Prices and knowledge: A market-process perspective

80 Prices and knowledgecomputational limits in human beings that could make some (or evenmost) situations too complex for them to handle without simplifyingdevices. As already stated, market-process economists emphasize adifferent problem, one that Simon’s approach seems to assume assolved. And this difference helps explain the divergences in theinterpretations of the role and achievements of markets that will nowbe considered.On Simon’s view of the marketFrom a perspective emphasizing bounded rationality what is ofinterest is the consideration of mechanisms that will allow individualsto make the best possible (‘reasonable’) decisions given their limitedcomputational capacities. Proposals for comprehensive centralplanning appear to be, from this point of view, completely oblivious ofthese human limitations: no central planner could handle successfullythe enormous quantity of facts required for planning a complexeconomy.For someone concerned about ways to make complex problemsmanageable for individuals with bounded rationality, one alternativeis to have them disregard some information (and thus have themsatisfice instead of optimize). Another alternative is to reduce theamount of information they need to handle. In other words, to lookfor ways of summarizing information so that as much of it aspossible can be used. The market system appears then, from such apoint of view, as one ingenious system for achieving this end. AsSimon (1983:88) describes it in the passages quoted above, prices actas summaries that contain ‘all the relevant information’.Nevertheless, a bounded-rationality theorist could find puzzlingwhy anyone would believe that relying solely on the price system isthe best way of coping with complexity. (Given the equation of theterm ‘market’ with price-mediated trading, this is what marketadvocates are interpreted to be doing.) After all, Simon (1962a:69)argues, the price mechanism is ‘just one—although an exceedinglyimportant one—of the means that humans can and do use to makerational decisions in the face of…complexity’. Why not takeadvantage of other mechanisms capable of helping man cope withcomplexity? If these other mechanisms are also marketalternatives—such as firms, contracts, and different institutionalarrangements—nothing controversial is being said for an