Prices and knowledge: A market-process perspective

Chapter 5Change, responsiveness andco-ordinationRichard R.Nelson has pointed out that some economists’ assessmentof the market system and their belief in its superiority to centralplanning are not supported by economic theory. 1 Their arguments, hesays, are made for a context of unpredictably changing resources,preferences, and technologies, rather than for the unchanging (‘static’)world of the standard economic approach. Nelson’s argument is ofinterest because he engages in a sophisticated analysis of standardwelfare economics and of what he believes to be Hayek’s argumentsin favour of markets. This analysis leads him to assert that a theoreticalcase for private enterprise not only has not been made but also,perhaps, cannot be made.Nelson and his frequent collaborator Sidney Winter say thatSimon has influenced their work but that, ‘much more than thebehavioralists’, their ‘concern has been with economic change’(Nelson and Winter 1982:ix, 35–6). This chapter will show that, inspite of this concern with change, Nelson’s argument is fully withinSimon’s theoretical framework and is therefore subject to the sameobservations. Does this justify devoting a chapter to Nelson? It does,for the following reasons. (1) Nelson’s perspective could be,incorrectly, considered indistinguishable from a market-processapproach. Although he has shown similar concerns and interests, thischapter will argue that he has not fully grasped the nature ofentrepreneurial competition as a discovery procedure and the role ofprices in it. (2) Nelson’s concern with unexpected change serves toclarify why change is important to a market-process perspective. (3)Nelson raises the question of the relative advantages of decentralizedorganizations and markets and thus provides an opportunity foroutlining briefly an entrepreneurial view of organizations. The lattersketch will be useful for clarifying some discussions of ‘marketsversus hierarchies’, as promised in the previous chapter.