March 13, 2015

Hayek and the Economic Role of the State: Some Comparison with Keynes’ views

By

Vito Tanzi
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I. Historical Background

More than two centuries ago Edmund Burke wrote that “one of the finest problems in

legislation [is] to determine what the state ought to take upon itself to direct by the public

wisdom, and what it ought to leave, with as little influence as possible, to individual exertion.”

Burke’s problem has remained the most difficult and controversial problem in economics and in

politics. In a lecture that John Maynard Keynes gave in Berlin in 1926, he cited Jeremy Bentham

that “perhaps the chief task of economists… is to distinguish… the Agenda of Government from

Non-agenda; and the companion task of Politics is to devise forms of Government within a

Democracy which shall be capable of accompanying the Agenda”. Keynes, 1926, p. 40.

When governments are not democratic, as they were at the time of Louis XIV, in 17th

century France, or during Lenin’s time, in XX century Russia, the Agenda of Government can, in

principle, range from the reply that Colbert, the Finance Minister of the King of France, received

from the merchant Legendre, when he asked him how the government could help the activities

of merchants--- “nous laissez faire” was the answer--- to the other extreme, the almost

complete nationalization of all the means of production, including labor, as was attempted in

Lenin’s Bolshevik Russia and as it had been advocated by Karl Marx.

In one extreme case the government was advised to just stay out of private economic

activities and to “laissez faire”. In the other, the government, or better some individuals within

it, would make all the economically -relevant decisions, leaving no liberty whatsoever to the

individual citizens. Today, the value of the market is more broadly recognized, so that even

authoritarian governments, such as those of China or Vietnam, see the benefits of leaving many
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economic decisions to individuals who operate in the global market. This means that even

authoritarian governments must, to some extent, address the Burke or Bentham question.

In democratic societies, in which the citizens have a say on Burke’s “finest problem in

legislation”, the Agenda of government must rest somewhere between the two extremes

mentioned above. The question that must be asked then is: at what point, in the range that goes

from governments doing nothing to governments doing everything, should the Agenda rest?.

Also, should that Agenda change over time, or remain the same, regardless of societal

developments, as some conservative thinkers seem to believe that it should?. Over the 20th

Century, through their democratic expressions, manifested in voting decisions and in decisions

as to the individuals sent to run the institutions that make up a modern government, citizens

have generally asked governments to do more than the merchant Legendre had asked Minister

Colbert, but far less than Lenin, or Stalin, or Marx would have considered desirable.

Hayek never, directly and specifically, addressed in one place the “problem” raised by

Burke. However, in the imagination of many, he has come to represent the epitome of what

some see as conservative views on the issue. For example, the main conference room at the

Washington’s Cato Institute, a leading think tank in Washington that many associate with

conservative (or alternatively libertarian) causes, was named after him. Even though Hayek did

not address directly and specifically and in one place, Burke’s “problem,” much of his writing

(and he was a prolific writer), was related to that problem. Hayek may have been the most

profound thinker on the limits of state intervention in the economy.

A superficial acquaintance with Hayek’s writing might lead one to believe that his views,

on what governments should do in the economic sphere, could be captured by the reply that

Diogenes, the Greek, Cynic philosopher, gave to Alexander the Great, who, when he visited him,
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seeing how poorly Diogenes lived, asked him what he could do to help him. The reply that the

great king got from the poor philosopher was simply: ” just do not block my sunshine”! It was a

reply similar in spirit to the one that Colbert had received from the merchant Legendre. Both

replies could be interpreted to reflect the economic philosophy that came to be called laissez

faire (“let it go” or “get out of the way”). It is the philosophy that, to a large extent, came to

dominate classical economics for a long time, until about the decade of the 1920s. Modern

market fundamentalists and some conservative economists still continue to believe that it

should or could guide the actions of governments and economic relations in today’s world.

This paper shall argue that Hayek’s views on the economic role of the state are more

interesting, more complex, more “modern”, and more nuanced than many people assume.

Although those views are still highly skeptical of large and direct governmental intervention in

economic activities, they are not those implied by the replies of Legendre or Diogenes. Hayek’s

views make him a most interesting philosopher of economics. While undoubtedly

“conservative”, in a right versus left political interpretation of the term, his views are far less

extreme than many believe they are.

