Hayekian welfare states: explaining the coexistence of economic freedom and big government

Abstract

To explain the coexistence of economic freedom and big government, this paper distinguishes between big government in the fiscal sense of requiring high taxes, and big government in the Hayekian sense of requiring knowledge that is difficult to acquire from a central authority. The indicators of government size in measures of economic freedom capture the fiscal size but ignore the Hayekian knowledge problem. Thinking about government size in both the fiscal and Hayekian dimensions suggests the possibility of Hayekian welfare states where trust and state capacity facilitate experimentation and learning, resulting in a public sector that is big in a fiscal sense but not necessarily more vulnerable to the Hayekian knowledge problem. Pensions in Sweden are used as a case to illustrate the empirical relevance of the argument. The new pension system represents big government in a fiscal sense, but by relying on decentralized choice it requires relatively little central knowledge.

Does Big Government Hurt Growth Less in High‐trust Countries?

“…For savings and investments, a larger public sector may affect the quality of investments through regulation of private investments or by crowding out private investment and replacing it with politically preferred projects. As noted in Bergh () and Newton, Stolle, and Zmerli (), higher trust means more state capacity in the sense of the ability of groups to act collectively and the ability of states to achieve official goals. Higher trust should therefore imply that public decision‐makers have more discretionary power over investment, and could lead to public investment crowding out private investment.…”

“…Finally, social trust may affect the ability of governments to deal with market failure without being subject to political failure. Bergh () argues that because social trust fosters state capacity, countries with higher trust will have better abilities to experiment and to learn from policy mistakes, and that process of experimentation may lead governments in high‐trust countries to engage in areas where the Hayekian knowledge problem (Hayek ) is relatively less severe, suggesting an insulation effect.…”

“…On the one hand, the size of the public sector is positively correlated with GDP per capita, and some (mainly Northern European) countries seem particularly successful in combining relatively generous welfare states with high levels of economic affluence (cf. Bergh ; Lindert ). On the other hand, when the relationship between government size and economic growth is examined for rich countries using panel data with country fixed effects, studies tend to find that an increase in government size is associated with lower growth rates in the medium to long run (Bergh and Henrekson ) .…”

Hayekian behavioral economics

“…For Hayek, the key economic question involves institutional design: How to incorporate that unorganized and dispersed knowledge? No particular person or group can possibly solve that problem (Bergh, 2020). However legitimate and appealing their goals, central planners, and the institutions they run, cannot have access to all of the knowledge held by diverse people.…”

Basic Economic Liberties: John Rawls and Adam Smith Reconciled

“…When looking at real-world examples, egalitarian liberals point to successful welfare-state regimes such as Sweden and Denmark. However, all these regimes protect a substantial degree of individual economic freedom alongside supportive welfare systems (Bergh 2020). Indeed, according to inevitably rough measures of economic freedom, the United States is less free than some social democracies (Sumner 2015, 61).…”