Herbert A. Simon - Sociology and Economics

Sociology and Economics

Herbert Simon has been credited for revolutionary changes in microeconomics. He is responsible for the concept of organizational decision-making as it is known today. He was also the first to discuss this concept in terms of uncertainty; i.e. it is impossible to have perfect and complete information at any given time to make a decision. While this notion was not entirely new, Simon is best known for its origination. It was in this area that he was awarded the Nobel Prize in 1978.

At the Cowles Commission, Simon’s main goal was to link economic theory to mathematics and statistics. His main contributions were to the fields of general equilibrium and econometrics. He was greatly influenced by the marginalist debate that began in the 1930s. The popular work of the time argued that it was not empirically apparent that entrepreneurs needed to follow the marginalist principles of profit-maximization/cost-minimization in running organizations. The argument went on to note that profit-maximization was not accomplished, in part, because of the lack of complete information. In decision-making, Simon believed that agents face uncertainty about the future and costs in acquiring information in the present. These factors limit the extent to which agents can make a fully rational decision, thus they possess only “bounded rationality” and must make decisions by “satisficing,” or choosing that which might not be optimal but which will make them happy enough.

Simon was known for his research on industrial organization. He determined that the internal organization of firms and the external business decisions thereof did not conform to the Neoclassical theories of “rational” decision-making. Simon wrote many articles on the topic over the course of his life mainly focusing on the issue of decision-making within the behavior of what he termed “bounded rationality”. “Rational behavior, in economics, means that individuals maximize thier utility function under the constraints they face (e.g., their budget constraint, limited choices, ...) in pursuit of their self-interest. This is reflected in the theory of subjective expected utility. The term bounded rationality is used to designate rational choice that takes into account the cognitive limitations of both knowledge and cognitive capacity. Bounded rationality is a central theme in behavioral economics. It is concerned with the ways in which the actual decision-making process influences decisions. Theories of bounded rationality relax one or more assumptions of standard expected utility theory”.

Simon determined that the best way to study these areas was through computer simulation modeling. As such, he developed an interest in computer science. Herbert Simon's main interests in computer science were in artificial intelligence, human-computer interaction, principles of the organization of humans and machines as information processing systems, the use of computers to study (by modeling) philosophical problems of the nature of intelligence and of epistemology, and the social implications of computer technology. Some of Simon's economic research was directed toward understanding technological change in general and the information processing revolution in particular.

While living in Pittsburgh, PA, he advised the citizenry on various issues including the use of public funds to build stadiums and the method of raising tax revenue. Simon emphasized the usefulness of the land tax, reflecting the early influence of Henry George on his economic thought.