In this chapter Hayek is pointing out that from its earliest inception, as part of the torrent of ideas that flooded out of the French Revolution, socialist thinkers have recognized that implementing collectivism will require a dictatorship.
He also points out that this requirement seems to have been overlooked by modern progressives (of the post-WWI 20th century) as they have embraced socialism as the better alternative to liberalism. The progressives have embraced the theoretical socialism, one that is ruled at top by democracy not dictatorship. This concept was an embellishment of socialism that became popular as the social upheaval of 1848 in central Europe evolved -- it gained in popularity because it was an idea that made socialism more popular.
In this chapter Hayek is pointing out that while the concept of democratic socialism makes it popular with progressives, it won't work in the real world. In the real world the governing must always evolve into a dictatorship. The reason is that the democratic governing structure can't micro-manage well, and can't make decisions quickly enough, and both of these are critical elements to collectivist governing -- the kind of system that is going to have the government make decisions about who gets what, both in allocating production and consumption resources.
Instead democracy works well with rule of law -- the democratic process can set up rules, and then those governing can back off. Once the rules are set the people of the community can interact with them, and the surprises that fall out of that interaction are not threatening to those governing.
And this is how you actually grant freedom to the people.