Economic Lessons

A Hayekian Case for Free Markets and a Basic Income

Posted By Ira Gorelick

Ira Gorelick is a Teacher and Student of Economics and has published numerous classes on Communication and Economics.
January 3, 2020

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A Hayekian Case for Free Markets and a Basic Income
Ira Gorelick
January 3, 2020

If Friedrich Hayek is not in our discussions on how best to govern a community, he should be. Not only because his most popular book, The Road to Serfdom, was used by Reagan and Thacher to run a country (their own admission), but because he has a lot of interesting things to say on how a community can govern themselves in the 21st Century.

A paper, “A Hayekian Case for Free Markets and a Basic Income,” recently published by Matt Zwolinski, an Associate Professor of Philosophy at the University of San Diego, and the founder of and frequent contributor to the popular Bleeding Heart Libertarians blog talks about Hayek and his support for “the rather socialist-sounding idea of an “equal minimum income for all.” (Need reference Hayek 2013: 427)

Apparently this creates some cognitive dissonance for Libertarian Purists. Libertarians often use Hayek as an example of a defender of the opposite of the welfare state, “a basic income guarantee.” So, it would be logical to view support for an income guarantee as wrong. How can one believe in freedom from coercion and at the same time guaranteed income for all?

 “Hayek himself was little help in resolving this paradox. Although his support for a basic income guarantee was consistent throughout his career, Hayek never really provided much detail about why he supported it.  Many readers were thus left with the forgivable impression that Hayek’s support was a kind of fluke — an idiosyncrasy that reflects either (if you’re sympathetic to libertarianism) a failure to think through the full logical commitments of his individualistic premises, or (if you’re not) a trace of compassion and humanity that his libertarian ideology failed to fully extinguish.  The thesis of this chapter is that Hayek’s support of a basic income guarantee was not a fluke. Or rather, since I wish to put the emphasis on positive political philosophy rather than Hayekian exegesis, that it need not be a fluke for those of us who draw inspiration from Hayek’s ideas.

What I shall argue is that a commitment to both the libertarian ideals of free markets and limited government, and to the idea of a basic income guarantee, both flow naturally from Hayek’s fundamental commitment to individual liberty, understood as the absence of coercion.

This thesis, I hope, will be of interest to more than just Hayekians. The Hayekian case for free markets and a basic income, as I understand it, is rooted in Hayek’s distinctive understanding of the nature of freedom, and how that freedom operates in a market economy. That understanding of freedom, I will argue, has much in common with the neo-republican conception advanced by theorists such as Philip Pettit.

And it is superior to the standard, rights-based account of freedom adopted by libertarians such as Robert Nozick and Murray Rothbard. Thus, one goal of this chapter is to convince non-Hayekian libertarians to adjust their understanding of freedom. This, I believe, will go a long way toward undermining a major source of resistance among libertarians to the idea of a basic income guarantee.

But I also think that non-libertarian republicans have something to learn from Hayek. Republicans in general, and Pettit in particular, have been adept at identifying sources of domination within the private sphere, and in suggesting various ways in which government can act so as to reduce the potential for domination. Where they have fallen short, I think, is in recognizing the ways in which market competition can itself serve as a powerful check against domination and the ways in which even well-intentioned government policies can both reinforce existing and give rise to new forms of domination.

The second goal of this chapter is thus to convince those already attracted to the republican ideal of liberty to adopt a more Hayekian understanding of the role markets and governments play in advancing or retarding freedom, and thus, I think, move in a more libertarian direction on questions of public policy.

This chapter is divided into four sections.

  • Hayek’s account of freedom and coercion, especially as developed in The Constitution of Liberty,
  • hat account supports the libertarian position of free markets and limited government.
  • it supports a basic income guarantee.
  • question of whether a guaranteed minimum income ought, as Hayek seems to have believed, to be contingent upon a willingness to work.

Hayek’s Account of Freedom and Coercion

Early in The Constitution of Liberty, Hayek defines freedom as the absence to render an individual unfree. Taxes and regulations imposed by the government, in contrast, do seem coercive and thus do seem to constitute an infringement of freedom on this view.

