Prices and knowledge: A market-process perspective

Change, responsiveness and co-ordination 972. Problems of command and control. Once the previous step issomehow solved, a large number of agents (farms, factories,consumers, and so on) have to be both informed about what theyshould do and somehow ‘motivated or coerced to do the right things’(Nelson and Winter 1982:358–9).Nelson argues that many economists believe that the market hasadvantages over central planning in handling both problems:Decentralized free enterprise operating in a market environmenthas been touted as superior to government ownership of firms andcentral planning on the grounds that the latter solution wouldinvolve vastly more information sending and would require thecomputation of much larger problems.They also believe thatfree enterprise is much more sensitive to demands, more stronglymotivated to cater to preferences of consumers, and more likely toproduce efficiently than is government bureaucracy.(Nelson and Winter 1982:359)Thus economists advocate the market because they holdan implicit theory of the role of organization in solving bigallocation problems, and some conjectures about the way in whichdifferent organizational structures perform.(ibid.)Nelson points out that a premise underlying these arguments,separating them from contemporary welfare economics, is the implicitor explicit presumption ‘that man’s data processing capacity, hisability to understand complex or novel situations, and his ability togain agreement are bounded,’ the presumption of ‘boundedrationality’ (Nelson 1981:95). Without this limitation, he argues, thedifficulties of collecting information for a central agency andcomputing a solution—the problem of information andcomputation—would simply disappear, and the problem of commandand control would be, at least, much easier to solve.(Nelson’s definition of bounded rationality tends to obscure thedistinction made in chapter 4 between the view of ignorance ofSimon and that of market-process economists. But, as he states, and