Let's have a Hayekian welfare state

The latest issue of Econ Journal Watch discusses the correlation between support for economic regulation and welfare state redistribution among economists. Why, Daniel Klein asks in the issue’s opening chapter, is an economist who supports a lot of economic regulation so likely to support a lot of income redistribution as well?

How are issues of progressive taxation, redistribution, and universal government provision so much like, say, the issues of public utility regulation, antitrust, consumer protection, workplace safety and labor standards, environmental protection, financial regulation, insurance regulation, land-use controls, housing regulation, agricultural regulation, healthcare regulation, transportation regulation, energy regulation, and so on?

A good question. He suggests that economists are motivated at a basic level by their feelings about ‘governmentalization’ – a general preference for or against using the government to solve problems that face society.

But like Andreas Bergh, another contributor, I am not convinced that at least one other configuration is so unlikely. Bergh argues that a ‘Hayekian welfare state’ is possible and may be more attractive than Klein suggests. I agree.

Probably the strongest general argument against regulation is given by Hayek, who argues that in a complex world our actions often have unexpected consequences. A ‘spontaneous order’ is a non-random system that has come about from individually-chosen actions, not from the design of a central planner. A language that does not have a central designing body might be an example, as might a free market economy.

In Adam Ferguson’s words, these are the result of human action but not of human design. Hayek’s argument is that because events in these orders have been shaped by the individuals’ choices within them, what may appear to an outside observer to be an inefficiency or failing may have a hidden logic to it.

Central planners or rule-makers often lack the information they would need to make good regulations, and in situations where people’s tastes or innovations may change over time, they may not ever be able to make regulations that achieve their own goals.

This argument has been added to by more recent work that has emphasised the value of feedback loops in learning (which markets have, but regulators usually don't), and the dangers of imposing the same error across an entire system. If we think that the future is basically unknowable in a complex world, and so most plans are wrong, but that we can learn from our mistakes and successes, then we should want as many different experiments as possible, with as many different mistakes to learn from.

In practical terms, that means that we should have a predisposition against regulation, even regulation that appears to solve problems, if it holds people back from experiments. There are also serious examples of regulations leading to bad things that are even worse because everyone has been forced to make the same mistake, which strengthens this predisposition even more. The more complex a system is is, the more we should value pluralism.

All of this has to do with having limited knowledge in a complex world, not incentives, though of course there may be good incentives-based arguments to be made on a case-by-case basis against certain regulations.

But this doesn’t tell us very much about the distribution of wealth in a society. To use Bergh’s terminology, redistribution may be something that can be done with relatively low amounts of knowledge. That doesn’t mean that it can’t fail – clearly it can, very easily, if the level of redistribution is set too high (or too low) – or that the system itself be badly designed.

The particular distribution of wealth in an economy may be an efficient reflection of who is most productive, and interventions that try to correct for that are likely to fail for the same reasons that other interventions designed at improving market efficiency will fail.

But we may have non-economic concerns about the distribution of wealth as well. An economy in which everyone is paid according to their productivity may be very brutal for people who are not very productive and cannot change that. We may wish to redistribute income for their welfare.

We might also want to redistribute money to encourage the sort of experimentation that drives innovation, above. Or, as Ben has argued, to make the market focus more on satisfying the wants of unproductive (ie, poor) people than it currently does.

A good argument against this would be that we don’t need the state to redistribute – that, left alone, private charity will be enough. There is some evidence for this position but not enough, yet. Maybe some day there will be and I will change my mind.

Until then, I am with Bergh. A ‘Hayekian welfare state’ would do almost no regulation of the economy, but redistribute quite a bit of money for welfare reasons. This looks not just possible, but very desirable.