by David L. Potts
In 2023, Cass Sunstein posted a paper titled “The Rule of Law,” which is intended to sing the praises of the rule of law but also to caution against claiming too much for it. The abstract states that “this [Sunstein’s] account of the rule of law conflicts with those offered by (among many others) Friedrich Hayek and Morton Horwitz, who conflate the idea with other, quite different ideas and practices.” As a strong admirer of Hayek, this statement caught my attention. At the same time, Sunstein’s account of the rule of law seems quite sensible and appropriate. So, if Sunstein’s sensible and appropriate account of the rule of law conflicts with Hayek’s, what’s the conflict? What “different ideas and practices” does Hayek “conflate” the rule of law with? Essentially none, it turns out. Sunstein’s and Hayek’s conceptions of the rule of law are largely the same. Sunstein misunderstands Hayek’s argument that the rule of law requires economic freedom. At least, so I will argue in what follows. Of course, Hayek did at one time promote the rule of law as an essential support of a liberal order in general and of economic liberty in particular. Then, later in his career, he deemphasized this claim markedly. The aim of this essay is to understand the role of rule of law ideal in Hayek’s thinking, why he promoted it so strongly in mid-career, and why he switched gears later.
Sunstein defines the rule of law as commitment to seven principles: (1) “clear, general, publicly accessible rules laid down in advance”; (2) no retroactive lawmaking; (3) “conformity between law on the books and law in the world”; i.e., the laws as written are actually enforced; (4) right of alleged lawbreakers to a hearing before judges with some degree of political independence; (5) separation between lawmaking/enforcement and law-interpretation; i.e., neither the lawmakers nor the police get to decide what counts as a crime, but independent judges who interpret the laws as written; (6) “no unduly rapid changes in the content of law”; (7) “no contradictions or inconsistency in the law.”
This list of requirements might seem unremarkable—merely to-be-expected. However, it is important in that it imposes constraints on what laws a legislature may enact. That is, it sets limits on legislative authority, since not just any “law” enacted by the recognized legislative authority will satisfy all the seven principles. The rule of law in this sense forms a moral standard by which government action is judged and limited.
This is Sunstein’s sensible and appropriate account of the rule of law. He claims no originality for it, and indeed he cites the influence of several important 20th century proponents of the rule of law ideal, such as Lon Fuller, whose 1964 The Morality of Law defines the rule of law by an essentially similar list of principles.
What, then, does Sunstein say Hayek gets wrong about the rule of law? Sunstein’s criticism is based on Chapter 15, “Economic Policy and the Rule of Law,” of Hayek’s 1960 book, The Constitution of Liberty, where Hayek argues that government “measures designed to control the access to different trades and occupations, the terms of sale, and the amounts to be produced or sold” are incompatible with the rule of law. In other words, attempts by the government to control wages and prices, production quantities, and who can take what jobs are incompatible with the rule of law. And the basic reason Hayek cites is that such controls cannot be maintained through general rules but must “involve arbitrary discrimination between persons.”
Sunstein objects that Hayek has no general criterion of what is arbitrary. For instance, in regulating who can take which jobs, surely it is permissible to require that taxi drivers have good enough eyesight or that medical doctors demonstrate a certain level of competence. Indeed, Hayek explicitly allows such rules to be nonarbitrary. Presumably, what would count as an arbitrary restriction would be, say, requiring that only white males can be taxi drivers or doctors. But how do we determine that the latter requirement is arbitrary, but the former are not? We might say that the former restrictions are relevant to the performance of the jobs in question, whereas the latter is not. But how do we know what is “relevant” to the performance of a given job? The standard of relevance cannot be derived from the principles of the rule of law alone. What is relevant to the performance of a given job depends on the substantive particulars of that job, as well as on prevailing societal norms and values (such as, perhaps, a commitment to social equality). Thus, nearly any requirements might be compatible with the rule of law—or not—depending on our assessment of the substantive facts about a given job and our societal values. Therefore, the rule of law per se does not require a free market in access to jobs.
This argument is entirely reasonable, but it is not an objection to Hayek. Hayek does not say that arbitrariness consists in having legal requirements that are not “relevant,” but in having legal requirements that are based on the discretionary judgments of officials rather than general rules. Thus, one way—the most direct—to have arbitrary rules about access to jobs is to have local officials simply hand out licenses at their own discretion. But a more insidious way is to have restrictions that distort the market and thus require officials to make discretionary exceptions on the basis of “local need.” Hayek is explicit about this one–two punch in which market restrictions violate the rule of law. First, rules may directly assign discretionary power to officials. Second, restrictions on the market may prevent it from functioning adequately, thereby creating “emergencies” that can be addressed only by discretionary authority.