A close reading reveals, however, that Hayek’s understanding of freedom diverges from that of the standard libertarian in terms of both its underling theory and its practical implications.

In terms of theory, standard libertarians such as Rothbard and Nozick understand coercion as a moralized term that makes essential reference to the idea of individual rights. Libertarians believe, roughly, that A coerces B if and only if A proposes to violate B’s rights unless B complies with A’s demands.8

Since governments do not have the right to seize an individual’s justly held wealth without her consent, its threat to fine or imprison individuals who do not pay their taxes is viewed by libertarians as coercive. Taxation is theft.

As many critics of libertarianism (and some friends!) have argued, the logical implication of this theory of freedom (combined with the libertarian’s underlying theory of rights rooted in self-ownership) would seem to be anarchism. Even a minimal state devoted solely to the protection of individuals’ negative rights would still require coercive taxation to finance its activities. But if all taxation is a violation of individual rights, then freedom and even the smallest of governments are necessarily incompatible.9

Hayek rejects the idea that freedom and coercion should be understood in terms of abstract natural rights.

Instead, Hayek holds that freedom consists of being able to live one’s life “according to [one’s] own decisions and plans, in contrast to . . . one who was irrevocably subject to the will of another.”10 Coercion, in contrast, consists of a state in which “one man’s actions are made to serve another man’s will, not for his own but for the other’s purpose.”11


Hayek stood in terms of abstract natural rights. Instead, Hayek holds that freedom consists of being able to live one’s life “according to [one’s] own decisions and plans, in contrast to . . . one who was irrevocably subject to the will of another.”10

Coercion, in contrast, consists of a state in which “one man’s actions are made to serve another man’s will, not for his own but for the other’s purpose.”11

According to Hayek, “coercion implies both the threat of inflicting harm and the intention to bring about certain conduct” by means of that threat.12

The harm that is threatened will often take the form of physical violence, but Hayek notes that threats of brute force are not the only means by which coercion can be exercised.13

One can also coerce by effectively withholding a resource or service that is crucial to the existence of another individual or the preservation of that he or she most values.14

The owner of the only source of water in the middle of a desert, for instance, can wield coercive power through his ability to withhold the resource from others.15

Even a “morose husband, a nagging wife, or a hysterical mother” might be said to exercise “coercion of a particularly oppressive kind,” though in these cases any attempt to correct the coercion by means of government action would lead to “even greater coercion” and would thus be unacceptable in a liberal society.”16

On this understanding of freedom, the activities of government can be coercive but need not be so. An absolute monarchy in which subjects live and property were subject to the whim of the king would clearly be a situation rife with coercion, on Hayek’s view. But, crucially, Hayek believed that a government consisting of general rules applied equally and impartially to all would not be coercive.17

Such rules world, of course, restrict what individuals could do. But insofar as they are general and applied equally to all, they do not render any individual subject to the will of any other individual. They are, in Hayek’s words, like “laws of nature”—stable facts of social existence around which individuals can learn to navigate and plan their lives. They do not place some citizens in a position of subordination, and they do not elevate others to a position of dominance.18

But one advantage it seems to have over traditional libertarian theories is its focus on the actual character of social relationships. For libertarians, freedom is understood in terms of abstract rights, which are themselves understood in a historical sense.20

And thus, for the libertarian, we can never tell simply by looking at the character of a social relationship whether it is a state of freedom or unfreedom. A man is being dragged, fighting, into a car by stronger men armed with guns. Is his freedom being infringed? That depends. Is he a criminal who is being justly arrested by the police (or, if you prefer, by the Dominant Protection Agency)?

Then, despite all appearances to the contrary, the answer is no—his freedom, that is, his rights, are not being infringed. A soldier is told when to eat, when to sleep, what to wear, and who to kill by his superiors, on the threat of severe punishment for disobedience. Is he free?

The libertarian’s answer is, Not if he signed up for it.

For the libertarian, it seems that there is no set of social arrangements so oppressive, no amount of being bossed around by others that is incompatible with freedom, so long as that situation arose in the right way. Whatever arises from a just situation by just steps, is itself just. And whatever arises from a free situation by freedom-respecting steps, is itself free.

