Prices and knowledge: A market-process perspective

74 Prices and knowledgebelieves that it is this Hayekian view that best describes the marketsof reality (43).What is, in Simon’s view, the achievement of the market? This iswhere considerations of bounded rationality enter the scene:even without assumptions of perfect competition and perfectrationality markets provide a way of restricting how much we needto know about everyone else’s business in order to do our own. Themarket mechanism may provide a way to reach tolerablearrangements in a society even if optimality is beyond reach.(Simon 1983:89)Markets constitute ‘one of the mechanisms that enable human beingshaving limited information and computational capacity to operatemore or less intelligently’ (ibid.). To illustrate his point, Simonprovides an example showing how a buyer needs to know only theprice of a good to make his purchasing decision; no knowledge of howthe good is made, of the supplier’s problems, etc., is necessary.Markets and prices turn out to beextremely powerful mechanisms in modern societies for helpingeach of us to make decisions without having to learn a whole lot ofdetail about other people who may be involved. All the relevantinformation is summed up in the price we have to pay in order tomake the transaction.(ibid.: 88)In Simon’s interpretation, Hayek’s defence of the market does not reston its achievement of optimal states. Instead, its defence is based on anawareness of the computational limits of human beings:Market processes commend themselves primarily because theyavoid placing on a central planning mechanism a burden ofcalculation that such a mechanism, however well buttressed by thelargest computers, could not sustain. They conserve informationand calculation by making it possible to assign decisions to theactors who are most likely to possess the information (most of itlocal in origin) that is relevant to those decisions. 23(Simon 1981:41)For Simon (1981:49, 51), markets are only one of the ‘mechanisms for