Smith described as “those public works, which, though they may in the highest degree be advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals.” And there are many other kinds of activity in which the government may legitimately wish to engage, in order perhaps to maintain secrecy in military preparations or to encourage the advancement of knowledge in certain fields. But though the government may at any moment be best qualified to take the lead in such fields, this provides no justification for assuming that this will always be so and therefore giving it exclusive responsibility…. [T]he services in question can generally be provided, and more effectively provided, by the government’s assuming some or all of the financial responsibility but leaving the conduct of the affairs to independent and in some measure competitive agencies….
Furthermore, a free system does not exclude on principle all those general regulations of economic activity which can be laid down in the form of general rules specifying conditions which everybody who engages in a certain activity must satisfy. They include, in particular, all regulations governing the techniques of production…. This is true of most of the wide field of regulations known as “factory legislation.”…
We must now turn to the kinds of government measures which the rule of law excludes in principle because they cannot be achieved by merely enforcing general rules but, of necessity, involve arbitrary discrimination between persons. The most important among them are decisions as to who is to be allowed to provide different services or commodities, at what prices or in what quantities—in other words, measures designed to control the access to different trades and occupations, the terms of sale, and the amounts to be produced or sold.
So far as the entry into different occupations is concerned, our principle does not necessarily exclude the possible advisability in some instances of permitting it only to those who possess certain ascertainable qualifications…. [I]t is probably undeniable that in some instances, such as where the sale of poisons or firearms is involved, it is both desirable and unobjectionable that only persons satisfying certain intellectual and moral qualities should be allowed to practice such trades….
There are several reasons why all direct control of prices by government is irreconcilable with a functioning free system…. In the first place, it is impossible to fix prices according to long-term rules which will effectively guide production. Appropriate prices depend on circumstances which are constantly changing and must be continually adjusted to them…. [W]ith prices different from those that would form on a free market, demand and supply will not be equal, and if the price control is to be effective, some method must be found for deciding who is to be allowed to buy or sell. This would necessarily be discretionary and must consist of ad hoc decisions that discriminate between persons on essentially arbitrary grounds….
The range and variety of government action that is, at least in principle, reconcilable with a free system is thus considerable. The old formulae of laissez-faire or non-intervention do not provide us with an adequate criterion for distinguishing between what is and what is not admissible in a free system…. [T]he continuous growth of wealth and technological knowledge which such a system makes possible will constantly suggest new ways in which government might render services to its citizens and bring such possibilities within the range of the practicable.
Why, then, has there been such persistent pressure to do away with those limitations upon government that were erected for the protection of individual liberty?… The answer is that during the last few generations certain new aims of policy have emerged which cannot be achieved within the limits of the rule of law. A government which cannot use coercion except in the enforcement of general rules has no power to … determine the material position of particular people or enforce distributive or “social” justice. In order to achieve such aims, it would have to pursue a policy which is best described—since the word “planning” is so ambiguous—by the French word dirigisme, that is, a policy which determines for what specific purposes particular means are to be used.
This, however, is precisely what a government bound by the rule of law cannot do…. The restrictions which the rule of law imposes on government thus precludes all the measures which would be necessary to ensure that individuals will be rewarded according to another’s conception of merit rather than according to the value that their services have for their fellows.
…[N]o government in modern times has ever confined itself to the “individualist minimum”… All modern governments have made provision for the indigent, unfortunate, and disabled and have concerned themselves with questions of health and the dissemination of knowledge. There is no reason why the volume of these pure service activities should not increase with the general growth of wealth. There are common needs that can be satisfied only by collective action and which can be thus provided for without restricting individual liberty. It can hardly be denied that, as we grow richer, that minimum of sustenance which the community has always provided for those not able to look after themselves, and which can be provided outside the market, will gradually rise, or that government may, usefully and without doing any harm, assist or even lead in such endeavors. There is little reason why the government should not also play some role, or even take the initiative, in such areas as social insurance and education….
[O]nce the rigid position that government should not concern itself at all with such matters is abandoned—a position which is defensible but has little to do with freedom—the defenders of liberty commonly discover that the program of the welfare state comprises a great deal more that is represented as equally legitimate and unobjectionable… Though the position that the state should have nothing to do with matters not related to the maintenance of law and order may seem logical so long as we think of the state solely as a coercive apparatus, we must recognize that, as a service agency, it may assist without harm in the achievement of desirable aims which perhaps could not be achieved otherwise….
[A]n important distinction has to be drawn between two conceptions of security: a limited security which can be achieved for all and which is, therefore, no privilege, and absolute security, which in a free society cannot be achieved for all. The first of these is security against severe physical privation, the assurance of a given minimum of sustenance for all; and the second is the assurance of a given standard of life, which is determined by comparing the standard enjoyed by a person or group with that of others. The distinction, then, is that between the security of an equal minimum income for all and the security of a particular income that a person is thought to deserve. The latter is closely related to the third main ambition that inspires the welfare state: the desire to use the powers of government to insure a more even or more just distribution of goods. Insofar as this means that the coercive powers of government are to be used to insure that particular people get particular things, it requires a kind of discrimination between, and an unequal treatment of, different people which is irreconcilable with a free society….