II. A World Undergoing a Great Transformation

It is important to start by observing that much of the fundamental work by Hayek, and

especially his most popular and famous book, The Road to Serfdom, was written in a period of

great transition in Europe and was inevitably influenced by what he saw going on around him. It

was a period of transition, a bridge in time, from the old, traditional world of the past, when the

guiding economic philosophy of economists and governments had been laissez faire, to the new

world that was coming into being, after the industrial revolution and the democratization of

societies in Europe. The new world being created did not require the complete abandonment of
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the laissez faire philosophy, that had dominated thinking in the past, but it required some

adaptation, or modernization, of that philosophy. It was a period when, writing at about the

same time as Hayek, Keynes would state that while “[w]e do not dance…yet to a new tune…a

change is in the air”. Ibid. p. 5. Both Hayek and Keynes, from different perspectives and places,

were reacting to the same technological, political and societal developments.

In the years when Hayek was thinking about the issues he would deal with in The Road

to Serfdom (the book was first been published in 1944) economic and political changes were

definitely in the air. They were caused by what was happening in Russia, by the Great

Depression in the industrial countries, by the advent of authoritarian regimes in countries such

as Italy and Germany, by the approaching World War, and by that other, older, and slower –

acting, but still radical, development that was the Industrial revolution. The industrial revolution

was still having its radical effects on society, on communities, and on economic relations among

individuals.

The Russian Revolution had provided a concrete, real- life, experiment to the ideology of

Karl Marx and other socialist writers, the so-called “ low radicals” of the 1848 revolution and of

the 19th century. The socialists had wanted to abolish private property (that they considered a

theft) and had wanted to nationalize the means of production and abolish the private market,

replacing the latter with decisions made centrally, by self-proclaimed representatives of the

“oppressed masses”. Those representatives would know what citizens (the masses) wanted and

would be able to provide to their needs, eliminating class differences and differences in

standards of living. This centralization of economic activities would, of course, deprive

individuals of both their economic liberty and their political freedom.

The Great Depression had provided a major, intellectual challenge to classical economics,

because it had deprived large proportions of the working populations of their economic

freedom, by leaving them and their families without an adequate income, while they still had

their political freedom, at least in the countries that had not turned into authoritarian regimes.

This development had not been considered possible in a well working market economy. The

market had not shown the flexibility and the adaptability that classical economists had assumed

that it had. The loss of both economic and political freedom was an issue that would interest

Hayek during his whole life and would be a constant preoccupation in all of his writings.

The industrial revolution had destroyed the, at times, paternalistic relations that had

existed in the past, between the aristocrats (who were the employers) and those who, directly

or indirectly, served them. It had also separated physically many individuals from the closely -

knit (“social”) communities in which they had been raised and in which individuals knew one

another and had been, therefore, more ready to assist one another, in moments of need. The

new and more urban communities that had replaced the traditional communities, in which the

workers had found themselves in the new employments in industrial activities, were often larger

and did not have the “community” or “ social” spirit, which had inspired mutual assistance and

had influenced personal relations, in the traditional, rural societies of the past. See Tanzi, 2011.

They had become similar to the “Bowling Alone” communities that Robert Putnam, 2000, would

write about.

The rest of the paper will outline and, to some extent, interpret the main views that

Hayek seemed to have had, with respect to the relationship that should exist between

individuals and the state; and, closely related to that, on the economic role that he expected the

state to play in democratic societies. Hopefully, not much will be lost, or distorted, in the
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interpretation of Hayek’s views. The paper shall also draw some comparisons with Keynes’

views, to show that the views of these two towering economists were not always as discordant

as some have come to believe. These two economists were undoubtedly, in a fundamental way,

the most important economic thinkers of the 20th Century.

Section III will deal with Hayek’s views on the role of the state as exercised through

economic planning. In the decades of the 1920s and 1930s, economic planning, much influenced

by the socialist thinking of the previous hundred years, became important in Europe. It also

contaminated the thinking and the actions of politicians, not just in authoritarian regimes but

also in democratic, market economies. Section IV, will deal with the, then, newly -developing

economic role of the state --- that of stabilization of economic activity---that, in the 1930s and

1940s, became so important as to push aside other roles, and even to change the traditional

meaning of the term fiscal policy, which until that time had been related to redistribution and

not to stabilization. The stabilization role had been introduced by the Great Depression and by

the seminal work of Keynes.

