Prices and knowledge: A market-process perspective

‘Bounded rationality’ and the price system 73change’ (Simon 1962a:70). Studies inside business firms, he argued,were ‘already calling into question beliefs that allocation throughmarkets simplifies information processing as compared withcentralized allocative processes’ (ibid.). He held that, in firms,with modern computing equipment, the solution-finding process ishandled centrally as readily as it could be through decentralizedprice mechanisms. The decentralized procedures simply do notyield the savings in information-transmitting cost usually claimedfor them….(ibid.: 61)Two decades later, Simon engaged in slightly more detailedconsideration of markets. He then stated that ‘the social function ofmarkets is to coordinate the decisions and behavior of multitudes ofindividual economic actors…’ (Simon 1981:37). Markets are only onecomponent of a spectrum of methods of co-ordination that includes‘statistical averaging, markets, bargaining, hierarchy, and voting’(ibid.: 38). 22Simon’s view of the market is, he says, not that of generalequilibrium theory, which isa dazzling piece of machinery that combines the optimizingchoices of a host of substantively rational economic actors into acollective decision that is Pareto optimal for…society.(Simon 1981:43)The Pareto-optimal result is usually obtained under the assumptionthat the trading agents are perfectly (or at least optimally) informedabout available opportunities, and that they are fully capable ofmaximizing their utility or profits. However, Simon (1981:39) pointsout, people are satisficers, and ‘markets populated by consumers andproducers who satisfice instead of optimizing do not meet theconditions on which the theorems rest’.According to Simon (1981:41), ‘no one has characterized marketmechanisms better than Friedrich von Hayek…’, so he adopts whathe understands Hayek’s view of the market to be, a view that doesnot claim optimality properties for it. In Simon’s (1981: 39) view, themarket manages to bring into ‘patterned order’ the ‘productive effortsand consumption activities of a great population’, although thispattern will not necessarily have any optimal properties. Simon