Excerpt

Herbert Simon’s “Organizations and Markets” offers a sprinkling from the conceptual gusher coming from the pen of this legendary polymath author. It focuses on organizations and highlights his differences from the “optimization + efficiency” heuristics used by economists to account for organizational patterns. Simon instead lays out a world of networks, norms, and heuristics as the basis for economic organization, stressing the role of organizations in allocating power and authority, engendering loyalty and group identity, and managing expectations and facilitating coordination, none of which would be required in a world of perfect rational agents, costless economic contracting, and efficient selection of organizational forms. I think much of Simon’s view summarized in the paper has been internalized by students of organizations, and so this paper is foundational.

Simon is clearly arguing with the dominant organizational theories in economics at the time he was writing, which invoked Panglossian arguments at every turn. These include the Alchian–Demsetz theory of efficient hierarchy, the Coase view on the efficient boundary of the firm, and the Chicago/Hayek optimism about the informational power and efficiency of market selection. Simon’s view qualifies all these positions. Instead of firms being evolutionarily optimized organizations designed to monitor team production and minimize transaction costs, Simon suggests that the adaptive pressures function weakly at best. Instead of the price mechanism now being the primary source of information through a modern economy, Simon suggests “orders,” both in the sense of inventories and in the sense of commands, as the actual flow of information in a day-to-day sense.

Bibliography

Weitzman, M. L. 1974. “Prices vs. Quantities.” The Review of Economic Studies 41 (4): 477–491. https://doi.org/10.2307/2296698.

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