Prices and knowledge: A market-process perspective

Introduction 7then considers some of the ways Simon believes individuals getround this problem, namely, through ‘satisficing’ instead ofoptimizing, and by relying on prices as summaries of informationand on organizations. Because Simon thinks he is adopting Hayek’sapproach to markets, his view of the knowledge problem and hisconsequent understanding of prices are contrasted with those arisingfrom a disequilibrium view of markets. This contrast is completed byan examination of writings of modern Austrian economists,indicating similarities to and differences from bounded rationalitytheory.What could appear to be a third perspective on markets in thecontext of informational limitations, the work of Richard R. Nelson,is examined in chapter 5. The chapter describes his criticism ofwelfare economics and of some arguments in favour of the marketsystem, and his view of the knowledge problem and of the relativeadvantages of markets and central planning. This view is analysedand found to be similar, in important respects, to that of Simon.Although Nelson has always been explicit about the influenceSimon’s work has had on his, which would render this finding trivial,the conclusion is that on this issue Nelson is so close to Simon as tobe susceptible to the same criticisms. Evaluations of economicsystems caused by different interpretations of the knowledgeproblem are then contrasted, and some consideration is given to theimportance of change for the knowledge problem and to the problemof co-ordination of activities in a market economy. Finally, thechapter tries to clarify discussions regarding the relative advantagesof markets and ‘hierarchies’ by providing an outline of a marketprocessapproach to organizations.Chapter 6 provides a summary and some suggestions for furtherresearch.