Section V, will outline Hayek’s view on the broader role of the state, the one related to

the needs of particular individuals and to income redistribution. It was a role broadly related to

that pursued by the (newly –developing) welfare states, being created at that time in some

countries. The move toward the creation of welfare states had started (on a very small scale, in

empirical terms) when, at the end of the 19th century, Bismarck had introduced in Germany the

new and potentially revolutionary concept, that the state has some direct responsibility for the

welfare of individuals, and especially for workers. The Bismarck’s reform would be given a great

push, first by Roosevelt, with the New Deal, in the 1930s in the USA, and, later, would be much

deepened by the welfare reforms that would be introduced in the United Kingdom in the late
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1940s, reforms that had been outlined by the Beveridge Report in 1942. See Tanzi, 2011. These

developments would dramatically change the economic relationships that had existed between

the state and the citizens, in democratic countries. They would have major influences on tax and

public spending levels in the second half of the 20th Century.

Section V will argue that, although Hayek was critical of these developments in their advanced

form, his views were more modern and more nuanced than generally assumed. He was not a

laissez-faire conservative and did not believe that the state had no role to play in this area. As it

will be shown, he would not have had difficulties with some of these policies, as long as they

were limited, focused, not carried too far, and not seen as entitlements by those who benefited

from them. Section VI will draw some general conclusions.

III. Hayek, Socialism and Economic Planning

A close reading of Hayek’s work indicates that the caricature that is at times presented

of him, that makes him appear as the darling of true conservatives, of those who almost wish to

abolish the state, is not a correct or objective description of his sophisticated thinking. In the

closing section of his powerful book The Constitution of Liberty, a section appropriately titled,

“Why I am not a conservative”, he tried to correct this misinterpretation of his views, perhaps

recognizing that his views were being misinterpreted and trivialized in some quarters.

Hayek clearly recognized that a democratically elected government would be one

associated with a significant role of the state. As he put it: “ In no system that could be rationally

defended would the state just do nothing”. [1944] 2007, p. 88. Citing Adam Smith, he

recognized that there are many tasks “…that provide …a wide and unquestioned field for state

activity”. Ibid. While he accepted that reality, he would have preferred to see that the growth in

the state activity be kept limited. He rejected the “wooden” or “dogmatic” advocacy of free
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market and laissez faire solutions in all circumstances, as some modern market fundamentalists

still suggest today. As Hayek put it: “ Probably nothing has done so much harm to the liberal

cause as the wooden insistence of some liberals on certain rough rules of thumb, above all the

principle of laissez faire”. “ There is all the difference between deliberately creating a system

within which competition will work …and passively accepting institutions as they are”. [1944]

2007, p. 71. “ With better understanding of the problems” …. “we should some day be able to

use …the enormous powers for good… that the government possess”. Ibid. p. 72. These are not

words by a thinker who believes that the state is necessarily, or always, evil.

Hayek even recognized “the need for an international political authority… [which ought ]

be able to restrain… [actions] which…[might] damage others”. At the same time he expressed

concern that such an authority might not be prevented from drifting toward authoritarianism.

He favored actions “[to] prohibit the use of certain poisonous substances or to require special

precautions in their use, to limit working hours, or to require sanitary arrangements…[as long

as] the advantages gained [by their prohibition] are greater than the social costs which they

impose. “ 2007, pp. 86-87. He favored “… an extensive system of social services---as long as the

organization of these services is not designed in such a way as to make competition ineffective

over wide fields”. Ibid, p 87. He also favored actions to combat dangers associated with the

environment such as “deforestation” and “some method of farming”, p. 87. If he had been alive

today he might have been in favor of measures to prevent “global warming” and would not

have understood why this has become a political rather an exclusively scientific issue.

Hayek stressed that he was not a conservative because, as he put it, “one of the

fundamental traits of the conservative attitude is a fear of change, a timid distrust of the new.”