Theodore Burczak has argued that the same is true of Hayek’s account since, according to Burczak, Hayek makes the presence or absence of coercion in a proposal depend on how the conditions in which that proposal was made came about.21

But this, I think, is a mistaken interpretation of Hayek’s position. For Hayek, it doesn’t matter how the wanderers in the desert became dependent on the monopolist. What matters is what the monopolist does with that power. If he threatens to withhold resources unless the others do as he wishes, he acts coercively. If he shares the water with them freely, he does not.

How is the monopolist’s position different from other forms of conditional transactions in the marketplace? Note that it is not the mere presence of monopoly in the background, because, for Hayek, that makes the proposal coercive. Someone who wishes to be painted by a particular artist but must pay a very high fee to do so is not coerced. Hayek’s explanation for this is that the painter’s service, unlike the water in the desert, is something one can easily do without.22

But as his later response to Hamowy makes clear, this is only part of the explanation. The deeper explanation is that, for Hayek, you do not have a right to the painter’s services, whereas you do have a right to life-saving water in the case of an emergency23

Hayek admits that he lacks a full account of why we have such a right in the desert case, but presumably, the fact that the water is vital to our survival is one part of the story and the fact that the situation is such where the normal mechanisms of supply and demand are insufficient to produce desirable outcomes is another.

With this clarification, Hayek’s account of coercion, and his analysis of the several cases he provides, appear to form a plausible and coherent whole.

The key issue, for Hayek, is whether a proposal increases or decreases one’s options, relative to a baseline in which one’s moral and legal rights are respected. An offer of an unpleasant job from an employer is (generally) not coercive because it simply adds one option to whatever options one already has, and one does not generally have a right to work, or a paycheck, from any particular person. A gunman’s threat of “your money or your life” is coercive because it removes options—specifically the option to keep both your money and your life—to which you are entitled and which you had before the gunman showed up. And, finally, the desert monopolist’s proposal to withhold water unless you do as he says is coercive because you have a right to a share of the water, but his threat to withhold it is essentially akin to the gunman’s threat to take your life unless you hand over your wallet.

Freedom and the Market

Hayek’s theory of freedom is in many respects similar to the neo-republican theory advanced most famously by Philip Pettit.24

Like Pettit, Hayek takes something like the idea of dominance to be central to the understanding of freedom, where dominance is understood as being subject to the arbitrary will of another person, and freedom being understood as the absence (or the minimization) of dominance. The question I wish to take up in this section is—how well does a republican view of freedom such as this square with Hayek’s embrace of the free market?

Contemporary critics of republicanism, such as Geoffrey Brennan and Loren Lomasky, argue that the view is “profoundly antimarket.” I think this view is mistaken, but it is buttressed by the way in which advocates of republicanism such as Philip Pettit and Richard Dagger talk about markets.25

At best, contemporary republicans take a stance of “complacency” toward markets, tolerating but hardly celebrating them. At worst, republicans are deeply skeptical of markets and view them as a troubling source of domination and unfreedom.

Both Pettit and his critics have a point. But in neither case is that point as strong as it is taken to be. The republican theory of freedom is not inherently hostile to markets, and markets are not inherently inhospitable to republican freedom.

Indeed, a Hayekian perspective on markets suggests that we can say quite a bit more than this. Markets are not only not inherently inhospitable to republican freedom; they are, in fact, often one of the most effective guarantors of that freedom.

The essence of market competition is the existence of alternatives, and the right to say “no” to proposals that fail to serve one’s interests at least as well as one of those alternatives. In a competitive labor market, an employer who tries to force her employee to do something she doesn’t want to do is constrained by that employee’s ability to quit and find a job elsewhere.26

Taking that exit option is not always easy, but in many cases, it is sufficient to protect the freedom of all that the option exists and that some people take it. I almost never compare prices on toothpaste among the various stores at which I shop. But some people apparently do, and that is enough to keep the price competitively low for everyone.

The more competitive a market is, the more prices and other terms of agreements are regulated by the impersonal forces of supply and demand, and the less any particular market agent is able to impose his or her particular will on her partner in exchange. Of course, everything in the market has a price, and that price combined with budgetary restraints implies that no one will be “free” to do everything they might wish.

