The suggestion that wealthy pensioners should hand back benefits such as the winter fuel payment poses another question: why do pensioners get hypothecated benefits such as free TV licences, free bus travel or fuel payments? Wouldn't it be simpler to just raise pensions generally? And if some pensioners are too rich, just tax 'em.

The issue here is not simply one of administrative efficiency, but of basic welfare economics.

To see the point, take free bus travel. For those who uses buses, this equivalent to a cash handout equal to the cost of their bus tickets. But for those pensioners who don't use buses much a cash payment would be better. Net, the cash payment is better than free bus tickets. And free bus travel incurs another cost, as it can encourage pensioners who wouldn't otherwise use buses to do so, thus adding to congestion and fuel costs.

Econ 101, then, tells us that cash transfers are better than benefits in kind. So, why are pensioners paid ear-marked benefits instead?

One possibility is paternalistic. Winter fuel payments and free bus travel nudges pensioners to keep warm or to visit their family in a way that higher pensions alone would not.

But I want to suggest another possibility. It arises from a tension in the very concept of government.

On the one hand, the function of government is to be impersonal - to lay down general laws that apply to everyone; this was emphasised by Hayek and is captured by old saws such as "justice is blind" and "the law is no respecter of persons." But on the other hand, this isn't sufficient to generate popular support - as its very impersonality creates a distance between government and citizens. Politicians who want to "connect" with voters will thus want to appear human and caring. And they do so more by making hypothecated payments, such as winter fuel payments, than by raising pensions generally.

There's an analogy here with the economics of Christmas. Joel Waldfogel has shown that giving gifts is less efficient (pdf) than giving cash, for much the same reason that benefits in kind are inferior to cash payments; at best, the gift gives us what we would have bought anyway, and at worst, we'd spend the £10 on something we'd like better than socks.

So, why do we give gifts rather than cash? It's because doing so seems more human, more thoughtful, more caring. In like fashion, winter fuel payments seem more caring than raising the basic pension.

If I'm right, we have a conflict between legitimacy and efficiency. Efficiency requires simple cash benefits, but these are cold-hearted compared to benefits in kind. I suspect this trade-off occurs in other fields. One reason why governments make interventions which libertarians (often rightly) think are inefficient - such as minimum wage laws or drug prohibitions - is that a government which concerned itself only with freedom and efficiency would be too cold and distant from voters to command much support.

And this in turn implies that a government of Hayekian classical liberalism, whatever its other merits, is just infeasible.