16 October 1978
STUDIES OF DECISION-MAKING LEAD TO PRIZE IN
ECONOMICS
The Royal Swedish Academy of Sciences has decided to
award the 1978 Alfred Nobel Memorial Prize in Economic Sciences
to
Professor Herbert A. Simon, Carnegie-Mellon University, USA,
for his pioneering research into the decision-making process
within economic organizations.
Simon's scientific output goes far beyond
the disciplines in which he has held professorships - political
science, administration, psychology and information sciences. He
has made contributions in, among other fields, science theory,
applied mathematical statistics, operations analysis, economics,
and business administration. In all areas in which he has
conducted research, Simon has had something of importance to say;
and, as a rule, he has developed his ideas to such an extent that
it has been possible to use them as a basis for empirical
studies. But he is, most of all, an economist - in the widest
sense of that word - and his name is associated, most of all,
with publications on structure and decision-making within
economic organizations, a relatively new area of economic
research.
In older, traditional economic studies, no distinction was made
between enterprises and entrepreneurs, and it was assumed that
the entrepreneurs had only one goal: profit-maximizing. The
purpose of this classic and rather rudimentary theory of the firm
was primarily to serve as a basis for studies of total market
behaviour and not of the behaviour of the individual firms. As
long as these companies consisted of small, patriarchally-run
units, their activities remained relatively uninteresting. As
companies grew in size, however, as running them became separated
more and more from owning them, as employees began to form labour
unions, as the rate of expansion increased, and as price
competition between many was replaced by competition with regard
to quality and service between few, the behaviour of the
individual companies attained quite another degree of
interest.
Influenced by the organizational research that was being
conducted in other social sciences, however, economists in the
1930s began to look at the structure of companies and at the
decision-making process in an entirely new way. Simon's work was
of the utmost importance for this new line of development. In his
epoch-making book, Administrative Behavior (1947), and in
a number of subsequent works, he described the company as an
adaptive system of physical, personal and social components that
are held together by a network of intercommunications and by the
willingness of its members to cooperate and to strive towards a
common goal. What is new in Simon's ideas is, most of all, that
he rejects the assumption made in the classic theory of the firm
of an omniscient, rational, profit-maximizing entrepreneur. He
replaces this entrepreneur by a number of cooperating
decision-makers, whose capacities for rational action are
limited, both by a lack of knowledge about the total consequences
of their decisions, and by personal and social ties. Since these
decision-makers cannot choose the best alternative, as can the
classic entrepreneur, they have to be content with a satisfactory
alternative. Individual companies, therefore, strive not to
maximize profits but to find acceptable solutions to acute
problems. This might mean that a number of partly contradictory
goals have to be reached at the same time. Each decision-maker in
such a company attempts to find a satisfactory solution to his
own set of problems, taking into consideration how others are
solving theirs.
Simon's theories and observations about decision-making in
organizations apply very well to the systems and techniques of
planning, budgeting and control that are used in modern business
and public administration. These theories are less elegant and
less suited to overall economic analysis than is the classic
profit-maximizing theory, but they provide greater possibilities
for understanding and predictions in a number of areas. They have
been used successfully to explain and predict such diverse
activities as the distribution of access to information and
decision-making within companies, market adjustment to limited
competition, choosing investment portfolios and choosing a
country in which to establish a foreign investment. Modern
business economics and administrative research are largely based
on Simon's ideas.
Simon has been awarded this year's prize in economics for his research into the decision-making process within economic organizations, but he has also made other important contributions to the science of economics. For example, his interest in simplifying and understanding complex decision-making situations led him at an early stage to the problem of breaking down complex equation systems. His studies of "causal order" in such systems have been of particular importance.