Classical liberals all agree that government should be limited, but they disagree about how they get to that conclusion. I want to approach these differences by looking at three different questions that anyone concerned about the role of government should care about.

1. What is the methodology or the philosophy that will determine what the role of government is?

2. Why should the government be limited? Should it be limited because of the consequences of government actions or because people have natural rights?

3. What is the legitimate role of government? What should governments do, and what should governments not do?

I’m going to ask those three questions with reference to five different schools of thought. All these schools are classical liberal, and all believe that liberty is the most important political value, but they disagree on these three fundamental questions.

Milton Friedman and the Chicago School


The Chicago School of Economics approached the questions above by using an empirical methodology. That is, they were all about testing the power of theories.

To test a theory, the Chicago School economists would present a hypothesis (e.g. if you increase the minimum wage, lower-skilled workers will find it more difficult to find employment) and test it with empirical evidence.

Why limited government?

The Chicago School believes that there is such a thing as market failure—markets sometimes fail—but that there’s also such a thing as government failure. And they claim that usually government failure is much greater than market failure.

In much public debate about the role of government, politicians will identify a market failure and assume that a perfect government can come in and solve that problem. The Chicago School says that’s not right. We need to compare imperfect markets, with all the imperfections they have, with imperfect government, with all of their imperfections. The Chicago School believes that when you do these two things, government failure is usually much greater than market failure.

Underlying this claim is the observation that there is a gap between the intentions of policymakers and the actual results of what they advocate. Sometimes policies even lead to the opposite to that of which was intended. For example, the idea of rent control is to provide more housing opportunities for poor people. But by reducing the price of rental property, you actually reduce the supply of rental property, which makes it more difficult for poor people to find housing. It has the opposite effect to what’s intended.

And why is there this gap between intentions and consequences? The Chicago School argues it’s because of policymakers’ failure to take into account the importance of self-interest in explaining peoples’ behavior. They ignore human nature.

Then there are many other government policies that, while they might actually achieve their intended goals, also have negative, unintended consequences. For example, some people do benefit from raising the minimum wage, but large numbers of people can’t get jobs at all because of it. And so we need to compare both the positive consequences, which were intended, and the negative, unintended consequences.

Role of government

Milton Friedman identifies four main areas of government responsibility.

1. Protection: We need a military to provide us with defense against our foreign enemies and a police force to protect us from criminals.

2. Administration of justice: If you live in a society with other people, people will inevitably come into conflict with one another. One possible way of resolving any sort of conflict is by beating up the other person. Presumably, though, we don’t want to live in a society where every time there is a disagreement, we try and have a physical fight with the other person. So we want some neutral arbiter that is not connected with either side to say who was right and who was wrong. It’s the job of the government to provide courts for this service.

3. Public Goods and Negative Externalities: There are some things that the marketplace simply cannot provide satisfactorily, and the government has a role in providing them. Public goods have two characteristics. One, you can’t exclude people from benefiting from them. And two, they are “nonrival”, meaning the fact that I consume more of it does not mean that you have less of the product.

The classic example of a public good is defense. Suppose that I didn’t want to pay my taxes towards defense. The problem is a) that the American military are going to defend me whether I want it to or not. I can’t be excluded from American defense. And b) it’s nonrival. The protection of me doesn’t mean any less protection for anyone else. This would not work in a voluntary system because people would simply not contribute to public goods, preferring to free-ride.

Negative externalities occur when interactions between people have consequences for third parties. The classic case of that is pollution, where my production of a good produces pollution, which then affects the people who live in my neighborhood. The Chicago School says that we need some way of controlling these negative externalities.
More controversially, Milton Friedman argued that the poor are a negative externality. We don’t want to live in a society where there are people begging and starving on the streets. Therefore, Friedman argues for some form of social safety net.

4. Protecting the irresponsible: The classic case of where it is appropriate for the government to care for those who cannot look after themselves is children. Normally we can allow parents to make these decisions, but we still have to keep an eye. Not all adults treat children properly.

The Chicago School approach to the role of government is often called the Social Market Approach. Friedman believes that while governments do have some responsibilities, they should use market mechanisms as much as possible to achieve these ends. So, for example, it is the responsibility of the government to make sure every child is educated, but that does not mean that the government has to provide the schools. Government could give vouchers or support private schooling. While the government has a social responsibility, it doesn’t necessarily have to directly provide it in order to meet that social responsibility.

The Public Choice School


The approach of the School of Public Choice to the question of how we decide the role of government is to look for a “social contract”. Supposing you’ve got rational individuals together and they had to decide what they would do, how would they set up a form of government? What would they universally agree upon?

