Courtesy Mises Institute / Friedrich Hayek

Spontaneous order is a crucial concept. It’s not original to the Austrians—it’s actually of Scottish origin—but Friedrich Hayek took it forward with dramatic implications for business.

Here’s the idea: we’ve got an economy based on specialization and trade. It’s clearly a human creation, this economy of ours. But it was never designed by a human. Back in the hunter-gatherer days, nobody sketched out how one person would grow grain, another would bake, a third would make it gluten free. But today we have a tremendously complex mechanism for getting me my morning bread, without anyone having planned this system.

It’s not just the economy, though. Language itself, in the words of Adam Ferguson, is “the result of human action, but not the execution of any human design.” There were no cavemen grunting about a language that would include nouns and verbs and prepositions. It just happened, as people tried to make their situations better.

In the business sphere, this is a vital message for senior leadership: your employees do not need everything planned for them. They can figure a lot of stuff out for themselves, developing better methods and systems as they go.

When Hayek looked at the challenge of central planning, he emphasized “dispersed knowledge.” The information needed to make a specific decision is at the local level. Your company has a piece of equipment that is acting up. Not a job for the CEO. The mechanic who has been working on it probably has the best handle on what should be done. A higher-level person might be in a better position to decide whether to fix or replace it. But the best decision for a specific piece of equipment is fairly low down in the organization, not high up in the executive suite. I sometimes here about CEOs approving every expenditure over $50,000 or some amount, and at a larger company that’s nonsense.

To take advantage of the dispersed knowledge within your organization, rules and incentives need to be right. That is an important job for the CEO. For example, will the company comply with laws and regulations? Compliance can be vital to a business’ success. And is the facility manager incented to fix or to replace equipment? Does he or she know the cost of capital? Sometimes a capital expenditure makes sense, sometimes it doesn’t. The C-suite seldom has enough knowledge about equipment, but the manager may not know the value of capital. With the proper financial incentives, though, the facility manager can make great decisions.

Hayek’s next major insight was simply that circumstances are continuously changing. The desires of customers, the cost of resources, technological possibilities, government rules and competition are all changing, so last year’s answer may not be right this year. A healthy organization reacts organically to change, without direction from the top.

That leads to a different role for senior leadership: setting rules, incentives, and the really big resource allocation decisions. Leave the details to your people.

This approach requires that first-level managers understand good decision-making. With the right rules and incentives in place, your managers will generally make the right decisions. However, some structure for their decision-making process will help. A good starting point would be Charles Koch’s The Science of Success. Whether you like his politics or not, his guide to “Market-Based Management” offers a good structure for pushing decisions down to those who are in the best position to make them. His last chapter may be the most important. He shares mistakes his company made in implementing the system.

The greatest challenge to using the spontaneous order concept is likely to be the self-confidence of senior leadership. A company’s top executives are invariably smart and experienced. They are good at solving problems and seeing opportunities. But they need to be humble about their ability to fully grasp the issues involved in all of the small decisions that need to be made.