Prices and knowledge: A market-process perspective

130 Notestheories of cognition held by Simon and market-process economists, asargued below.20 The market system allows individuals a choice between organizing activitythrough firms or through market trading according to what they perceive tobe most advantageous.21 Simon’s use of these concepts implies that, when he finds limitations inwhat he calls ‘markets’, his alternative is not necessarily governmentintervention: perhaps some other market alternative, such as firms, is thesolution. In fact, the next chapter argues that the market system stimulatesthe discovery of solutions to possible limitations of price-mediatedtransactions.22 Simon credits this idea to Dahl and Lindblom (1953).23 The price system is ‘an institution that reduces the amount of nonlocalinformation the actors must possess to make reasonable (i.e. satisficing)decisions’ (Simon 1981:57).24 The lack of an explicit distinction between market and non-markethierarchies is evident here.25 ‘We must keep in mind that…externalities…are rarely absent. Markets canonly be used in conjunction with other methods of social control and decisionmaking…’ (Simon 1983:89).26 ‘Bounds on rationality are interesting…only to the extent that the limits ofrationality are reached—which is to say, under conditions of…complexity’(Williamson 1975:22).27 The intention of the example is to build a simple situation so that this is true.It would be easy to turn this same example into a complex situation byarguing that the small number of traders introduces strategic considerationsand other bargaining difficulties.28 ‘One reason why computers have been so important to Man is that theyenlarge a little bit the realm within which his computational powers canmatch the complexity of the problems’ (Simon 1976:430).29 See Dreyfus (1979: esp. 91–129).30 If human beings have this ability, Simon’s notion of satisficing may turn outto be of doubtful validity. (Individuals would not need to scan; their attentioncould be drawn directly to the most worth while alternative.)31 According to Dreyfus (1979:33), the ‘knowledge representation problem’refers to ‘the problem of how to structure and retrieve data in situations whenanything might be relevant’.32 Again, in this view the planner neglects knowledge of specific circumstancesbecause he is incapable of ‘absorbing’ it, not because he does not notice it orbecause it is, in some way, tacit and inarticulable.33 As pointed out, Hayek has also sometimes argued in this way.34 This may also explain his puzzling statement about the advantage in terms ofoptimality properties of markets over hierarchies.35 As will be pointed out, this does not mean that market participants will not, inspite of these disadvantages, find it useful sometimes to adopt hierarchicalforms of organization for carrying out their activities.36 For example, market-process economists have clearly improved theirunderstanding of the nature of ignorance and discovery by facing thechallenges posed by the economics of information and search theory.