This is particularly clear in the case of wage and price controls. Here Hayek points out that, first, long-term rules that fix prices directly cannot keep up with the constantly changing circumstances that determine prices in a market. Second, rules that attempt to determine prices indirectly as, say, a certain percentage over cost, “will not be the same for all sellers and, for this reason, will prevent the market from functioning.” This argument is obscure as stated. I think he must mean something like the following. If an average cost to produce some widget is assumed on the basis of conditions at the time of making the law, this will favor producers who have lower costs and penalize those with higher costs, however these may fluctuate, regardless of the reasons for the lower or higher costs, whether bad luck, bad planning, temporary market distortions with regard to labor or other factors of production, shortages, surpluses, and so forth. As Hayek emphasizes elsewhere (“The Use of Knowledge in Society,” sec. 4), particular economic agents are always confronted with particular challenges, not “average conditions.” On the other hand, if each producer is allowed a certain margin of profit above his own cost, no matter what it is, this leads to well-known problems of its own, beginning (but certainly not ending) with gutting the incentive to reduce costs. The result either way is discretionary intervention by government officials or else a dysfunctional market. Third, since prices different from what the market would set must necessarily result in either surpluses or shortages, some way will have to be found to deal with these, and this again is bound to involve discretionary coercion. Fourth, Hayek claims that “experience has amply confirmed” that effective price controls always come down to “the judgment of authority concerning the relative importance of particular ends.” I think this is probably true, but he cites no evidence for the claim.
As in the case of access to job opportunities, Sunstein objects that a general law fixing prices is only “arbitrary” from the perspective that the market is the only appropriate means of setting prices, not from the perspective of the rule of law per se. Hayek’s preference for market determination of prices “is a reasonable judgment, but it is not part of the rule of law.” And again, this misconstrues what Hayek says. Hayek does not say that a general law fixing prices is arbitrary. He is clear that governance by general rules is nonarbitrary by definition. But in order for a system constrained by the rule of law
to function properly, it is not sufficient that the rules of law under which it operates be general rules, but their content must be such that the market will work tolerably well. The case for a free system [sc., system governed by the rule of law] is not that any system will work satisfactorily where coercion is confined by general rules, but that under it such rules can be given a form that will enable it to work. If there is to be an efficient adjustment of the different activities in the market, certain minimum requirements must be met; the more important of these are, as we have seen, the prevention of violence and fraud, the protection of property and the enforcement of contracts, and the recognition of equal rights of all individuals to produce in whatever quantities and sell at whatever prices they choose. Even when these basic conditions have been satisfied, the efficiency of the system will still depend on the particular content of the rules. But if they are not satisfied, government will have to achieve by direct orders what individual decisions guided by price movements will.
Thus, Hayek’s claim is that material considerations, for example of microeconomics, show that a workable system constrained by the rule of law requires tolerably free market conditions. Sunstein is right to insist that free market principles do not follow directly from the principles of the rule of law. But Hayek doesn’t claim they do. Rather, the claim is that a system constrained by the rule of law cannot survive without reintroducing arbitrary coercion—in a sense that Sunstein himself would recognize as arbitrary—unless it includes certain kinds of rules.
Notably, in the chapter of The Constitution of Liberty immediately preceding Chapter 15, Hayek lays out his own conception of the rule of law, which, although less elaborate than Sunstein’s, conforms well with it. Hayek stresses four major principles of the rule of law. Laws must be: (1) general, “containing no references to particular persons, places, or objects”; (2) known and certain; (3) applied equally to all; and (4) not applied at the discretion of the legislator or enforcer. Hayek also mentions that laws should be long-term measures and never retroactive. The only principles named by Sunstein that Hayek doesn’t explicitly mention in this chapter are the third and seventh. Moreover, Hayek expressly emphasizes the role of the rule of law as “a limitation upon all legislation” that thereby constitutes “a meta-legal doctrine or a political ideal” that sets the terms of what the law ought to be. Thus, so far from conflicting with the Sunstein’s conception, Hayek’s conception of the rule of law is essentially similar to it.
These matters are important because, it seems to me, Hayek’s case for “a free system” or libertarian order rests fundamentally on his conception of the rule of law as a prohibition on discretionary coercion. As is well-known, Hayek’s basis for a libertarian order differs radically from the more familiar grounding in the idea of natural rights or a “non-aggression axiom” that we find in writers like Ayn Rand and Murray Rothbard. For Hayek, the essential point always seems to be to liberate people from subjection to arbitrary authority. This is why his conception of what a libertarian order requires is so much less strict than that of the writers just mentioned. For example, he will not be that libertarian who says, “taxation is theft!” and who opposes government social welfare programs and even the very institution of government as inherently coercive. That is because he has a different conception of coercion (or rather, of the sort of coercion that is incompatible with individual liberty). It is a striking claim that the ban on arbitrary coercion encapsulated in the rule of law is sufficient to generate a tolerably free market, libertarian order.
However, if Hayek has made such a good case for the rule of law as a bulwark of liberty, why does he seem to drop the idea in later writings? In particular, in the second decade after The Constitution of Liberty, Hayek published a second magnum opus, Law, Legislation, and Liberty (1973; 1976; 1979), on essentially the same theme, namely the theoretical and institutional foundations of a free society. Yet, in this second work, the notion of the rule of law is hardly mentioned. Why? Does he no longer see a connection between the rule of law and liberty? Has he come around to Sunstein’s way of thinking? I think the answer is no. I think the discrepancy between the earlier and the later works is not that Hayek identified some error in the logic of his earlier argument, but rather that he decided that the ideal of the rule of law is overly susceptible to distortion and ideological attack, making it unsuitable to be a loadbearing pillar of a liberal order. In what remains of this essay, I will try to explain and justify this claim.
Hayek himself says, in the “Introduction” to Law, Legislation, and Liberty (hereafter LLL), that the ideals articulated in The Constitution of Liberty have failed to attract present day idealists due to confusion about the notion of justice and that the purpose of the new work (LLL) is to explain properly for the first time some “fundamental insights” that will help correct the situation. The important one of these new insights for our purposes is the distinction between a spontaneous order and a designed order (or “organization”) and the correlative distinction between two different kinds of rules suitable for governing each, which will turn out to be (a) the system of laws that emerge historically from judicial decisions between litigants in court cases, which are the rules suitable for a spontaneous order, and (b) legislative rules declared by government authorities, which are the rules suitable for organizations. It will soon emerge that Hayek regards judge-made law as the only appropriate kind for a spontaneous order (even if it may require correction occasionally by explicit legislation) and legislation as appropriate only for organizations. This distinction between “law” and “legislation” is a telling break from The Constitution of Liberty, which had taken for granted that much or most of the rules governing a libertarian order would be explicitly legislated.
Where the rule of law is mainly mentioned in LLL is in Chapters 8, 9, 12, and 13. Chapter 8 traces the subversion and destruction of the rule of law by “legal positivism,” which holds that law consists of the enactments of the recognized legislators of the community, who are unconstrained in their lawmaking by any higher principles. Legal positivism in effect destroys the rule of law, because it implies that “no distinction can be drawn between a legal system in which the rule of law … prevails and where this is not the case, and that therefore every legal order, even one where the powers of authority are wholly unlimited, is an instance of the rule of law.” In Chapter 9, Hayek argues that social justice measures that attempt to reward individuals for actions judged to be meritorious must single out particular individuals and actions and thus violate the rule of law. He then repeats the point that such measures can be (falsely) claimed to conform to the rule of law “only if one understands by law not the general rules of just conduct only but any command issued by authority (or any authorization of such commands by a legislature).” In Chapter 12, Hayek complains again of the degeneration of the rule of law: “while the conception of the rule … of law presupposes a concept of law defined by the attributes of the rules, not by their source, today legislatures are no longer so called because they make the laws, but laws are so called because they emanate from legislatures” (Hayek’s italics). Finally, in Chapter 13, we find the same: “The existing situation is such that even the awareness has been lost of the distinction between law in the sense of rules of just conduct and law in the sense of the expression of the majority’s will on some particular matter.” Thus, in LLL, Hayek’s main theme with regard to the rule of law is the conceptual abuse and breakdown it has suffered.
In addition, there is reason to believe that Hayek was significantly influenced in the writing of LLL, and even in the decision to write LLL in the first place, by Bruno Leoni’s Freedom and Law of 1961. In that work, Leoni argues that judge-made law is superior to legislation, and also—importantly for us—that the long-run certainty of the law prized by the rule of law ideal is seriously compromised by the very institution of legislation. Hayek seems to have found this to be a serious criticism. In a 1968 tribute delivered after Leoni’s untimely death, Hayek wrote, “He argues persuasively, and has convinced me, that although the codification of the law was intended to increase the certainty of the law, it did at most enhance the short-run certainty of the law, and I am no longer sure that even this is strictly true, while the habit of altering the law by legislation certainly decreases its long-run certainty.” (For more on Leoni’s influence on Hayek and LLL, see Shearmur’s 1996 and 2021 writings.)
In place of the rule of law ideal, in LLL Hayek emphasizes the virtues of judge-made law as an institution for promoting and maintaining a spontaneous order. Judge-made law is the system of (often implicit) rules that emerges and grows over time, which can stretch back hundreds of years, from judicial decisions in cases brought by individuals in a community. Judge-made law is thus traditional or case law, which depends on the honoring of precedents. Hayek argues for the benefits of case law in LLL, Chapter 5. Following are some of the more significant points.
- The scope of judge-made law is inherently limited, because judges merely adjudicate cases. Thus, the principles they invoke will be restricted to such as provide for the avoidance and resolution of disputes and will not stray into, for example, social welfare schemes. (Of course, Hayek allows that society may wish to pursue such schemes, but that will have to be done with a different kind of law.)
- Judges’ rules seek to maintain and develop an already existing order. There is no social order without rules. Therefore, the rules that support a spontaneous order are already in place well before a system of law courts and judges comes into existence—and these will be predominantly the sort of rules that promote smooth and reliable interactions between community members.
- Judges have little power to enforce their rulings, which therefore are unlikely to be enforced unless they appeal to the litigants’ pre-existing intuitions about justice (which will have been produced by the cultural-evolutionary process that produced the rules that maintain the already existing spontaneous order mentioned in point 2).
- The fact that the rulings that produce judge-made law must invoke traditional rules and principles enhances the predictability and certainty of the law, possibly beyond what can be achieved by explicit legislation. The inarticulate intuition of traditional rules by a trained judge can be more certain and reliable than attempts to interpret newly legislated general rules, even when the latter are not imperfectly formulated and incomplete, as they frequently will be.
- By contrast, the attitude of the legislator tends to be managerial; i.e., to be oriented toward the creation and direction of particular social structures, institutions, and goals (Ch. 6).
- Finally, there is a general argument that the sort of rules that promote smooth and reliable interactions between community members—i.e., the sort that are characteristic of judge-made law—will be rules that define and protect property rights. To wit, the aim of the rules of a spontaneous order is to coordinate the legitimate expectations of community members so they can plan their actions. Of course, such expectations cannot be based on particular persons and institutions and conditions, since these are constantly changing, but on abstract relationships. But the only method yet discovered of doing this “is to demarcate for every individual a range of permitted actions by designating… ranges of objects over which only particular individuals are allowed to dispose and from the control of which other individuals are excluded. … In other words, rules are required which make it possible at each moment to ascertain the boundary of the protected domain of each and thus to distinguish between the meum and the tuum. … Property… is the only solution men have yet discovered to the problem of reconciling individual freedom with the absence of conflict. Law, liberty, and property are an inseparable trinity.”
Thus, the institution of judge-made law plays a role in LLL similar to that played by the rule of law ideal in The Constitution of Liberty. Namely, to be an institution that maintains and promotes a libertarian order, including economic freedom. The key difference, I think, is that judge-made law is an institutionalized practice that inherently promotes the development of a libertarian order. The rule of law, by contrast, is an abstract ideal whose implementation requires self-conscious vigilance and adherence to the ideal on the part of legislators whose institutional incentives, so far from inherently aligning with the ideal, may often run counter to it. No wonder, then, that the rule of law ideal was undermined (as Hayek was already documenting and complaining about in The Constitution of Liberty, Ch. 16) and failed to achieve what he had hoped. The switch to judge-made law seems to be an attempt to rely on the very evolutionary process that originally spawned the spontaneous order to begin with. If the process of developing and implementing law could be confined within bounds akin to the cultural evolutionary process to which Hayek attributed the origin of a spontaneous order, we might expect law to continue in a healthy state and a libertarian order to be preserved.
I remarked earlier that Hayek was not a libertarian absolutist who denies the legitimacy in principle of government social welfare programs. In light of this fact, it seems that Keynes in particular pressed Hayek on the question of what principled criterion or mechanism Hayek could cite that would prevent the inevitable growth of the welfare state and keep Hayek off his own Road to Serfdom. Indeed, this is a key issue in Hayek’s social philosophy. It seems that the rule of law ideal was Hayek’s initial response to this problem, but that it was quickly replaced by the mechanism of judge-made law. The change can be seen as a practical one. There is no incompatibility between judge-made law and the rule of law ideal, and the introduction of the former doesn’t mean Hayek had concluded that the rule of law, if properly adhered to, couldn’t accomplish what he claimed. However—speaking of practicality—institutional change of the sort that would be required to create a strict system of judge-made law of the sort Hayek describes would be a heavy lift indeed. This is unfortunate, because it is a tantalizing prospect.
David L. Potts is both a philosopher and a psychologist. He teaches philosophy at the City College of San Francisco and blogs at Policy of Truth. Send him mail.
Isonomia Quarterly 