In this aspect he was ideologically close to the position that Keynes had expressed in one of his
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writings. Compare, for example, Hayek’s views in the Constitution of Liberty with those of

Keynes, expressed in an essay, written in 1925, titled “Am I a Liberal?”. Hayek recognized that

when societies change, for example they change from being based on small, rural-based

communities, to being based on large, heterogeneous, urban communities, made up of

individuals who do not have much in common with one another and do not know one another,

the behavior of the members is likely to change and to become different, from the way it was in

the closely-knit communities, in which the word “social” had still the original specific Latin

meaning, derived from “socio”, or partner.

What conservatives ignore or fail to understand is that, as communities grow, traditional

rules can no longer play the same role that they played in the past. The traditional rules must be

adapted, or new rules must be created. Consequently the role of the state must change, to

reflect the new reality. The problem becomes how to make this change while preventing the

state from becoming too powerful and from reducing too much the liberty of the citizens. The

main issue is not whether the same traditional rules can be adhered to, but how the rules can be

changed and modernized, while still preserving as much freedom for individuals and as much

vitality and legitimacy for economies as possible. The reality must be to bring change “without

distrust of the new,” and to prevent the new from becoming authoritarian and suffocating.

Much of The Road to Serfdom is an attack on economic planning that occurs when some

or all the decisions of individuals, in the economic sphere and in the market, are replaced by

decisions made by planners and by bureaucrats in the government. As Hayek pointed out, with

economic planning, individuals, as individuals, lose (much or all) their freedom of action over

their economic future and risk becoming economic tools of the state. Bureaucrats make decision

for them: on what to do, where to work, in which activities, what and how much to buy, what to
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possess, how much to save, and so on. Hayek believed that the loss of economic freedom that

came with planning inevitably led to the loss of political freedom making planning inevitably

“the road to serfdom”.

Besides the obvious political considerations, that played a major role in Hayek’s views,

the role that free prices and a free but well working market, played in allocating resources and

in making a market economy efficient and dynamic, was very important. This role was lost when

planning replaced the work of the free market. In this view of planning Hayek’s views were once

again close to, but more forceful than the views that Keynes had expressed. In Hayek’s view, a

market, in which the prices are freely set by the demand and the supply of those who operate in

it, records and distributes to the whole system the knowledge that is dispersed among many

individuals and economic agents. That knowledge makes it possible for producers to produce

what buyers want to buy and for buyers to find what they desire to buy, without the need for

buyers and sellers to meet.

By definition, planners could never have this knowledge. Therefore their decisions would

inevitably fail to allocate resources in an optimal fashion, making planning far less efficient than

a free market. Keynes had made a similar point but not as specifically about planning, after

returning from a honeymoon trip to Russia (with his Russian born wife), in 1925, where he had

observed, first hand, the Russian experiment with central planning. He had written an essay in

which he stated that: “communism”… “as an improved economic technique”… “has not made

any contribution to our economic problems of intellectual interest or scientific value”. [1925a]

1933, pp. 305-306.

Hayek stressed that, when planning replaces spontaneous, individual decisions, the

reduction in personal liberty would not be accompanied , or compensated , by greater economic

efficiency, as some economists had come to believe, in the 1920s and 1930s. He also believed

that, as is the case with pregnancy, in which a woman cannot be and cannot remain only a little

pregnant, central planning tended to be a one- way street, without easy exits once taken. Once

governments entered that road, those who made the decisions would soon discover that

planning was a powerful tool for acquiring political power. That realization would attract, to

government and to politics, less scrupulous individuals and would open the way to serfdom.

Socialist writers had questioned the role of the market and had stressed shortcomings

already known to Adam Smith, such as cartels, monopolies and occasional abuses. Socialist

writers had, for a long time, advocated economic planning to replace the market. When in the

1920s and the 1930s the Bolshevik Revolution had introduced central planning in Russia, some

economists had believed that planning might work and might point to the future, on how to

organize economies and societies and better satisfy citizens’ needs. Faith in planning had

blinded many observers, including some clever economists, to its shortcomings. Planners and

socialists had done such a good propaganda job on behalf of economic planning, that it had

started to influence the governments of countries with authoritarian regimes, such as Italy,

Germany, Japan, and even those of countries with democratically elected governments, such as

France, Great Britain, and some others. Hayek and Keynes had not shared the enthusiasm for

planning, however they would strongly disagree on one kind of short term planning that was

that implicit in stabilization policies.

