Prices and knowledge: A market-process perspective

72 Prices and knowledgeSimon calls the ‘combined use of markets and hierarchies’. Itsdescription sheds light on Simon’s views of markets and prices.Markets and hierarchiesThe combined use of markets and hierarchies is, according to Simon,a simplifying device used at the social level. It is the analysis of thisaspect of his thought that has been the motivation for the previoussections.Simon shares with Richard Nelson, whose writings the nextchapter will examine, and with other authors, a use of the term‘hierarchy’ that does not distinguish clearly (1) between market andnon-market hierarchies, and (2) between ‘appropriatelydecentralized’ hierarchies (i.e. hierarchical organizations that takeinto account the individual’s bounded rationality) and markets. Theimportance of making these distinctions will be shown later, in thenext chapter. However, a lack of these distinctions frequently leadsthese authors to speak of ‘markets versus hierarchies’ withoutmaking it explicit whether they mean ‘market exchange versus firm’(or ‘internal organization’ as Williamson (1975) calls the latter) 20 or‘markets versus government planning’. Thus it is not clear howcontroversial some of Simon’s arguments are from a market-processperspective: after all, no market-process economist has ever deniedthe usefulness of firms and other market-created organizations. Evenso, this difficulty with Simon’s terminology does not render acomparison of both theoretical perspectives impossible. This isbecause, whether he is discussing the advantages of firms versusmarket exchange or of government planning versus the marketsystem, both discussions involve a view of what the advantages ofprice-mediated transactions are. And it is this view that will becontrasted with the market-process view of prices. 21 However,Simon’s use of terminology should be kept in mind.In the early 1960s, Simon (1962a:69) described the pricemechanism as ‘just one—although an exceedingly important one—of the means that humans can and do use to make rational decisionsin the face of uncertainty and complexity’. He believed that what hecalled ‘the great plan versus no plan debate’ depended on empiricalcomparisons between price mechanisms and planning mechanisms:‘what costs they impose of information gathering and computing;how stably and rapidly they adjust the system to environmental