My friend Matt introduced me to Russ Roberts’ EconTalk podcast while we were in Germany in September. At his suggestion I recently listened to an episode that delved into F.A. Hayek’s distinction between “made order” and “emergent order” in human systems. The main thread of discussion in this podcast was differentiating law (emergent order) from legislation (made order). The law/legislation discussion was quite enlightening, but it was the more general point of made/emergent order that really struck a chord with me. I found it particularly insightful as I wrestle with the challenge of ownership and governance at Atomic Object.

Made vs emergent orders

Made orders are easy to see and understand. Companies, governments, the military, and sports leagues are common examples of human institutions where rules are created to achieve a specific purpose. People in these institutions abide by the rules and the purpose of the institution is achieved (or not, and the institutions wither and eventually die). It’s accurate to observe the results and achievements of these made orders and attribute them to the order itself and its intent — whether the results are positive, negative, or unintended, they nevertheless follow from the conscious intent and actions of the order. So for example, a company hires people, makes, markets and sells its products, and generates a profit. That’s the intent of the company, and it achieves this intent by creating order in the activities of its employees. A military has a purpose (defense of a country), leaders with intent, and achieves its desired end by having a rigid set of rules soldiers operate by. Made orders don’t always achieve their purpose, but when they do it’s not surprising.

Emergent order is something that arises from the un-coerced interactions of individuals acting in their own self-interest. There is no central intent or purpose to an emergent order. There is no one person or group of people trying to achieve something. No single entity could possibly hope to know enough or be smart enough to create the results of an emergent order, even if it could theoretically have all the necessary information to act on. (A very cool subtlety here is that in fact the information necessary doesn’t even exist, it arises dynamically out of the interactions between people in the order.) Bird flocking is a natural example of an emergent order. No single bird decides which direction the flock will move, or even knows everything that should be considered in this decision. The behavior of the flock arises out of the interactions between individual birds. Markets are examples of emergent orders that are commonly misunderstood.

Our familiarity with made orders, and our correct conclusion that their achievements are a result of their purpose or intent fools us when it comes to emergent orders. When we look at the achievements of emergent orders it’s very easy to attribute these achievements to a cohesive purpose or intent. You hear this in everyday language when people say “the market determines the price of houses”, “it’s not fair, teachers deserve higher pay”, etc. We deduce the existence of something with intent and purpose from the observation of very real effects. Yes, housing prices are determined by the market for houses, but “the market” is in fact not a sentient being with its own intent, it is nothing more than the innumerable interactions of home buyers and sellers. Markets don’t have a central purpose or goal they wish to achieve because they aren’t made orders, they are emergent orders. Emergent orders cause results, but those results don’t indicate intent, purpose or conscious thought.

This distinction between made and emergent orders strikes me as both important and obvious. But it was only obvious to me after I heard it explained. I believe understanding this distinction is important for everyone who cares about how well our human societies operate. In other words, nearly everyone.

Company ownership

I was struck in listening to the EconTalk podcast with the applicability of the idea of made versus emergent orders to company ownership. I’ve been thinking, reading and working a great deal recently on my plan for employee ownership of Atomic. I hope to create an ownership and governance structure which will make Atomic sustainably successful beyond my daily involvement in the company. (This is a long-term project; I see myself being an important part of Atomic for the indefinite future.)

So what’s the connection? A traditional company is most obviously a made order. Depending on company size, the owner or executive leadership of the company has a plan and creates rules the company operates by. Employees follow the rules and execute the work of the business. If the plan is sound, and employees execute well, the company makes a profit. If an employee doesn’t follow the rules, he loses his job. On the other hand, employees don’t have to do more than follow the rules and dispatch their responsibilities in order to keep their jobs, presuming the company overall does well enough.

I think employee ownership changes this straightforward understanding of companies as made orders.

