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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‘Bounded rationality’ <strong>and</strong> the price system 73change’ (Simon 1962a:70). Studies inside business firms, he argued,were ‘already calling into question beliefs that allocation through<strong>market</strong>s simplifies information <strong>process</strong>ing as compared withcentralized allocative <strong>process</strong>es’ (ibid.). He held that, in firms,with modern computing equipment, the solution-finding <strong>process</strong> ish<strong>and</strong>led 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 <strong>market</strong>s. He then stated that ‘the social function of<strong>market</strong>s is to coordinate the decisions <strong>and</strong> 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, <strong>market</strong>s, bargaining, hierarchy, <strong>and</strong> voting’(ibid.: 38). 22Simon’s view of the <strong>market</strong> 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, <strong>and</strong> that they are fully capable ofmaximizing their utility or profits. However, Simon (1981:39) pointsout, people are satisficers, <strong>and</strong> ‘<strong>market</strong>s populated by consumers <strong>and</strong>producers who satisfice instead of optimizing do not meet theconditions on which the theorems rest’.According to Simon (1981:41), ‘no one has characterized <strong>market</strong>mechanisms better than Friedrich von Hayek…’, so he adopts whathe underst<strong>and</strong>s Hayek’s view of the <strong>market</strong> to be, a view that doesnot claim optimality properties for it. In Simon’s (1981: 39) view, the<strong>market</strong> manages to bring into ‘patterned order’ the ‘productive efforts<strong>and</strong> consumption activities of a great population’, although thispattern will not necessarily have any optimal properties. Simon