Prices and knowledge: A market-process perspective

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Change, responsiveness and co-ordination 111conceivable organizational forms is most appropriate for his purposes.The particular form he chooses will determine which functions it willinclude, what tasks and responsibilities the individual filling each onewill have to carry out, and so on. The ‘planner’ will need to knowwhich employable individuals in the market are the most competent tofill each position. All these facts must be discovered.Profit-motivated entrepreneurs will be stimulated to discoveras much as possible of the knowledge necessary for setting up themost convenient hierarchical organization. No similar incentivesystem seems available to government planners. Thus anentrepreneurial perspective shows significant differences betweenorganizations chosen by agents in the market and organizationsimposed by government. The latter are much less likely torepresent a wise decision in terms of grappling with ‘theeconomic problem’.The following statement of Coase, although it claims too much forthe market because it seems couched in equilibrium terms, alreadyhinted in 1937 at this conclusion:The important difference between [economic planning andplanning in firms] is that economic planning is imposed on industrywhile firms arise voluntarily because they represent a moreefficient method of organising production. In a competitive system,there is an ‘optimum’ amount of planning!(1937:389, n.)Of course, there is not an ‘optimum’ amount of planning in acompetitive system—at least, not in the usual sense economistsattribute to the word ‘optimum’. The argument is instead that thereare profits to be made in such a system as long as the mostappropriate degrees and forms of planning have not beendiscovered and implemented. These profits keep entrepreneursalert and flexible regarding organizational forms. Non-marketcreatedhierarchies, on the other hand, would most likely beestablished with better alternatives remaining undiscovered, andcould continue to exist regardless of whether they were appropriateor not.
112 Prices and knowledgeMarkets and decentralized bureaucraciesNelson pointed out once that even though comprehensive centralplanning might be impossible to carry out successfully because ofbounded-rationality considerations, this is not a sufficient argumentfor turning over to markets for a solution. There is still anotheralternative to consider: decentralized bureaucracies. In Nelson’swords,[Hayek] argued that…simulated socialist markets were likely tooperate much more sluggishly than real capitalist markets. Whilehe did not spell out in any detailed way why this should be the case,obviously he did not believe that bureaucratic decentralizationwould be effective. It is apparent that many contemporaryeconomists agree with him.(1977:134)In spite of this apparent agreement among economists, Nelson states,it is not ‘clear that it is impossible to devise responsive decentralizedsystems without going to the unregulated market, and there may begood reasons for trying’ (ibid.: 141).This is a reasonable argument from a perspective emphasizingbounded rationality as the main constraint on a central planner.After all, Simon (1979:501) mentions the division of ‘thedecision-making task among many specialists, coordinating theirwork by means of a structure of communications and authorityrelations’ as a procedure already widely used by organizations to‘transform intractable decision problems into tractable ones’. 19 Infact, Simon criticizes the economics literature for treatingorganizations ‘as highly centralized structures in which all theimportant decisions are made at the center’, without noticing that‘real-world organizations behave quite differently’ (1981:48).Although the context of this specific argument suggests thatNelson has in mind decentralized government bureaucracies andthat he is using the term ‘markets’ to include privateorganizations, this is just one instance of the absence, in thebounded-rationality approach, of differentiation between pricemediatedtransacting and decentralized organizations.This absence is also noticeable in Simon’s writings. Businessorganizations, Simon believes, ‘like market economies, are vast,distributed computers whose final choice processes are substantiallydecentralized’ (ibid.: 49; emphasis added). This, as pointed out in
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Prices and knowledge
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ContentsAcknowledgmentsvii1 Introdu
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Chapter 1IntroductionIn recent deca
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Introduction 3to changes, and not a
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6 Prices and knowledgeOUTLINE OF TH
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Chapter 2A theory of the market pro
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10 Prices and knowledgeexistence of
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12 Prices and knowledgebehavior of
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14 Prices and knowledgedisequilibri
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16 Prices and knowledgeresources kn
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18 Prices and knowledgeproduce, bet
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20 Prices and knowledgeimportant in
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22 Prices and knowledgeauxiliary’
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24 Prices and knowledgeSome writers
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26 Prices and knowledgeall practica
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28 Prices and knowledgemarket parti
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30 Prices and knowledgeprices fully
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32 Prices and knowledgeoptimal allo
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34 Prices and knowledgeAn example.
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36 Prices and knowledgeIn this case
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38 Prices and knowledgeequilibrium.
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40 Prices and knowledgethose return
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42 Prices and knowledgeprices in th
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44 Prices and knowledgeThe informat
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46 Prices and knowledgeinformationa
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48 Prices and knowledgeas devices f
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50 Prices and knowledgeIt is probab
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52 Prices and knowledgetrue that in
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54 Prices and knowledgeknowledge st
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56 Prices and knowledgereached in r
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58 Prices and knowledgecorrespond t
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Page 79 and 80: 70 Prices and knowledgeThus the sim
Page 81 and 82: 72 Prices and knowledgeSimon calls
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Page 85 and 86: 76 Prices and knowledgeIf what is u
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Page 95 and 96: 86 Prices and knowledgeAgain Mises
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Page 99 and 100: 90 Prices and knowledgeand B’s ta
Page 101 and 102: 92 Prices and knowledgecoordination
Page 103 and 104: 94 Prices and knowledgeFinally, the
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Page 109 and 110: 100 Prices and knowledgeapples in l
Page 111 and 112: 102 Prices and knowledgeThe identif
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Page 115 and 116: 106 Prices and knowledgerealized th
Page 117 and 118: 108 Prices and knowledgedeliberate
Page 119: 110 Prices and knowledgeframework s
Page 123 and 124: 114 Prices and knowledgeassigned an
Page 125 and 126: 116 Prices and knowledgemain virtue
Page 127 and 128: 118 Prices and knowledgechapter 3 t
Page 129 and 130: 120 Prices and knowledgenoticed, wo
Page 131 and 132: 122 Prices and knowledgeAs a by-pro
Page 133 and 134: 124 Notesmoney, the behavior of arb
Page 135 and 136: 126 Notes14 It is not clear why the
Page 137 and 138: 128 Notes39 See also Hahn (1984a:11
Page 139 and 140: 130 Notestheories of cognition held
Page 141 and 142: 132 Notes3 Economists, Nelson and W
Page 143 and 144: ReferencesAkerlof, G.A. (1970) ‘T
Page 145 and 146: 136 ReferencesGilad, B. (1981) ‘A
Page 147 and 148: 138 ReferencesKihlstrom, R.E. and M
Page 149 and 150: 140 ReferencesOsana, H. (1978) ‘O
Page 151 and 152: 142 Referencesfrontiers of analytic
Page 153 and 154: 144 IndexCercone, N. 79change: and
Page 155 and 156: 146 Index61, 118; on costless infor
Page 157 and 158: 148 Indexmisinformation 55, 57mista
Page 159: 150 IndexVeljanowski, C.G. 43voting
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