Prices and knowledge: A market-process perspective

132 Notes3 Economists, Nelson and Winter (1982:358) say, are aware of the fact thatnot all firms act as price-takers, that there are public goods and‘externalities are pervasive’, that economic agents may lack perfectinformation, and so on.4 Nelson (1981:95) credits Simon for the ‘most forceful articulation of themeaning and significance of bounded rationality…’.5 Nelson (1977:136) points out the failure of economists—whom he does notidentify— ‘to recognize the contradiction between those arguments formarket structure which are based on the premise that behavior of acompetitive regime will be Pareto optimal, and those arguments for realmarkets which are focused on the alleged flexibility and responsiveness ofsuch a regime…’.6 Nelson (1981:95) notices that both Mises and Hayek, ‘the two advocates ofprivate enterprise in this debate, pose their arguments in a form much moredistant from that of contemporary welfare economics than does Lange, theadvocate of Socialism’.7 The other exception to the ‘static perspective,’ in his view, is ‘the earlySchumpeter’. Because of his questionable differentiation of Mises’s andHayek’s argument, Nelson seems to believe that Lange’s was an appropriateresponse to Mises’s challenge.8 In the light of the economic analysis of regulation and the theory of publicchoice, Nelson may have been too hasty in attributing such altruistic motivesto these government interventions. However, it should be noticed, he ends bynot advocating any particular regime because he does not ‘have any strongnotions about the answers’ to these organizational questions (Nelson1981:110).9 See the quotation of Gordon and Hynes (1970) in chapter 2.10 For a survey of this literature, see Fisher (1983).11 The tone of this statement is cautious because a market economy need notactually achieve equilibrium even under imaginary unchanging conditions.However, as long as this equilibrium state was not reached, a market systemwould still stimulate entrepreneurial activity, whereas no equivalentdiscovery process would be at work in a planned regime.12 Mises and Hayek used a similar assumption, although Mises (1936: 142)correctly pointed out that to do so ‘we need only avoid asking how thisstationary condition is achieved’. See, e.g., Mises (1920: 109–10), andHayek (1940:188).13 In Nelson’s book with Winter, consideration of these possibilities appears tohave been deliberately suppressed (Nelson and Winter 1982:38).14 The terms ‘hierarchy’ and ‘organization’ will be used interchangeably.15 The term ‘non-market hierarchies’ is used because although it will most oftenrefer to government-generated organizations, what is meant, more generally,is organizations created by individuals whose decisions are not motivated byprofits in the market and who are significantly immune from its competitivepressures (in the sense that they do not have to compete for the acquisition ofresources and may not be overly concerned about pecuniary losses caused bytheir decisions). In the case of government, this independence from themarket is due to the possibility of obtaining resources through non-voluntarymeans.