III. The Stabilization Role of the State.

When the Great Depression made its unwelcome visit, it raised questions in the mind of

some economists whether the traditional economic role of the state, the one that in the past

had guided governmental action (or often inaction) in economic activities, could remain
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unchanged, given the current economic conditions and difficulties. At this point the views of

Hayek and Keynes had diverged sharply. The traditional role of the state had required that it

remained detached from what was happening to the economies, except for removing rigidities

in labor markets and some other areas and assuring that the monetary policy that a country

followed was appropriate. That view came under strong attack by Keynes, at the intellectual

level, and later by Roosevelt, with the New Deal in the United States, at the policy level. The

pressures to deal with the Great Depression made the case for short run planning to fight it

appear strong.

Given his views against economic planning, and his trust in the role of the free market

and of prices freely set by the forces of the market, Hayek had been against any control of

wages, by labor unions, or of prices, by governments, including the exchange rate. He would

have been against the policies to control prices and wages that were introduced by President

Nixon, in the early 1970s in the USA. He would have considered these measures as steps toward,

or expression of, economic planning. It was thus natural that he would be against the massive

intervention by governments in the economy that Keynes was recommending, in the 1930s, to

deal with the Depression.

The Great Depression had started with a crash in the New York stock market in October

1929 and had soon led to high and growing unemployment. In some economies, including the

U.S. economy, a fourth of the labor force would soon be unemployed, at a time when there

were no safety nets and no policies to sustain the consumption of families. It would be difficult

for governments to ignore this development. At that time the shares of the countries’ levels of

taxing and spending into GDP were still very low. The average for industrial countries was below

20 percent. In the USA, at the Federal level, the share of taxes into GDP was only about three
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percent of GDP and for the whole government only about 12 percent. See Tanzi, 2011, Table

1.2, p.10. Much of the public spending in the USA at that time took place at the sub-national

level.

Classical economists who were still in the majority at the time believed that a well

adjusting economy, one with flexible wages and prices would automatically tend to be fully

employed. Therefore, the depression was blamed on existing rigidities, especially those in

wages, that labor unions had created and that were preventing wages from adjusting, to allow

employers to hire more workers. Economists of the Austrian School attributed the depression

also on misguided monetary policy, that had moved interest rates away from the equilibrium

levels.

Countries had started reacting to the high unemployment by pursuing policies that

would prove to be counterproductive and damaging, such as competitive devaluation and the

imposition of tariffs on imports, in order to encourage domestic production. For a time Keynes

had supported these policies. See, Wapshott, 2011. Classical economics did not enclose a view

that governments could make a difference, by injecting aggregate demand through

expansionary fiscal policies, even though some countries had, historically, introduced some

public works in times of crises, to create employment, for some of the unemployed workers.

However, the spending for these public works was not supposed to come from deficit spending

and there was no theory about the impact that a “multiplier” could play. Roosevelt would use

public works on a large scale, after he was elected. With the introduction of the New Deal he

would also allow a fiscal deficit, that would grow up to about six percent of GDP. Keynes would

support these policies while Hayek would oppose them.

Keynes, who was an influential and prominent economist at the University of Cambridge

in England, would become an outlier, in a profession that still believed in the virtue of balanced

budgets, under any circumstances, by advocating an explicit income-generating policy by

governments. In the early 1930s, Hayek had been invited to teach at the London School of

Economics and was soon engaged in a debate with Keynes, on whether income policy and public

spending could be beneficial to deal with the high unemployment. The debate would go on in

various forums and in various forms, for several years. Hayek would never accept the Keynesian

view that income policy, promoted by government spending, could be beneficial to deal with

the economic crisis. See Wapshott, 2011, for a useful account of the debate.

The Hayek-Keynes debate has continued, in some forms in the economic profession,

until present days. Economists have continued to divide themselves between those who side

enthusiastically with the Keynesian view, that economic slowdowns can always be fought with

more government spending, and those who have questioned that view with various arguments.

See Tanzi, 2015 for a recent account. In the period between the 1940s and 1960s the economic

profession went through what came to be called the “Keynesian Revolution”, led by followers of

the ideas that Keynes had introduced in the 1930s. The Keynesian ideas went from being highly

controversial to coming to be accepted by most economists. Keynes and the Keynesian

Revolution created the field of “macroeconomics”, or “income theory”, a field that had not

existed before. That field introduced “stabilization policy” as an explicit role of the state, a role

that had not existed before Keynes’ time.

