Authoritarian movements, both from the left and the right, are on the rise again around the world. In an age where the process of creative destruction takes place faster than ever before, people look for help, for someone to finally make sense of the supposed chaos and bring order back into life. Thus, many have moved to strong leaders in a search for stability, particularly in the West.
As Donald Trump noted in his State of the Union address, some people are even calling for socialism, despite a long history of terrible failure and evil. “Tonight,” he said, “we renew our resolve that America will never be a socialist country.” Indeed no complex society can be.
One of the 20th century’s great thinkers, Friedrich A. von Hayek, always despised such top-down systems of economic planning. Works like his most popular The Road to Serfdom are a strong rebuke to such authoritarian systems, and his concept of the spontaneous order, perhaps the most significant of his many groundbreaking ideas, provides an alternative vision of an order that does not exist when a strongman is in place.
One of his lesser-known essays, “Kinds of Order in Society,” which was published in 1981, sheds further light on Hayek’s conception of different orders, and explains how the search for security through a big government will always stay fruitless.
In Hayek’s opinion, an order of some sort is obviously needed in society: “A complete absence of an order cannot be seriously maintained.” To have no order whatsoever would lead to chaos. But which kind of order is most suitable to coordinate millions of activities a day “is the central problem of social theory and social policy.”
Order, Two Kinds
There are two kinds of order. One is that of the spontaneous, or polycentric, order, “which, though it is the result of human action, has not been created by men deliberately arranging the elements in a preconceived pattern.” In the other, the organization, “relations between the parts” are instead arranged “according to a preconceived plan” by some central planner.
While most people think that ordered activities are the result of such a planner, much of the order “of which we speak is, however, not of this kind.” Indeed, much of what we take for granted is not ordered deliberately, such as the world of physics or biology. Still, even in social phenomena the spontaneous order is clearly active, as in language, where the fact that social phenomena “possess an order which nobody has deliberately designed and which we have to discover, is now generally recognized.”
In the field of the social sciences, however — regardless of whether in politics, economics, or culture — the concept of organization, of a mastermind directing life, still often dominates in hearts and minds. It is in human affairs, nonetheless, where we find the most impressive examples of spontaneous order, such as the market.
In Hayek’s words, the division of labor on which our economic system rests is the best example of such a daily renewed order. In the order created by the market, the participants are constantly induced to respond to events of which they do not directly know.” Indeed, the market system is “an order which consists of the adaptation of the multitudinous circumstances which no single person can know completely.”
In today’s global market, coordinating mechanisms like the price system have evolved spontaneously, and while no one is in charge, the trillions upon trillions of transactions and interactions still take place almost flawlessly. It is tempting to think that someone is in charge of it, if only an invisible hand. But spontaneous orders do not only come into being in the market, but in social life in general. Indeed, many social rules, mores, habits, and traditions evolve in such a bottom-up process.
This does not mean that no type of deliberately created order is necessary at all. While the rule of law, the general and absolutely necessary rules of a society, may come into being spontaneously as well, it needs to be enforced in some way. That rule of law should not direct every minute detail in society, but rather simply create the framework in which the spontaneous order can exist and unfold and which leaves “the individual to create his own position.” For Hayek, this organization seems to be the state, though he does, in this essay, leave the door open for any organization that could enforce the rule of law (so, if it has that ability, perhaps also some other social institution may serve that function).
What would be a big mistake, however, is if we put too much trust in this organization and look to this institution to actively impede the spontaneous ordering process. In primitive, tribal societies it may be “conceivable that all activities are governed by a single mind.” But in societies that go beyond that, the organizational approach will quickly hit its boundaries, if only for the reason that no single mind could know and control all activities in that society.
“There is no such thing as a fully planned society of any degree of complexity.” Modern society is so complex and global today for the simple reason that “it was not dependent on organization but grew as a spontaneous order.”
Down with Ordnungsgestaltung
Those that demand a government that actively plans human affairs because social life has become too complex today to still be left alone commit a fatal error. Hayek writes, “The fact is rather that we can preserve an order of such complexity only if we control it not by the method of ‘planning,’ i.e., by direct orders, but on the contrary aim at the formation of a spontaneous order based on general rules.”
Doing otherwise, by demanding the German approach of Ordnungsgestaltung (i.e. order creation), would merely lead to catastrophe in the long run. This conception of law “is the conception prevailing in totalitarian states,” and while those demanding order creation might not advocate totalitarianism themselves, they possibly will still get it sooner or later.
Thus, Hayek’s conception of the spontaneous order, merely complemented to a small extent by an organization to provide a general framework, is an argument against authoritarianism of any sort, especially today, as society has grown even more complex and thus more complicated, making central planning even more utopian. But not only this: the spontaneous order is also an important argument in favor of freedom.
As Hayek himself writes, “In the social field it provided the foundation for a systematic argument for individual liberty.”
December Business Conditions Monthly


AIER’s Leading Indicators index inches higher while the Roughly Coincident index and Lagging index fall.