But market competition does help to ensure that one’s choices will not be determined by the particular will of other market agents. It limits the ability of market agents to manipulate your circumstances so that the thing they want you to do becomes your least painful option. Such non-manipulability is an important element of freedom on Pettit’s view, and on Hayek’s as well.

It is largely because Hayek views competition as such an effective check on coercion that he views government power with suspicion. For government is, after all, the only institution within society to claim and generally possess an effective monopoly on the use of force. And this monopoly on force is often used to establish and maintain other monopolies, such as on roads, on the delivery of regular mail, on the creation and enforcement of criminal law, and so on. Because individuals who value these services have nowhere else to go, they are often left with no practical alternative to complying with the government’s demands. Indeed, this might very well be the essential difference between government and other organizations within society—most organizations can do nothing more than make proposals to which you are free to say “no”; government, in contrast, does not make proposals—it makes demands.

Insofar as those demands take the form of general rules equally applicable to all, Hayek suggests, the coercive nature of government might be kept to an acceptable level. But as legal rules become more numerous and complex, as ordinary individuals become unable to know in advance what actions are permitted and which are prohibited, as law enforcement becomes practically unable to enforce all the rules that they could, in theory, enforce; the extent of individual discretion increases and so too does the possibility of coercion. When that with which individuals have to comply is no longer “the law” but some bureaucrat behind a desk, or some officer behind a badge, with the practically unchecked power to apply the law in whatever way he or she sees fit, then individuals are no longer fully free. If, then, we follow Hayek in understanding freedom as the absence of coercion, and coercion as the state of being subject to the arbitrary.27

If then, we follow Hayek in understanding freedom as the absence of coercion, and coercion as the state of being subject to the arbitrary will of another, his libertarian attitude toward both the market and the state make sense. Competition in the market means that individuals can say “no” to proposals that do not advance their interests and thereby encourages firms to make offers that people do. Because individuals are not dependent on any particular buyer or seller, no one is in a position to force them to accept terms that they do not like. In contrast, the lack of competition in government means that individuals will often have no choice but to accept proposals that are not in their interest. Competition protects choice and limits coercion; monopoly inhibits choice and makes coercion more likely. And the government is the ultimate monopolist.

Of course, the Hayekian argument in favor of markets that I have just presented applies only to competitive markets. And this is a standard that we cannot simply assume all markets to meet. No real-world market lives up to the economist’s standard of perfect competition with its full information, infinite buyers and sellers, and zero transaction costs. And some real-word markets fall short of even a more forgiving standard of competitiveness. Some markets have significant natural barriers to entry; others have barriers that have been artificially created by government policy. Some markets deal in highly differentiated products for which there are few substitutes; some are plagued by limited and asymmetric information.

In cases where competition is substantially lacking, significant opportunity for coercion may exist. In times or sectors of high unemployment, for example, a manager can use his discretionary power to compel workers to “voluntarily” work overtime, or to keep quiet about their political opinions, or to put up with harassing behavior and so on, on the threat of being fired and plunged into unemployment. Hayek recognizes the possibility of such coercion, but views it as a relatively rare phenomenon in a market economy:

There are, undeniably, occasions when the condition of employment creates an opportunity for true coercion. In periods of acute unemployment, the threat of dismissal may be used to enforce actions other than those originally contracted for. And in conditions such as those in a mining town the manager may well exercise an entirely arbitrary and capricious tyranny over a man to whom he has taken a dislike. But such conditions, though not impossible, would, at the worst, be rare exceptions in a prosperous competitive society. (Hayek 2013: 204)

Not every threat of termination will count as coercive on Hayek’s view, or indeed on any defensible view of the matter. Whether the threat of termination is coercive will depend, at least in part, on how bad the consequences of termination would be for the employee. For instance, the threat of termination will not qualify as coercive if the employee has other acceptably good opportunities for employment. Nor, I believe, would it qualify as coercion for Hayek if the consequences of unemployment are not that bad—perhaps because the employee has a significant amount of savings to fall back on. Recall Hayek’s example of the person who would very much like his portrait painted by a famous artist.28

The artist’s monopoly on his own services and his demand for a high price in exchange for them does not suffice to render his offer coercive, for Hayek. And the reason he does not act coercively is that the services he offers are ones that potential customers can easily do without. Similarly, an employer—even an employer who enjoys a degree of monopsony power—will not act coercively if her offer of employment is one which her potential employee can easily do without. I will return to this point in the next section.

