Hayek expressed the distinction thus:
Now, as Hayek said, we can never know precisely the effects of specific interventions. But we might hazard that the following costs would be incurred:
Under the rule of law the government is prevented from stultifying individual efforts by ad hoc action. Within the known rules of the game, the individual is free to pursue his personal ends and desires certain that the powers of government will not be used deliberately to frustrate his efforts…
Economic planning of the collectivist kind necessarily involves the very opposite of this. The planning authority…must provide for the actual needs of people as they arise and then choose deliberately between them. It must constantly decide questions which cannot be answered by formal principles only, and in making these decisions it must set up distinctions of merit between the needs of different people. (The Road to Serfdom, ch VI)
1. A misallocation of investment, as a result of over-riding the market mechanism. Market forces are telling us that there’s been over-investment in house building and under-investment in gas and power generation. Taxing energy companies and subsidizing builders exacerbates this problem.
2. It worsens the quality of business decision-making. As Anthony says, these twin policies would subsidize bad judgment and penalize good. What incentive does this give firms to do well?
3. In showing that the government caves into pressure groups, it gives everyone an incentive to invest in lobbying and rent-seeking rather than in running their own affairs well.
The tragedy here is that there’s no need for all this. The problems raised by high fuel prices and a collapsing construction sector can be tackled within the framework of the rule of law. If you’re worried by “fuel poverty” the solution is to raise the incomes of the poor, ideally through a higher citizens’ basic income. If you think firms’ profits are too high, you can raise corporation tax rates. And if you’re worried by job losses among construction workers, you can raise unemployment benefit rather than treat the jobless as criminals.
What we’re seeing in these proposals, then, is just what to expect when the state and business collude - the drawbacks of arbitrary government, without the offsetting benefit of any genuine egalitarian principle.