The “Keynesian Revolution” was promoted with almost religious fervor by Keynes’

followers. They carried Keynes’ ideas further than he would have liked. For example, he would

have been uncomfortable with the way his ideas came to be used to justify large and permanent
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increases in public spending, and a permanently large role of the state. There is some evidence

to indicate that he would have been opposed to the large increases in tax and spending levels

that occurred in several countries, in the years after his death. In the 1940s he had shown little

interest in the welfare reforms proposed by William Beveridge in his 1942 Report and in the

reforms introduced in the UK after World War Two. See Tanzi, 2011.

Some of the economists who helped propagate the ideas of Keynes, in the period after

World War II, won Nobel prizes in economics, when that prize was introduced. Harvard, MIT and

the University of Cambridge were the leading centers that spread the original Keynesian gospel.

In the 1970s there began some reactions against the Keynesian Revolution led initially by

economists at the University of Chicago (Friedman, Lucas, and others). Hayek, who spent many

years in that University, before returning to Europe, did not seem to have played a particular

role in the anti-Keynesian reaction, even though he had never accepted the view that there

could be a field such as macroeconomics that, by definition, called for a large economic role by

governments. He continued to believe that all the relevant economic actions take, or should

take, place at the level of the individual, at the micro level. In this particular sense he was not

close to Friedman, who had accepted the existence of macroeconomic policy and had declared

that: “we are all Keynesians”. Hayek remained more closely linked to Austrian economics and

more interested in the relation between economics and political freedom.

It might seem strange to remark that, politically, Keynes and Hayek were closer than it

has generally been assumed. They both rejected the connotation of “conservative”; they both

questioned the value of economic planning, in Keynes’ case the extreme version of planning

introduced in Russia; they both rejected socialism; and both rejected large tax and spending

levels. On the latter point, there is a letter that Keynes wrote to the economist Colin Clark, in
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1945, in which he agreed with Clark’s view that the tax level should not exceed 25 percent of

national income (see Clark, 1964), a very modest level by today’s standards. It has also been

reported that Keynes had been “…relatively less engaged in analyzing problems of unequal

distribution of wealth and social welfare”. See, Sen, 2009, p. 29.

Where Keynes and Hayek differed sharply was that Keynes was more optimistic about the

role of policymakers in improving the welfare of the citizens and, as a close observer of markets

and especially of financial markets, more skeptical about their inherent virtue. His views of

“modern capitalism” were not exactly enthusiastic. He described it as “…absolutely irreligious ,

without internal union, without much public spirit, though not always, a mere congeries of

possessors and pursuers”. See Keynes 1925, pp. 306-307. He compared the capitalism in 1925

with that in the “…nineteenth century [when] it was in a certain sense idealistic”. Ibid. p. 307.

One must wonder how he would have reacted to today’s capitalism and with the role of

cronyism and highly paid lobbiests.

Hayek continued to have much more trust in the (theoretical) free market and much

more distrust in the power and role of policymakers who, he believed, were more likely to use

their economic power to promote their political objectives, than to improve the lives of citizens.

He believed that the more economic power policymakers acquired, the more political power

they would attempt to gain. This brought him close to the School of Public Choice, of which

James Buchanan would be one of the major creators.

Hayek would have believed that the repeated pursuit of stabilization policy over the

long run would inevitably lead to a large and growing role of the state, because of the lack of

symmetry in the use of that policy. Governments would increase public spending in bad times

but would be reluctant to reduce it sufficiently in good times. They would also be more disposed
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to borrow than to tax, to finance public spending. Over the longer run, this would not be in the

interest of the countries’ citizens and would inevitably reduce their liberty, their capacity and

their motivation, to act in their individual capacity. A “nanny state” would be the inevitable

consequence. And, in the long run, a “nanny state” would not promote individual liberty and

economic efficiency.