Before turning to that section, I wish to raise one more issue regarding the relationship between market competition and coercion. At its best, market competition works to ensure that people’s wages and other terms of employment are regulated by the impersonal forces of supply and demand, and not by the whim of any particular employer (or employee). But even in this best case, market competition ensures only that people are paid the fair market value of their labor. It does not ensure that people are paid adequately for their labor, at least if we understand “adequate” in some independent sense, such as what would be sufficient to maintain an acceptable standard of living. People whose productivity is very low, for instance, might still receive an inadequate wage under conditions of perfect competition. What, then, should we say about this category of persons, which might include those with a severe disability, or the very elderly? Does the market subject such persons to coercion?

That some persons in a competitive market are able only to earn a wage that is less than adequate for meeting their basic needs does not appear to be itself coercive. In cases such as these, wages are low because the productivity of labor is low, and because employers would lose money if they were to pay a wage that was higher. It cannot be said that employers are paying low wages in order to manipulate their employees’ options, to bend them to their will, or to take special advantage of them. They are not threatening harm; they are, rather, offering a benefit that will improve the situation of workers, though perhaps not as much as those workers would like.

Even still, although less-than-adequate wages might not themselves be coercive, those who are dependent on them are certainly vulnerable to coercion from other sources. To be poor is to lack options, and when all of a person’s small number of options are extremely bad, it is easy to imagine how an unscrupulous person or firm might exploit that vulnerability for her own advantage. A starving man can be made to act in accordance with your bidding by the “offer” of a loaf of bread, at least if yours is the only offer on the table. To be dependent on your survival on the will of another, and to be compelled to act in accordance with his will rather than your own, is, for Hayek, the essence of unfreedom.

The question remains, however, of how we should respond to that unfreedom. Legally prohibiting coercive proposals is one option, and in some cases, it will be the most appropriate. When we ban threats of physical violence, we eliminate coercion and thereby expand (or at least preserve) the range of options of the potential victims of such threats. But what about the kinds of proposals involved in offering bad jobs to desperately poor people? Should we prohibit sweatshop labor? Notice that if we did so, the result would not necessarily be that the poor would be in a better position with respect to the range of options available to them. People work in sweatshops because they are the least bad option on the table. Taking that option away, without doing anything else to replace it, make those individuals worse off, not better.29

What individuals in circumstances like these need is an expansion of options, not a reduction. In this case, the minimization of coercion requires not prohibitions, but the provision of opportunities.

It is to the provision of those opportunities that we now turn.

Freedom and the Basic Income

The first step of a Hayekian argument for a basic income is to note that some redistribution is necessary in order to protect people from coercion. Lack of wealth, as we have noted, renders people vulnerable to coercion by others. An employee in a tight labor market must do what his boss tells him or else risk destitution. A wife who is dependent on her husband’s paycheck may have to put up with abusive behavior simply in order to keep a roof over her head. In these cases and in many more, a person is unable to escape serious and pervasive interference by others because they lack the financial resources to stand on their own. Provid- ing that person with money gives them options; it gives them the effective


to state redistribution is thought to be central to the libertarian ideology. But we should note that the basic idea here is not so obviously different from other forms of policy that libertarians already accept. Leaving the anarchists to the side, most libertarians accept that the provision of police protection is a legitimate function of the state, necessary for the protec- tion of individual rights. But police protection is not provided on a fee-for- service basis. It is funded out of general tax revenues, and then distributed to all persons on the basis of need. If, then, the libertarian can comfortably endorse the redistributive financing of services in order to protect individu- als against coercion, why can she not also endorse the redistribution of cash for the same end? In both cases, the goal is to use coercion to limit coercion—to minimize the degree of coercion in society as a whole.


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