Prices and knowledge: A market-process perspective

Chapter 4‘Bounded rationality’ and the pricesystemLike market-process economists, Herbert A.Simon sees the ignoranceproduced by the complexity of the task faced by a planner as themain obstacle to comprehensive central planning of an economy.However, Simon has a different view of this ignorance. He bases iton certain limitations of the human mind that he describes as‘bounded rationality’. The advantage of markets, from this point ofview, is that they permit the decentralization of activities and thatthey generate prices that summarize information. They thus allowhuman beings with necessarily limited minds to make use of alarger amount of knowledge than would otherwise be possible. Acomparison of this interpretation with the market-processapproach is useful, given that there is a risk that the differencesbetween them will not be noticed. 1From Simon’s writings will be sought (1) an understanding of theidea of bounded rationality, which, in spite of its being frequentlyreferred to, has never been examined in much detail by economists;(2) a brief view of the idea of ‘satisficing’, for which Simon is mostknown among economists; and (3) a bounded rationality view of themarket system.HERBERT A.SIMONSimon, winner of the 1978 Nobel Memorial Prize in Economics(although economics is not his primary field), has devoted aconsiderable amount of effort to the study of human rationality. He hasemerged as a severe critic of the standard description in mainstreameconomics of individuals as omniscient, perfectly rationalmaximizers. Ando (1979:92) has pointed out that Simon’scontribution, from the point of view of economics, has been