Prices and knowledge: A market-process perspective
Prices and knowledge: A market-process perspective
Prices and knowledge: A market-process perspective
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72 <strong>Prices</strong> <strong>and</strong> <strong>knowledge</strong>Simon calls the ‘combined use of <strong>market</strong>s <strong>and</strong> hierarchies’. Itsdescription sheds light on Simon’s views of <strong>market</strong>s <strong>and</strong> prices.Markets <strong>and</strong> hierarchiesThe combined use of <strong>market</strong>s <strong>and</strong> 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, <strong>and</strong> with other authors, a use of the term‘hierarchy’ that does not distinguish clearly (1) between <strong>market</strong> <strong>and</strong>non-<strong>market</strong> hierarchies, <strong>and</strong> (2) between ‘appropriatelydecentralized’ hierarchies (i.e. hierarchical organizations that takeinto account the individual’s bounded rationality) <strong>and</strong> <strong>market</strong>s. Theimportance of making these distinctions will be shown later, in thenext chapter. However, a lack of these distinctions frequently leadsthese authors to speak of ‘<strong>market</strong>s versus hierarchies’ withoutmaking it explicit whether they mean ‘<strong>market</strong> exchange versus firm’(or ‘internal organization’ as Williamson (1975) calls the latter) 20 or‘<strong>market</strong>s versus government planning’. Thus it is not clear howcontroversial some of Simon’s arguments are from a <strong>market</strong>-<strong>process</strong><strong>perspective</strong>: after all, no <strong>market</strong>-<strong>process</strong> economist has ever deniedthe usefulness of firms <strong>and</strong> other <strong>market</strong>-created organizations. Evenso, this difficulty with Simon’s terminology does not render acomparison of both theoretical <strong>perspective</strong>s impossible. This isbecause, whether he is discussing the advantages of firms versus<strong>market</strong> exchange or of government planning versus the <strong>market</strong>system, both discussions involve a view of what the advantages ofprice-mediated transactions are. And it is this view that will becontrasted with the <strong>market</strong>-<strong>process</strong> 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 <strong>and</strong> do use to make rational decisionsin the face of uncertainty <strong>and</strong> complexity’. He believed that what hecalled ‘the great plan versus no plan debate’ depended on empiricalcomparisons between price mechanisms <strong>and</strong> planning mechanisms:‘what costs they impose of information gathering <strong>and</strong> computing;how stably <strong>and</strong> rapidly they adjust the system to environmental