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Hayekian Welfare States: Explaining the Co-Existence of Economic Freedom and Big Government




The idea that all types of economic freedom – including limited government – promote prosperity is challenged by the fact that some countries successfully combine a large public sector with high taxes and otherwise high levels of economic freedom. To explain the co-existence of economic freedom and big government, this paper distinguishes between big government in the fiscal sense of requiring high taxes, and in the Hayekian sense of requiring knowledge that is difficult to acquire by a central authority. The indicators of government size included in measures of economic freedom capture the fiscal size but ignore the Hayekian knowledge problem. hinking 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.

Suggested Citation

  • Bergh, Andreas, 2018. "Hayekian Welfare States: Explaining the Co-Existence of Economic Freedom and Big Government," Working Paper Series 1252, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:1252

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    Cited by:

    1. Lucas, David S. & Boudreaux, Christopher J., 2020. "National regulation, state-level policy, and local job creation in the United States: A multilevel perspective," Research Policy, Elsevier, vol. 49(4).
    2. Christopher Boudreaux & Anand Jha & Monica Escaleras, 2021. "Weathering the Storm: How Foreign Aid and Institutions Affect Entrepreneurship Following Natural Disasters," Papers 2104.12008,
    3. Feld, Lars P. & Nientiedt, Daniel, 2022. "Hayekian economic policy," Freiburg Discussion Papers on Constitutional Economics 22/01, Walter Eucken Institut e.V..
    4. J. Brandon Bolen & Russell S. Sobel, 2020. "Does Balance Among Areas of Institutional Quality Matter for Economic Growth?," Southern Economic Journal, John Wiley & Sons, vol. 86(4), pages 1418-1445, April.

    More about this item


    Welfare state; Hayek; Economic freedom; Economic reforms; State capacity;
    All these keywords.

    JEL classification:

    • B25 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Historical; Institutional; Evolutionary; Austrian; Stockholm School
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government


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