In this chapter Hayek discusses the incompatibility between central planning and the rule of law -- you can have one or the other, but not both. This chapter stuck a chord with me because I see rule of law as essential not just to freedom and a competitive business environment, I also see it as a foundation for the feeling of enfranchisement which is so important to containing crime as I point out in my essay Enfranchisement and Gangs.
Hayek says, "Rule of Law, stripped of all its technicalities, means that government in all its actions is bound by rules fixed and announced beforehand." The benefit of this is being able to predict where government will use its coercive powers in given circumstances and the individual can plan accordingly.
This is a huge benefit to making material progress in a community where commerce and technological improvement are the mainstays of prosperity. Business is uncertain enough when dealing with inherently uncertain things such as business cycles, technological changes and consumer preferences. The more the government is going to add uncertainty over its role, the more cautious businesses, and individuals, must be about their affairs. And bringing new technology to a community faces the same issues with the same effect of promoting more caution in the face of more uncertainty.
Here's an example: You make some money, it doesn't matter how. The question then becomes what to do with it? Do you...
o Invest in a fixed asset such as a farm and hope to make even more money?
o Buy gold to hold for a rainy day and bury it in the ground somewhere?
o Give it to beggars who are needier than you are.
o Spend it tonight on hookers and blow and have a really good time right now?
o Give it to the government so they can decide how to spend it?
The right answer depends on how you, the decision maker, view your present and future prospects. And how you view those prospects is strongly influenced by your views of the feelings and actions of the community around you, including the government you live under. And this is why how much authority rule of law has in a community is so important -- if the rules of law aren't followed strongly, then someone else is making the rules. In the central planning environment how this money earned by you is spent is not up to you and how you view your circumstance. A central planning example: How is your social security money invested? How is your pension money invested? That's not up to you.
Another difference between Rule of Law and central planning is how fast the rules can change. If the rules can change essentially instantaneously and at the will of a government official who has an agenda, then you have central planning, and you have ad hoc rules. As Hayek has pointed out in other chapters, this combination works best with a government form that can make micromanaging decisions quickly -- a dictatorship based on a single overreaching goal that the whole community agrees with.
Hayek emphasizes the difference that uncertainty plays in the two environments. In the Rule of Law environment uncertainty is part of the system. If someone comes up with a possible hot idea the only question authorities have about it is, "Is it legal within the existing framework of laws?" The question about how really hot it is is one for the free marketplace to answer, not the authorities. In the central planning framework a possible hot idea starts as automatically a bad one because it's not part of the plan. It becomes a good idea by becoming part of some government planning official or committee's agenda, and then it is automatically a good idea and the plan is changed to accommodate it.
Either way the concept of "a good idea" is a very human choice. The question is, which human?: the end user of the idea or a government planner? If it's the government planner, then we fall into that famous third of the three great lies, "I'm from the government, and I'm here to help you."
The relevance of this conflict to 2010 US times comes in legislation such as Obamacare and the Dodd-Frank financial regulation bills. These 2,000+ page pieces of legislation are not Rule of Law, they are the 2010's incarnation of central planning. People dealing in these areas on a day-to-day basis will innovate by submitting ideas to planning committees, boards, panels, czars, and other authorities. Notably not on this list are customers and providers. Customers and providers must also represent their interests by appealing to these same planning committees, board, panels, czars, and other authorities.