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.