Public Choice scholars start with the question of what would happen if we had no state at all. They believe it would look something like English philosopher Thomas Hobbes’s “state of nature”. Hobbes said that life without a government is “nasty, brutish, and short.” Without a government, humans could basically do three things: produce things, steal other people’s things, or spend time protecting their things.

Because life in the state of nature wouldn’t be very pleasant, it would be in the self-interest of everyone to create a body that would protect the things that we produce. With a protective government body, we could spend a lot more energy producing things. We would be wealthier. We wouldn’t need to spend so many resources protecting ourselves. So it’s argued that rational individuals, thinking about what sort of government they would want, would create a government whose responsibility was to protect our life and property.

Why limited government?

In economics, we assume that people are motivated by their own self-interest, and Public Choice scholars say that people behave exactly the same way in the political realm as they do in the economic realm.

What their self-interest drives them to do, however, may not be the same. In economics, we tend to look for income and wealth to identify people’s self-interest. In politics, your self-interest is getting elected and reelected to public office. Politicians do that by promising goodies to particular groups. Vote for me, and I will protect your Social Security! Vote for me, and I will reduce your student loans! Vote for me, and I will support your farms! So it’s in the vested self-interest of politicians to promise goodies to particular groups within society.

Government bureaucrats are also self-interested. It’s in the interest of bureaucrats to have a bigger government. The more government there is, the more income they probably have and the more power they have. The bigger their offices are.

Interest groups are self-interested as well. They look to manipulate the government to work to their benefit. To use an economic term, they are rent-seekers. They try to get the rules written in such a way that makes it more difficult, for example, for a competitor to enter into the market and compete with them.

So the problem for the Public Choice School is that most political actors have a vested interest in growing government well beyond what people agree on in the social contract. That’s why they think the government needs to be limited—to prevent it from going well beyond what the proper role of government should be.

Role of government

So what should the role of government be in that context? It’s often described as the public goods state. The public goods state has two responsibilities.

  1. Protection: It should protect individual rights, especially our property.
  2. Production: It needs to provide public goods and deal with externalities.

It is not the responsibility of the state—public choice argues—to have any form of welfare state; that goes well beyond the social contract.

So why does the government tend to grow far beyond that which people would reasonably agree to under the social contract? For example, why does the federal government in the United States do so much more than the limited and enumerated powers established in the U.S. Constitution? The public choice school explains this with the concept of concentrated benefits and dispersed cost. That is, the benefits of a government program concentrate in the hands of a relatively small number of people while the costs of those programs are spread out among a larger group of people.

Let’s take agricultural policy for example. Only about 3 percent of the population in the United States is engaged in agriculture. 97 percent are not. But when it comes to deciding agricultural policy, these 3 percent, they really, really care about it. It would determine who they vote for. It would determine who they campaign for. It would determine who they will give money for.

The 3 percent would throw cow manure over politicians who don’t support agricultural subsidies and tariffs that make it difficult to import food from outside the United States. The 97 percent of us all lose by this. We lose because we pay higher taxes to subsidize this. We lose because the tariffs mean that we pay more for the food we buy in the supermarkets.

You would think that, in a democracy, a policy that is in the interest of 3 percent and against the interest of 97 percent would fail. But every attempt to do away with these agricultural supports has failed. And that’s because those who really care about it really care about it. They’re active on the issue.

The rest of us, the population who loses by it, don’t even think about agricultural policy. But even if we did think about it, the losses for each one of us amount to only a couple of dollars a week. We’re not going to get politically active on that issue. So when it comes to debating agricultural policy, it’s the small 3 percent that determine what those policies should be. According to public choice, this is true of most government laws and programs. It is driven by the small number of people, by the concentrated beneficiaries of that policy, and not at all by those who pay the costs—consumers and taxpayers.

The Austrian School


The Austrian School of economics actually approaches limited government with two different methodologies, propounded by the two leading Austrian School figures—Ludwig von Mises and Friedrich Hayek.

When arguing for limited government, Friedrich Hayek tends to emphasize the limits of knowledge and reason. He’s much more willing to give deference to tradition, to how social and legal rules have evolved over a period of time. So, for example, he’s much more interested in the concept of a spontaneous order, how we come to work together without any central planner that tells us how we should behave. He’s interested in the common law, how traditional law has developed over the ages.

