Hayek's Golden Rule: Liberty, Progressive Taxation, and Individual Freedom

Freedom and the Crisis of Modern Civilization

Friedrich Hayek's central argument in The Constitution of Liberty revolves around freedom and its value to the individual, society, and civilization overall. Progress in each of these areas seems impossible without freedom of action. Hayek uses liberty and freedom interchangeably, arguing that contemporary civilization faces a crisis because Western nations have lost faith in liberty principles. Generally, liberty requires minimizing the compulsion of some people by others. While one function of government is to protect people from coercing one another, government must itself be prevented from using coercion improperly. This dual obligation—to enable freedom while restraining arbitrary power—forms the foundation of Hayek's constitutional philosophy.

In his early discussion of progressive taxation, Hayek observes that the notion of interpersonal comparability of utilities has been largely abandoned in economic theory. However, many policymakers and ordinary individuals still assume that wealthy people gain less utility than poor people from income gains of similar magnitude. This creates a fundamental tension: the philosophical basis for redistributive taxation has been intellectually discredited, yet the practice persists.

Progressive Taxation and Utility Comparison

The idea of progressive taxation focuses on redistributing wealth to an extent that the scope of redistribution could be quite restricted. Consequently, redistribution through progressive taxation has become nearly universally accepted as just. Regardless of whether this principle is combined with the welfare state, progressive taxation is currently the main means of redistributing incomes. As a result, it remains a major source of governmental arbitrariness and democratic irresponsibility.

Despite being the chief mechanism for income redistribution, the concept of interpersonal comparability of utilities underlying this principle has been generally abandoned. The principle of diminishing marginal utility—which suggests that additional income produces less wellbeing for the wealthy than for the poor—has lost theoretical credibility. Yet the practical logic persists: taxing wealthy people at high marginal rates has minimal impact on their overall wellbeing, while transferring that wealth to the poor significantly enhances theirs. This disconnect between abandoned theory and continued policy raises the core question: should the Golden Rule be abandoned as a moral foundation for such redistribution?

The Golden Rule as Moral Foundation

Even though interpersonal utility comparison has been largely ignored or denied, the Golden Rule should not be abandoned on the basis of making people consult their individual preferences when doing unto others. This is primarily because the Golden Rule serves as a foundation for moral action and a criterion for evaluating moral consequences and the quality of laws. The Golden Rule is fundamentally a principle of fairness that should be detached from behavior originating from the desires of recipients or agents.

Rather than collapsing into subjective preference satisfaction, the Golden Rule operates as an objective standard. It asks not "what do others want?" but "what principle would I accept if universal?" This distinction matters profoundly for reconciling the Golden Rule with individual liberty rather than undermining it.

Individual Liberty and Life Plans

A critical factor in defending the maintenance of the Golden Rule is clarifying what it does not mean. The rule does not require people to project their desires and values onto others or to enforce on them the preferences we would like enforced on ourselves. When the principle is misinterpreted in this coercive way, it becomes a tool for limiting individual liberty rather than protecting it.

Instead, the Golden Rule should be regarded as a regular principle of action with which individuals establish and adhere to their own plans in life. Since the human individual is the being that thinks, chooses, and acts, the concept of liberty effectively applies to such an individual. As a result, freedom must be described in light of individuals. A free society cannot exist without free people, since it requires the liberty of everyone. The Golden Rule, properly understood, enables rather than constrains this individual autonomy.