Prices and knowledge: A market-process perspective

Change, responsiveness and co-ordination 1094 Price-mediated transactions versus decentralized markethierarchies.5 Several comparisons between market and non-market hierarchies,both in their centralized and in their decentralized versions.Pairing (1) was, in most interpretations, the subject of the socialistcalculation debate. Pairings (3) and (4) are, within economics, thesubject of the analysis of organizations, a field pioneered by RonaldCoase’s classic article (1937). Although not much will be said aboutthem here, both the view of competition as a discovery procedureand some remarks made by Hayek regarding organizations, to bequoted below, provide hints of possible contributions of a marketprocessapproach to this analysis.The task to be attempted by this section, however, is more limited.First, it will point out some important differences between nonmarketand market (entrepreneurial) hierarchies—the pairs includedunder (5) —from a market-process perspective. Then it will try toshow why decentralized hierarchies could not be perfect substitutesfor the price system—the pair included in (2) —as solutions to theproblems of centralized planning. 16Non-market- and market-designed organizationsIt is not always apparent in the writings of the bounded-rationalityauthors whether they see any significant theoretical differencesbetween non-market- and market-designed organizations. In fact, theabsence of a clear-cut distinction between them suggests that thedifferences are not believed either to exist or to be very important.However, some differences can be pointed out that are important.The differences appear most clearly when comparing how, forexample, government, on the one hand, and private individuals, onthe other, decide between carrying out an activity through ‘markets’(i.e. competition via a price mechanism) or through ‘hierarchies’ (ororganizations, or planning); and, if deciding to create a ‘hierarchy’,how they choose the type of organization to adopt, the specificpersonnel to be included, and so on.In government hierarchies, market competition is replaced bycentral direction, or planning. This, to a certain extent, is also true offirms. As Coase (1937:389) put it, ‘the distinguishing mark of thefirm is the supersession of the price mechanism’. 17 Planning, from anentrepreneurial perspective, has the disadvantage of not providing a