Hayek is cautious about self-evident proofs that, for example, the Founders of the United States Constitution examined. He thinks that much of the order that we do see in society was the result of human action, but not of human design. Take the English language, for example: no group or institution decided this is what the English language was meant to be; it’s something that has naturally evolved over time. But we recognize what the rules of the language are, and we can live with those sorts of rules. Ludwig von Mises had a totally different approach. He adopts what’s called a priori deductive reasoning. He believes that we can identify certain truths about human behavior, what he calls axioms, and that we can discover these axioms through our experience and through the use of reason:

  1. Human action is purposeful. That is, humans seek to achieve certain goals. Actions are neither random nor predetermined. We can identify what people’s goals are and what it is they’re trying to achieve through their actions.
  2. Individuals are the only actors. The technical term for this is “methodological individualism”. In so much political debate, we tend to say, “France does this” or “London does that.” Of course, it’s not all the French people acting, but a small number of ministers at the top of the French government deciding to act. Actions are only conducted by individuals; they’re not conducted by broad groups.
  3. Value is in the eye of the beholder. This is the so-called “subjective theory of value”. That is, things do not have value in themselves, but only that to which people attribute to it. For example, I think rap is crap, but some people like rap. Some people think it’s a good thing. There’s no objective value to rap.

You often hear a criticism of economists that they know the price of everything and the value of nothing. But that assumes that we can know what the value is of something. But that is impossible. The value for the same thing can be different for different people.

Mises argues that simply using our reason, we can identify these axioms or these truths.

Why limited government?

Now, Mises and Hayek tend to agree about why government should be limited: because government policymakers lack the knowledge to:

  1. Understand what the goals are of regular people.
  2. Work out what the best means are for people to achieve these goals.

That’s why the Soviet Union collapsed. It wasn’t able to know what people wanted, and even if it did, it wouldn’t know how to achieve those wants. The Austrian School takes a consequentialist view—that the consequences of government action are often bad.

Role of government

When it comes to the question about the role of the state though, Hayek and Mises again diverge. Hayek says the criteria for deciding what government should do is what he calls the “rule of law”, by which he means that there are certain general principles that we should apply to any government action or any piece of legislation. In the United States, for example, the Supreme Court will often look at the law passed by Congress and signed by the president and strike it down under the U.S. Constitution.

Hayek argued that every society should have general principles that we should apply to every government action and every citizen, without exception. But in America, it’s very common for the U.S. Congress to pass a law which applies to everyone but themselves.

A classic example is the Americans with Disabilities Act. The law says that all buildings need to adjust in a certain way to enable disabled access. During the debate on the bill, however, they realized it would cost the U.S. Congress hundreds of millions of dollars to adapt Capitol Hill to meet those standards. So they excluded themselves from that bill. That’s an example of inequality before the law.

Another example would be earmarks, where the government offers money to a particular company in a particular way. Hayek argued that this should be considered illegitimate because it goes against the rule of law.

Hayek does believe that some form of limited welfare state can be justified by following the rule of law. Ludwig von Mises, however, concludes that there should only be a minimal state. That is, the job of government is solely and exclusively to guarantee the protection of life, health, liberty, and private property. There’s no role for the welfare state—only a minimal state.

Natural rights

America has a strong tradition of natural rights going back to the American founding. They were strongly influenced by the ideas of John Locke, who believed these natural rights came from God. And we saw that expressed in the Declaration of Independence.

Perhaps two of the most famous natural rights thinkers in the classical liberal tradition are Ayn Rand and Robert Nozick. Ayn Rand is famous for being a novelist, but she also wrote lots of philosophy. She is probably best known for her book Atlas Shrugged. Robert Nozick was a Harvard philosopher who wrote a famous book called Anarchy, State, and Utopia.


Rand is associated with her own philosophy which she called Objectivism. She believed that there is an objective reality and an objective morality, that we can discover reality and morality by the use of reason. We know that it is in the nature of man to want to live, to want to survive. In order for people to live, in order for people to survive, they have to have certain natural rights. That is, natural rights exist for the goal or purpose of human beings. This is called a “teleological” explanation.

Robert Nozick also believed in natural rights. He believed that by pursuing rational self-interest, you would not violate the natural rights of others. He assumed that rights exist and examined the consequences of that assumption. In this view, natural rights takes a so-called “deontological” approach. Natural rights tell us the limits of what we should do. For example, “thou shall not kill” is a clear moral principle that tells us that we should protect the rights of people not to be killed.

Why limited government?

Rand and Nozick both agree that the problem with government is that it violates our natural rights. It is immoral to use force to obtain your goals. Capitalism, they argue, is the only moral economic system. It is based on voluntary exchange—not coercion.

Role of government

According to both Rand and Nozick, the ideal government is a minimal state whose sole purpose is to protect our natural rights. Nozick specifies that there should be a minimal state against force, theft, and fraud. He also argues that the enforcement of contracts is justified. Anything beyond that role is illegitimate because it violates people’s rights.

