Prices and knowledge: A market-process perspective

‘Bounded rationality’ and the price system 75distributing computational functions through a social system’ that‘magnify the computing capabilities of individual human beings andenhance the possibilities of their collective survival’. Their ‘chiefcompetitor’ is the hierarchical organization. 24 Markets and hierarchiesare bothsocial schemes that facilitate coordinated behavior, at the sametime conserving the critical scarce resource of human ability tohandle complexity and great masses of information.(Simon 1981:60–1)Apparently, in Simon’s view, the same advantage can be obtainedfrom both types of organization:matters of fact can be determined at the particular loci in anorganization that are best equipped by skill and information todetermine them, and they can then be communicated to ‘collectingpoints’ where all the facts relevant to a specific issue can be puttogether and a decision reached. Only a small part of the sourceknowledge and information and expertise need be present at thecollecting points, and these points can themselves be numerous anddispersed through the organization.(1981:49)If this is the case, what differences exist between the two types oforganization? In a somewhat puzzling statement, Simon mentions asa difference between markets and hierarchies that ‘none of thetheorems of optimality in allocation of resources…can be proved forhierarchic decision-making processes’. Therefore, he argues(1981:49–50), ‘hierarchies sometimes resort to internal markets orschemes of “shadow prices” in order to come closer to allocativeoptimality’. However, these statements are not compatible withSimon’s view of markets, which, as he stated, is devoid of optimalityclaims. Simon therefore leaves unanswered the question of what theadvantages of price-mediated trading might be, particularly withrespect to an appropriately decentralized hierarchical organization, anissue that the next chapter will consider in more detail.When considering the case for hierarchies as opposed to marketsas a form of organization, Simon mentions that they may makepossible the internalization of externalities. In addition, they may beuseful under certain situations of uncertainty. He says: