“Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law.” Nobel Laureate F.A. Hayek, “The Road to Serfdom”

“If, however, the law is to enable authorities to direct economic life, it must give them powers to make and enforce decisions in circumstances which cannot be foreseen and on principles which cannot be stated in generic form. The consequence is that, as planning extends, the delegation of legislative powers to diverse boards and authorities becomes increasingly common…Constantly the broadest powers are conferred on new authorities which, without being bound by fixed rules, have almost unlimited discretion in regulating this or that activity of the people.”, F.A. Hayek

Comment by Mike Perry, former Chairman and CEO, IndyMac Bank:

“Hayek is one of the great economic and political thinkers in history. Chapter Six of his famous book (written in the 1930’s), “The Road to Serfdom”, entitled “Planning and the Rule of Law” really hit home for me given my experiences of the past five plus years. It’s hard to believe that even today, I am still embroiled in civil litigation related to IndyMac Bank’s failure during the financial crisis. I didn’t do anything wrong (and not a single allegation against me was ever proven). I ran IndyMac to the very best of my abilities (and I am pretty able) and always followed the laws and regulations. I remain proud to this day of my decisions and actions during the financial crisis. Despite those facts, I and my family have experienced firsthand the unfairness and arbitrariness of our civil laws and dysfunction of our legal system. Hayek uses the term “coercive powers of government” throughout this book. (He is really talking about the fact that all governments have power over the individual.) Like most Americans, until my recent years’ legal experiences, I would never have thought of our government in this manner. However, I experienced firsthand the unfair, arbitrary and unchecked powers of government bureaucracies like the SEC and FDIC. It seems to me that our government and legal system in the U.S. is moving away from The Rule of Law and becoming more arbitrary by the day. I am concerned for our Country, because as Hayek argues below, abandonment of The Rule of Law leads to a totalitarian government.”

Excerpts from Nobel Laureate F.A. Hayek’s, “The Road to Serfdom: Chapter Six, Planning And The Rule of Law”:

“Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand….rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”

“..the essential point, that discretion left to the executive organs wielding coercive power should be reduced as much as possible, is clear enough. While every law restricts individual freedom to some extent by altering the means which people may use in pursuit of their aims, under the Rule of Law the government is prevented from stultifying individual efforts by ad hoc action. Within the rules of the game the individual is free to pursue personal ends and desires, certain that the powers of government will not be used to deliberately frustrate them.”

“The distinction we have drawn before between the creation of a permanent framework of laws within which the productive activity is guided by individual decisions and the direction of economic activity by a central authority is thus really a particular case of the more general distinction between the Rule of Law and arbitrary government.”

“Under the first the government confines itself to fixing rules determining the conditions under which the available resources may be used, leaving to the individuals the decision for what ends they are to be used. Under the second the government directs the use of the means of production to a particular end.”

“The first type of rules can be made in advance, in the shape of formal rules which do not aim at the wants and needs of particular people. They are intended to be merely instrumental in the pursuit of people’s various individual ends. And they are, our ought to be, intended for such long periods that it is impossible to know whether they will assist particular people more than others. They could almost be described as a kind of instrument of production, helping people predict the behavior of those with who they must collaborate, rather than as efforts toward the satisfaction of particular needs.

“Economic planning of the collectivist kind necessarily involve the very opposite of this. The planning authority cannot confine itself to providing opportunities for unknown people to make whatever use of them they like. It cannot tie itself down in advance to general and formal rules which prevent arbitrariness. It must provide for the actual needs of people as they arise and then deliberately choose between them. It must constantly decide questions which cannot be answered by formal principles only, and in making these decisions, it must set up distinctions of merit between the needs of different people. When the government has to decide how many pigs are to be raised or how many buses are to be run, which coal mines are to operate, or at what prices shoes are to be sold, these decisions cannot be deduced from formal principles or settled for long periods in advance. They depend inevitably on the circumstances of the moment, and in making such decisions, it will always be necessary to balance one against the other in the interests of various persons and groups. In the end, somebody’s views will have to decide whose interests are more important; and those views must become part of the law of the land, a new distinction of rank which the coercive apparatus of government imposes on people.”

“The distinction we have just used between formal law or justice and substantive rules is very important and at the same time most difficult to draw precisely in practice. Yet the general principle involved is simple enough. The difference between the two kinds of rules is the same as that between laying down a Rule of the Road, as in a Highway Code, and ordering people where to go; or, better still providing signposts and commanding people which road to take.”

“The formal rules tell people in advance what action the state will take in certain types of situation, defined in general terms, without reference to time and place or particular people….The knowledge that in such situations the state will act in a definite way, or require people to behave in a certain manner, is provided as a means for people to use in making their own plans…..They do not involve a choice between particular ends or particular people, because we just cannot know beforehand by whom and it what way they will be used.”

“In our age, with its passion for conscious control of everything, it may appear paradoxical to claim as a virtue that under one system we shall know less about the particular effect of the measures the state takes than would be true under most other systems and that a method of social control should be deemed superior because of our ignorance of its precise results. Yet this consideration is in fact the rationale of the great liberal principle of the Rule of Law.”

“If individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state, which may affect these plans. But if the actions of the state are to be predictable, they must be determined by rules fixed independently of the concrete circumstances which can neither be foreseen nor taken into account beforehand: and the particular effects of such actions will be unpredictable.”

“If, on the other hand, the state were to direct the individual’s actions so as to achieve particular ends, its actions would have to be decided on the basis of the full circumstances of the moment and would therefore be unpredictable. Hence the familiar fact that the more the state “plans”, the more difficult planning becomes to the individual.”

“Wherever the state can exactly foresee the effects (of laws it makes) on particular people of alternative courses of action, it is also the state which chooses between different ends. If we want to create new opportunities open to all, to offer the chances of which people can make what use they like, the precise results cannot be foreseen. General rules, genuine laws as distinguished from specific orders, must therefore be intended to operate in circumstances which cannot be foreseen in detail, and, therefore, their effect on particular ends or particular people cannot be known beforehand. It is in this sense alone that it is at all possible for the legislator to be impartial.”

“As soon as the particular effects are foreseen at the time a law is made, it ceases to be a mere instrument to be used by the people and becomes instead an instrument used by the lawgiver upon the people and for his ends. The state ceases to be a piece of utilitarian machinery intended to help individuals in the fullest development of their individual personality and becomes a “moral” institution….where “moral” is not used in contrast to immoral but describes and institution which imposes on its members its views on all moral questions, whether these be moral or highly immoral. In this sense the Nazi or any other collectivist state is “moral”, while the liberal state is not.”

“Perhaps it will be said that all this raises no serious problem because in the kind of questions which the economic planner would have to decide he need not and should not be guided by individual prejudices but could rely on the general conviction of what is fair and reasonable. This contention usually receives support from those who have experience planning in a particular industry and who find that there is no insuperable difficulty about arriving at a decision which all those immediately interested will accept as fair.”

“The reason why this experience proves nothing is, of course, the selection of the “interests” concerned when planning is confined to a particular industry. Those most immediately interested in a particular issue are not necessarily the best judges of the interests of society as a whole. To take only the most characteristic case: when capital and labor in an industry agree on some policy of restriction and thus exploit the consumers, there is usually no difficulty about the division of the spoils in proportion to former earnings or on some similar principle. The loss which is divided between thousands or millions is usually either simply disregarded or quite inadequately considered.”

“If we want to test the usefulness of the principle of “fairness” in deciding the kind of issues which arise in economic planning, we must apply it to some questions where the gains and the losses are seen equally clearly. In such instances it is readily recognized that no general principle such as fairness can provide an answer.”

“When we have to choose between higher wages for nurses and doctors and more extensive services for the sick, more milk for children and better wages for agricultural workers, or between employment for the unemployed or better wages for those already employed, nothing short of a complete system of values in which every want of every person or group has a definite place is necessary to provide an answer.”

“In fact, as planning become more and more extensive, it becomes regularly necessary to qualify legal provisions increasingly by reference to what is “fair” or “reasonable”; this means that it become necessary to leave the decision of the concrete case more and more to the discretion of the judge or authority in question.”

“One could write a history of the decline of the Rule of Law….in terms of the progressive introduction of these vague formulas into legislation and jurisdiction, and of the increasing arbitrariness and uncertainty of, and consequent disrespect for, the law and the judicature, which in these circumstances could not but become an instrument of policy.”

“It is important to point out once more in this connection that this process of decline in the Rule of Law has been going on steadily in Germany for some time before Hitler came into power and that a policy well advanced toward totalitarian planning had already done a great deal of the work which Hitler completed.”

“There can be no doubt that planning necessarily involves deliberate discrimination between particular needs of different people, and allowing one man to do what another must be prevented from doing. It must lay down by a legal rule how well off particular people shall be and what different people are to be allowed to have and do. It means in effect a return to the rule of status…”

“Indeed, the Rule of Law, more than the rule of contract, should probably regarded as the true opposite of status. It is the Rule of Law, in the sense of the rule of formal law, the absence of legal privileges of particular people designated by authority, which safeguards that equality before the law which is the opposite of arbitrary government.”

“A necessary, and only apparently paradoxical, result of this is that formal equality before the law is in conflict, and in fact incompatible, with any activity of the government deliberately aiming at material or substantive equality of different people, and that any policy aiming directly at a substantive ideal of distributive justice must lead to the destruction of the Rule of Law. To produce the same result for different people, it is necessary to treat them differently.”

“To give different people the same objective opportunities is not to give them the same subjective chance. It cannot be denied that the Rule of Law produces economic inequality….all that can be claimed for it is that this inequality is not designed to affect particular people in a particular way.”

“It is very significant and characteristic that socialists (and Nazis) have always protested against “merely” formal justice, that they have always objected to a law which had no views on how well off particular people ought to be, and that they have always demanded a “socialization of the laws,” attacked the independence of judges, and at the same time given their support to all movements which undermined the Rule of Law.”

“The conflicts between formal justice and formal equality before the law, on the one hand, and the attempts to realize various ideals of substantive justice and equality, on the other, also accounts for the widespread confusion about the concept of “privilege” and its consequent abuse. To mention only the most important instance of this abuse….the application of “privilege” to property as such. It would indeed be a privilege if, for example, as has sometimes been the case in the past, landed property were reserved to members of nobility. And it is a privilege if, as is true in our time, the right to produce or sell particular things is reserved to particular people designated by the authority. But to call private property as such, which all can acquire under the same rules, a privilege, because only some succeed in acquiring it, is depriving the word “privilege” of its meaning.”

“The unpredictability of the particular effects, which is the distinguishing characteristic of formal laws of a liberal system, is also important because it helps us to clear up another confusion about the nature of this system: the belief that its characteristic attitude is inaction by the state.”

“Of course, every state must act and every action of the state interferes with something or other. But that is not the point. The important question is whether the individual can foresee the action of the state and make use of this knowledge as a datum in forming his own plans, with the result that the state cannot control the use made of its machinery and that the individual knows precisely how far he will be protected against interference from others, or whether the state is in a position to frustrate individual efforts. The state controlling weights and measures (or preventing fraud or deception in any other way) is certainly acting, while the state permitting violence, for example, by strike pickets, is inactive. Yet it is in the first case the state observes the liberal principles and in the second it does not.”

“The Rule of Law was consciously evolved only during the liberal age and is one of its greatest achievements, not only as a safeguard but as the legal embodiment of freedom. As Immanuel Kant put it (and Voltaire expressed it before him in very much the same terms), “Man is free if needs to obey no person but solely the laws”.”

“As a vague ideal it has, however, existed at least since Roman times, and during the last few centuries it has never been so seriously threatened as it is today. The idea that there is no limit to the powers of the legislator is in part a result of popular sovereignty and democratic government. It has been strengthened by the belief that, so long as all actions of the state are duly authorized by legislation, the Rule of Law will be preserved. But this is completely to misconceive the meaning of the Rule of Law. This rule has little to do with the question whether all actions of government are legal in the juridical sense. They may well be and yet not conform to the Rule of Law.”

“The fact that someone has the full legal authority to act in the way he does gives no answer to the question where the law gives him power to act arbitrarily or whether the law prescribes unequivocally how he has to act.”

“It may well be that Hitler has obtained his unlimited powers in a strictly constitutional manner and that whatever he does is therefore legal in the juridical sense. But who would suggest for that reason that the Rule of Law still prevails in Germany.”

“To say that in a planned society the Rule of Law cannot hold is, therefore, not to say that the actions of the government will not be legal or that such a society will be necessarily lawless. It means only that the use of the government’s coercive powers will no longer be limited and determined by pre-established rules.”

“The law can, and to make a central direction of economic activity possible must, legalize what to all intents and purposes remains arbitrary action. If the law says that such a board or authority may do what it pleases, anything that board or authority does is legal…but its actions are certainly not subject to the Rule of Law. By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way democracy may set up the most complete despotism imaginable.”

“If, however, the law is to enable authorities to direct economic life, it must give them powers to make and enforce decisions in circumstances which cannot be foreseen and on principles which cannot be stated in generic form. The consequence is that, as planning extends, the delegation of legislative powers to diverse boards and authorities becomes increasingly common….Constantly the broadest powers are conferred on new authorities which, without being bound by fixed rules, have almost unlimited discretion in regulating this or that activity of the people.”

“The Rule of Law thus implies limits to the scope of legislation: it restricts it to the kind of general rules known as formal law and excludes legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. It means, not that everything is regulated by law, but, on the contrary, that the coercive power of the state can be used only in cases defined in advance by the law and in such a way that it can be foreseen how it will be used. A particular enactment can thus infringe on the Rule of Law. Anyone ready to deny this would have to contend that whether the Rule of Law prevails today in Germany, Italy, or Russia depends on whether the dictators have obtained their absolute power by constitutional means.”

“Whether, as in some countries, the main applications of the Rule of Law are laid down in a bill of rights or in a constitutional code, or whether the principle is merely a firmly established tradition, matters comparatively little. But it will readily be seen that, whatever form it takes, any such recognized limitations of the powers of legislation imply the recognition of the inalienable right of the individual, inviolable rights of man.”

“In this respect much more consistency is shown by the numerous reformers who, ever since the beginning of the socialist movement, have attacked the “metaphysical” idea of individual rights and insisted that in a rationally organized world there will be no individual rights but only individual duties. This indeed, has become the much more common attitude of so-called “progressives”, and few things are more certain to expose one to the reproach of being a reactionary than if one protests against a measure on the grounds that is a violation of the rights of the individual. Even a liberal paper like the Economist was a few years ago holding up to us the example of the French, of all people, who had learned the lesson that “democratic government no less than dictatorship must always have plenary powers in posse, without sacrificing their democratic and representative character. There is no restrictive penumbra of individual rights that can never be touched by government in administrative matters whatever the circumstances. There is no limit to the power of ruling which can and should be taken by a government freely chosen by the people and can be fully and openly criticised by an opposition.””

“This may be inevitable in wartime, when, of course, even free and open criticism is necessarily restricted. But the “always” in the statement quoted does not suggest that the Economist regards it as a regrettable wartime necessity. Yet as a permanent institution this view is certainly incompatible with the preservation of the Rule of Law and it leads straight to the totalitarian state. It is, however, the view which all of those who want the government to direct economic life must hold.”

“How even a formal recognition of individual rights, or of the equal rights of minorities, loses all significance in a state that embarks on a complete control of economic life, has been amply demonstrated by the experience of the various Central European countries. It has been shown possible to pursue a policy of ruthless discrimination against national minorities by the use of recognized instruments of economic policy without ever infringing the letter of statutory protection of minority rights. This oppression by means of economic policy was greatly facilitated by the fact that particular industries or activities were largely in the hands of a national minority, so that many a measure aimed ostensibly against an industry or class was in fact aimed at a national minority. But the almost boundless possibilities for a policy of discrimination and oppression provided by such apparently innocuous principles as “government control of the development of industries” have been amply demonstrated to all those desirous of seeing how the political consequences of planning appear in practice.”

Posted on January 30, 2014, in Postings. Bookmark the permalink. Leave a comment.

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