Prices and knowledge: A market-process perspective

‘Bounded rationality’ and the price system 65There are more points in common with market-processeconomists: Simon (1959:314) has also shown some interest in theanalysis of disequilibrium and of the processes of adjustment toequilibrium. 4 In more recent writings he has pointed out the need forwhat he calls a ‘Schumpeterian component’ in economic theory,because in the language of mainstream economics ‘there is no roomfor a concept like “initiative”’:In the Walrasian picture, there is at all times a fixed set of markets,each with its supply function and demand function and a pricefluctuating around the equilibrium value. Markets are neithercreated nor destroyed. In an economy where actions must bepositively motivated (let me call it a Schumpeterian economy),commodities are produced only after someone is motivated toconsider producing them. Investments are made only whensomeone is motivated to pay attention to a potential investmentopportunity and decides to invest. Job slots are created only whenemployers attend to the need for more workers and decide to try toemploy them. 5 (1984:53)It was probably this type of statement that led McNulty (1968: 656) topoint to Simon’s work as suggesting ‘a promising, if not yet altogethersatisfying, new dimension to microeconomics’ that could lead to a‘reformulation and expansion of the concept of competition’. Thisreformulation could make the concept of competition, ‘once again,what it was at the hands of Adam Smith: a disequilibrium, behavioralconcept which is meaningful and relevant in terms of thecontemporary pattern of economic life’. Interestingly, market-processeconomists also hold this rivalrous notion of competition favoured byMcNulty.With so much in common, major differences between Simon andmarket-process economists only start to appear on closerexamination of his thought. For Simon, what prevents man frombeing the perfectly optimizing creature of equilibrium economics isthat he suffers from bounded rationality. As he states in an oftenquoted definition:the capacity of the human mind for formulating and solvingcomplex problems is very small compared with the size of theproblems whose solution is required for objectively rational