AIER’s Business Cycle Conditions Leading Indicators index increased slightly in November, remaining modestly above neutral at 58. The Roughly Coincident Indicators index fell 17 points to 75 from 92 while the Lagging Indicators index fell nine points to 58 after posting 67 for three consecutive months (see chart).
The always-important holiday spending season is well underway and while early indications are for a strong selling period, the early indicators are not always indicative of the final results. Nevertheless, positive early signs are a welcome development given the importance of consumers to the economy, and holiday sales to most businesses. Other areas of the economy continue to post mixed results, suggesting the economy remains heavily dependent on consumer spending and therefore more vulnerable than usual to the whims of consumers.
Politics (impeachment proceedings and upcoming elections) and policy (trade policy, monetary policy, immigration policy and fiscal policy) have the potential to undermine consumer and business confidence. Overall, the economy continues to expand but at a slow pace and remains vulnerable to continued erratic policies and extreme partisanship.
Leading indicators index rises slightly in November
The AIER Leading Indicators index posted a small gain in November but remains close to neutral, supporting a cautious outlook.
The AIER Leading Indicators index rose 4 points to 58 in November. The index has been range bound between 25 and 75 for 12 consecutive months. The extended period of close-to-neutral results are consistent with the overall mixed performance of the various sectors of the economy. The general message is continued economic expansion albeit at a slow(ing?) pace and with a heightened degree of uncertainty.
The small change in the Leading Indicators Index was the result of just one change among the 12 indicators. Initial claims for unemployment insurance improved from a neutral trend in the previous month to a positive trend in the latest month. This indicator had been in a favorable trend prior to the drop to neutral. As discussed last month, initial claims for unemployment insurance is a bound indicator, meaning it cannot go below zero and in practical terms is about as low as can be expected. Therefore, it’s not surprising to see the indicator move to a flat trend. The improvement to a favorable trend in the most recent month helped boost the overall leading indicators index but as initial claims fluctuate near its natural lower bound, the indicator is likely to flip-flop between favorable and neutral. A move to an unfavorable trend would be a more significant development.
Among the 12 indicators, seven indicators had positive trends in November with 5 trending lower and none registering a neutral result. In addition to initial claims, positive trends were seen in real retail sales and food services, real new orders for consumer goods, housing permits, total heavy-truck unit sales, real stock prices, and the 10-year–1-year Treasury yield spread.
Unfavorable trends were seen in debit balances in customers’ margin accounts, new orders for core capital goods, the ratio of manufacturing and trade sales to inventory, the University of Michigan index of consumer expectations, and the average workweek in manufacturing.
Overall, the Leading Indicators index remains modestly above 50, indicating continued expansion is likely. However, the fluctuation around the neutral level over the past 12 months combined with the other mixed economic data and erratic policy suggest a high degree of caution remains warranted.
The roughly coincident indicators index fell to 75 in November from 92 in October. As expected, the industrial production indicator, which had improved from a negative trend to a neutral trend in the prior month, returned to a negative trend in the latest month. Manufacturing-related data continue to suggest a very difficult environment for the sector. In addition to the industrial production indicator, the consumer confidence indicator weakened from a positive trend to a neutral trend in the latest month. As discussed above, consumer spending remains a critical source of growth. Deterioration in consumer confidence is a worrying development. Overall, there were four roughly coincident indicators trending higher in November, one trending lower, and one neutral.
AIER’s Lagging Indicators index also declined in the latest month, dropping to 58 following three consecutive months at 67. The November result was the lowest reading since July. Among the six lagging indicators, three indicators are trending higher, two are trending lower, and one was neutral.
Consumer spending increasing but the pace is erratic
Following a moderate gain in the third quarter, early indicators for fourth-quarter consumer spending are mixed
The revised estimates for third-quarter real gross domestic product shows output rose at a 2.1 percent annualized pace versus a 2.0 percent pace in the second quarter. Consumer spending decelerated in the third quarter, rising at a moderate 2.9 percent pace compared to a 4.6 percent growth rate in the second quarter. The deceleration was broad-based across the major segments of consumer spending, with durable-goods spending rising 8.3 percent versus 13.0 percent in the second quarter, nondurable-goods spending up 4.3 percent versus 6.5 percent, and services gaining 1.7 percent versus 2.8 percent. Consumer spending contributed 2.0 percentage points to the 1.9 percent real GDP growth rate versus 3.0 percentage points in the second quarter.
October retail sales rise modestly…
The fourth quarter may have gotten off to a moderate start as retail sales and food services spending rose 0.3 percent in October following a 0.3 percent decline in September. Over the past year, total retail sales and food services were up 3.1 percent through October, the slowest pace since February.
Excluding the volatile auto and energy categories, core retail sales and food services were up 0.1 percent in October after a fall of 0.1 percent in September. Core retail sales had posted six straight monthly gains through August before declining in September. Over the last three months, core retail sales are up at just a 1.5 percent annualized rate, the slowest since February.