He also talks about defending capitalist acts between consenting adults. As long as the people involved are agreeing voluntarily, they should be allowed to do whatever they want to do. The result of this is that the state should only be designed to protect us. So the state should provide a military to defend us. It should provide a police force to defend us against criminals. It should provide a court to avoid conflict between people. And that is it. There’s no justification for any form of government beyond that, such as a welfare state.


So now we’re going to look at Murray Rothbard, David Friedman, and the anarcho-capitalists. Murray Rothbard is famous for his book For a New Liberty. David Friedman, Milton Friedman’s son, wrote a book called The Machinery of Freedom.


Murray Rothbard defended his anarchist position on the basis of natural rights. In that sense, he was similar to Rand and Nozick. But he was also strongly influenced by Mises and the Austrian School, and he developed what he called the “non-coercive axiom” or the “non-coercive truth”: that it is always wrong to use force except in self-defense. Rothbard argues that this is the principle we should use to establish what the government should do.

David Friedman approaches anarchism from a different point of view: empirical analysis. He compares the relative efficiency of leaving things to the market with the relative efficiency of leaving it to the government.

And while Rothbard and Friedman used two very different methodologies—one based on natural rights and one based on consequences—they both believe there should be no state at all.

Why limited government?

The classic definition of a state comes from German sociologist Max Weber. A state is an institution which claims a monopoly of a legitimate use of force over a given territory. So within a society that a government covers, nobody but the government is allowed to use force.

Rothbard criticized this because he said that this means that governments violate our rights. They obtain what they want through coercive means. If we don’t do what the government wants, they will throw us in prison. So, for example, he says that taxation is theft. If somebody came along and took 25 percent or 40 percent of our income and said “if you don’t give it to me I’m going to put you in jail,” we would call that person a thief and a criminal. Rothbard asks why we behave any differently when it’s the state that demands 25 percent or 40 percent of our income.

David Friedman, taking his efficiency approach, says the state is inevitably inefficient—that the market is always going to be more efficient than the government. Friedman argues that the market can even provide things that most people assume that only the government can do—like defense or provision of roads—most efficiently.

So they conclude that the best society is one of anarchy, one without any government at all. According to Rothbard, the government is illegitimate—it has no specific moral claim on us or our property. And according to Friedman, it’s inefficient—it cannot provide the goods and services that the market is able to provide at a lower cost.

Role of government

Both Rothbard and Friedman argue that we tend to forget that there are often private solutions to public problems. For example, there are more people employed in the private security sector than employed by the police force. Most people are protected by private institutions not the police. We just tend to ignore that. We ignore the fact that many disputes between businesses don’t go to our state courts. In fact, many business disputes are settled in private arbitration courts because state courts are so slow; they’re so inefficient; they’re so unreliable. Many businesses will prefer to use private arbitration agencies to do this.

They also argue that even if you believe in the idea of a minimal state, if you create a minimal state it will never stay minimal. It will be unstable. And it will most likely grow and grow and grow. This is why they favor anarchism—no state whatsoever.

Conclusion: what’s your view?

So what’s your view about what the role of government should be? What’s your criteria for deciding what you think the government should do? What’s your methodology? What’s your philosophy?

Why do you think the government should be limited? Do you think it should be limited because of the consequences of government action? Do you think it should be limited because the government infringes on your natural rights?

And what do you think the role of government should be? Do you think there’s no role for the government? Are you an anarchist? Do you believe the role of government should be minimal—that it should only provide the army, the police, and the courts but nothing else? Do you believe that there are certain public goods like defense, like dealing with externalities such as the environment? Do you believe that there’s a social-market economy, that there is a responsibility for dealing with the poorest within society? That we need some sort of basic welfare state such as making sure every child can go to school?

Or do you believe in non-classical liberal views about the role of the state? Is it the job of the state to promote a virtuous society, as some conservatives would argue? Do you think it’s the job of the state to create equality, as many people would argue on the left.

Are you a socialist? Do you believe that the government should either own or control all aspects of the economy? Or are you—I hope not—a totalitarian, a fascist, or a communist who believes that the government should control every aspect of life?

The question is—what’s your view about the role of government?

Further reading

For further reading on classical liberalism and related topics, be sure to check out some of the following content:

280 years later, here’s how Thomas Jefferson is still shaping our society

The Gadsden flag: a historic symbol rooted in classical liberalism

John Locke’s top 5 radical political ideas

What is capitalism?

7 lesser-known classical liberal thinkers for your World Philosophy Day

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Updated March 2023

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