IV. Hayek and the Welfare States

Hayek was not comfortable with the way the role of the states had grown, first with

planning and later with less planning but with growing taxes and public spending. Before World

War Two he had been mostly worried about the direct interference of governments in the

market, through economic planning. After the war he became worried about what the author of

this paper has called the “Fundamental Law of Public Expenditure Growth”, a law that has called

attention to the creeping increase of public spending in welfare states over the years. See Tanzi,

1913, Chapter 14. Hayek believed that the welfare state had grown too much and that it risked

transforming countries into “nanny states”, that reduced the incentive, the effort and the ability

of individuals to take risks, to innovate and to contribute to economic growth, inevitably

affecting economic and political freedom. Governments were becoming too invading and were

overstepping what Hayek thought should be their boundaries.

It spite of these strongly held views, it would be a mistake to believe that Hayek’s views

mimicked that of Colbert’s merchant, who wanted the state to just get out of the way. Hayek

saw a positive role of the state in several situations and expected the state to play what could

be called a “compassionate role” in specific cases. He did not believe in entitlements by citizens.

However he recognized that there could be situations in which the personal effort and the

initiative of a person would not be sufficient to provide that person with the assistance that he
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or she needed, while there might no longer be family members, or close members of the

community, ready to assist that person or that person’s dependents. In these situations he

believed that the government would have to play a role. He also saw the need to restrain the

behavior of some individuals, when it imposed costs on others or on society, as in the case of

pollution.

Citing directly from his writing: “There can be no doubt that some minimum of food,

shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured [by

the state] to everyone”. And that: “Where, as in the case of sickness and accident, neither the

desire to avoid such calamities nor the efforts to overcome their consequences are as a rule

weakened by the provision of assistance—where, in short, we deal with genuinely insurable

risk—the case for the state’s helping to organize a comprehensive system of social insurance is

very strong.”

The reliance on personal effort and on a competitive market should not exclude the

intervention by the government in fixing the number of working hours, in limiting the age at

which children should be allowed to work, in demanding health measures and in offering an

adequate system of social services. Hayek saw the need for a basic safety net, at the bottom of

the income distribution, and for strict rules of behavior, at the top. Democracy should aim for

equality of opportunities but within a system that maximizes the liberty allowed. The liberty that

individuals should have does not extend to their imposing abuses on others and the generation

of externalities that are damaging to others or to the environment.

Hayek also did not believe that free competition always arose spontaneously and

naturally. It was important to create the conditions for the market to operate fairly and

efficiently. If he had been alive today he would have been horrified by the role of lobbies and by
20

the growth of “crony capitalism.” He would also have recognized the growing importance of

asymmetric information in some sectors of the economy. These problems have grown

enormously since his time, because of the growth of sectors or industries, such as the health

industry, the financial market and various services. Areas in which the existence of asymmetry in

information between buyers and sellers is now common have grown enormously over the years,

making prices less informative than he had assumed. He would have recognized that in these

areas market prices do not always provide all the information for the free market to be

sufficient to ensure optimal outcomes. Some government role has become more necessary.

Hayek also recognized that there were areas in which “free competition” would not

deliver the desired outcome. He specifically mentioned “deforestation” and “pollution” among

the areas that cannot be left entirely to the decision of the owners. In these areas some

government role would be needed. He would probably be at a loss to understand why “global

warming” has become a political issue, rather than a scientific issue, and why it sets

conservatives versus liberals. This should be a scientific issue in which individuals who are

conservative and those who are liberal can have different views, based on their trust as

individuals, on the scientific evidence. Their positions should not depend on a priori political

biases.

His major fear was the replacement of objective rules of law, rules that would be

consistent with market efficiency, with discretion and economic planning, that would depend on

objectives not consistent with free market and individual liberty. The rules of law should be

assisted by efficient programs for individuals incapable of assisting themselves and by efforts to

create equality of opportunities for all individuals, while maintaining as much political and

economic liberty as feasible.

V. Concluding Remarks

In this short paper an effort has been made to rectify some misconceptions about the

economic and political philosophy that guided Hayek seminal thinking. It was stressed that

although his thinking was clearly consistent with what is considered libertarian thinking, it was

not as extreme laissez faire as some have characterized it. Hayek was a deep and prolific writer.

His writing requires a lot of concentration to fully appreciate it and to understand all the

nuances. It was also shown that he and that other giant in the field of economics, John Maynard

Keynes had great differences. There were also several areas in which the differences between

them were smaller than assumed. It can be concluded that Hayek was less conservative and less

“laissez faire” that many assume and Keynes was less pro government than many assume.

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