…though light-vehicle sales for first two months trail the third quarter…
Sales of light vehicles totaled 17.21 million at an annual rate in November, up from a 16.5 million pace in October. For the second quarter, unit light-vehicle sales averaged 17.0 million, ahead of the 16.8 million average for the first two months of the fourth quarter, suggesting vehicle sales may be a bit of a drag on overall consumer spending in the final quarter.
…However, Redbook weekly sales estimates suggest a strong holiday gain.
The Johnson Redbook weekly same-store sales index jumped to a 7.9 percent gain from a year ago for the week ended November 29. That is the third-highest result of the current economic expansion, trailing only the 9.3 percent gain recorded for the week of December 28, 2018 and the 8.9 percent rise for the week ended January 4, 2019. Other shopping tracking services have been generally optimistic about the start of the holiday selling season as well.
While these are welcome signs, the early results are not always indicative of the final tally. Shoppers can change the timing of purchases – spending heavily early but then slowing sharply, especially given that there is a shorter shopping period between Thanksgiving and Christmas this year. It’s also possible that consumers maintain or increase spending throughout the period.
Consumer attitudes holding at favorable levels
Consumer attitudes, measured by The Conference Board and the University of Michigan suggest consumers feel pretty good overall. Views on the current environment as well as expectations for the future remain relatively optimistic by historical comparison. While the various measures have fluctuated over the past two years, the levels of the measures of consumer attitudes are broadly trending sideways at a high level.
Various surveys note that the strong labor market is one of the key supports for the positive outlook and that spending is likely to remain solid. Surveys also note the sharp partisan differences among respondents and suggest that political events can have a significant impact in the future. The continued strength of the labor market and outside influences such as the impeachment proceedings and the 2020 presidential election cycle may be critical factors for consumer spending next year.
Trade deficit improving as imports fall more than exports
The U.S. trade deficit shrank to $47.2 billion in October, the lowest since March 2018. On a three-month average basis, the deficit totaled $50.6 billion, the lowest since July 2018. The improvement is a result of a smaller drop in exports relative to imports. Total imports dropped to $254.3 billion in October, down from $258.7 billion in September and $266.8 billion in October 2018, a 4.7 percent decline from a year ago. Total exports were $207.1 billion in October versus $207.6 in September and $210.1 billion in October 2018, a drop 1.4 percent.
Erratic trade policy including on-again, off-again trade negotiations and on-again, off-again tariffs can disrupt supply chains for businesses and alter buying plans for consumers. The elevated degree of uncertainty has the potential to become a significant drag on economic growth.
Federal Reserve balance sheet is growing again
Despite the end of quantitative easing, the Federal Reserve’s balance sheet has started to expand again. As of Wednesday December 4, total assets were $4,066 billion, up from $3,760 billion as of August 29, an increase of $306 billion or an 8.1 percent jump. About $180 billion of the increase is due to additional U.S. Treasury securities held outright. Repurchase agreements have also surged in recent months, totaling more than $200 billion. Holdings of mortgage-backed securities, the other major asset acquired during the implementation of quantitative easing programs, continue to fall.
The changes may be related to normal operations of the Fed and the banking system. While the Fed has been slowly shrinking its assets acquired during and after the financial crisis, the current methods of implementing monetary policy require the Fed to maintain a sizable quantity of assets. To that end, the Fed may be attempting to “right-size” its balance sheet.










Related Articles – Business Conditions Monthly
Initial Claims Rose Sharply but the Labor Market Remains Tight


Initial claims for unemployment insurance jumped to 252,000 for the week ended December 7 versus 203,000 in the prior week (see chart). The latest reading is the highest result since September 30, 2017. The four-week average rose to 224,000 from 217,750 in the prior week.
Weekly initial claims data tend to be quite volatile, especially around the holidays. Despite the surge in the latest weekly data, claims overall remain at historically low levels, hovering near the lowest levels since the late 1960s. The four-week average has been trending essentially flat since the beginning of 2018 and is also close to five-decade lows.
Measured as a percentage of employment (employment is much larger now than in the 1960s and early 1970s), initial claims are near record lows, well below the percentage seen in the 1960s and 1970s (see chart).
Furthermore, the latest employment report showed private-sector nonfarm payrolls added 254,000 in November following a gain of 163,000 in October and 183,000 in September. Over the past year, private payrolls have added 2.0 million workers or an average of 170,000 per month, a very solid pace of increase but below the 2018 average of 215,000 new private-sector employees per month. As of the end of September, there were approximately 6.3 million private-sector job openings, resulting in an openings rate of 4.7 percent. The unemployment rate in November was just 3.5 percent, matching a 50-year low.
Overall, while claims jumped in the latest week, the labor market remains tight. Mixed data on other sectors of the economy combined with nearly-neutral readings from the AIER Leading Indicators Index suggest continued economic growth but caution is warranted.