Successful employee-owned companies like the ones described in Equity: Why Employee Ownership is Good for Business are arranged and managed differently than typical companies. They rely on individual employee knowledge, ideas, and motivations to make the best decisions possible and improve the results of the business. These companies implicitly acknowledge that the leadership of the company can’t possibly make all the decisions that need to be made on a daily basis, or make them as well, as the people who are executing on the business plan day in and day out. In the most successful employee-owned companies new ideas for products and services, operational efficiencies, solutions to problems, and necessary sacrifices arise from the employees and their interactions with each other and customers. It seems to me that these companies have some of the characteristics of an emergent order. Matt pointed out to me after reviewing this post that employee ownership is neither necessary nor sufficient to achieve the positive characteristics that I’m attributing to an emergent order. He offered the Toyota Production System and Atomic Object as counterexamples where emergent, owner-like behavior arose without actual ownership. And of course United Airlines is the classic counterexample of an employee-owned company that didn’t succeed.

The strengths of a mule

Employee-owned companies are created with an intent and purpose as in a made order. They have rules and leadership like made orders. Yet they benefit from decisions and actions which the self-interested employee-owners make and take on a daily basis, as in an emergent order. They achieve results in ways that the leadership of the company didn’t direct and couldn’t have predicted. In effect they are a hybrid, with characteristics of both made and emergent orders. Far from being a bad thing, I see this “hybrid order” as having advantages similar to the world’s most famous hybrid, the mule. Mules have some of the best characteristics of their horse and donkey parents. According to one aficionado of mules (from Wikipedia), mules are “more patient, sure-footed, hardy and long-lived than horses, and they are considered less obstinate, faster, and more intelligent than donkeys.” Funny enough, that actually sounds like a pretty great set of attributes for a company, too.

No guarantees

Emergent orders can achieve results in systems of phenomenal complexity. If you stop and think about everything required to make it possible that I can reliably walk a few blocks and buy a high-quality cup of coffee for a reasonable price from one of several stores you realize the power in emergent orders like markets. Coffee beans grown thousands of miles away, innumerable people involved in planting, tending, picking, shipping, and roasting them. Equipment made in a different and equally distant country. Baristas trained to bring the equipment and the beans together for my cup of joe. And that doesn’t even touch on the clean water delivered to the store, the sidewalk I use to get there, the electricity and gas that make the store habitable, etc. That’s an incredible amount of complexity being wrangled to produce my cappuccino.

Given the evident power of emergent orders to create valuable results, an interesting question arises. Are emergent orders so powerful that they guarantee everyone’s expectations will be met? In other words, are they not only powerful, but morally ideal?

Russ Roberts and Don Boudreaux briefly address this question towards the end of the podcast on law and legislation. They describe how, in the context of markets, Hayek pointed out that the desirable outcomes from the emergent order require that some expectations are not met. I found this idea to be subtle and a little difficult to grasp, but my understanding is that the unmet expectations in an emergent order are the source of the dynamism of such systems. They are a signal that the system is not in equilibrium and an opportunity for some new result to arise from the interactions of individuals. So to continue the coffee example (which is from the podcast), if I were unable to find a good cup of coffee in my neighborhood my unmet expectations might lead me to start a coffee shop, or invest in someone who wanted to start a coffee shop. Or if a coffee shop owner in my neighborhood can’t stay in business due to insufficient sales, his unmet expectations might cause him to close his shop and open a shoe store instead. An order with no disappointment would be one so static that it wouldn’t be capable of adaptively solving the complex problems that emergent orders can solve. It wouldn’t in fact be an emergent order.

The possibility, perhaps even the necessity, of disappointment and unmet expectations is a cautionary tale for me as I lead Atomic down the path from made order to a hybrid between a made and emergent order. Employee ownership doesn’t guarantee that the company will be stronger. It doesn’t guarantee that my expectations will be met, or that every employee will be happy. While I believe in the power I’d be tapping into with employee ownership, there are no guarantees I’ll get it right or we’ll succeed in the transition. The only guarantee is that by loosening the control of the made order and broadening ownership, I’ll be creating a more dynamic system that will adapt in unforeseen ways. My intent and purpose will become less relevant. And that’s ok. (I hope.)