In 1978, Herbert Simon was awarded the Nobel Prize in Economics. This award recognized the significance of his work, which had received acclaim not only in economics but also in the fields of computer science and psychology.

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Herbert Simon (1916–2001), also known as 'Herb' Simon, was an economist who used a thought experiment about a Martian visitor to emphasize studying firms over just markets. By the time of his death in 2001, many of his ideas had become mainstream. His work, which argued for building economic theories on empirical data, is considered a foundation of behavioural economics. Simon contended that economics is not a self-contained science, requiring practitioners to be both mathematicians and social psychologists. His intellectual career is notably contrasted with Friedrich Hayek, as both explored how societies thrive under uncertainty but proposed different mechanisms to achieve this.

Herbert Simon (1916–2001)

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Traditionally, the discipline of economics concentrated on markets, with a particular emphasis on how competition determines prices. Herbert Simon highlighted this conventional focus as a contrast to his own work, which called for greater attention to the internal structures of firms.

Traditional Economic Focus on Markets and Prices

This node provides the full citation for Herbert A. Simon's influential 1991 paper: 'Organizations and Markets', published in the *Journal of Economic Perspectives*, Volume 5, Issue 2, on pages 25–44. This paper is the origin of the argument that organizations, not markets, are the most prominent features of the economic landscape, an idea famously illustrated with the Martian view thought experiment.

Source: 'Organizations and Markets' (Simon, 1991)

Herbert Simon's 1978 Nobel Prize in Economics

Herbert Simon proposed that a firm should not be seen as a monolithic agent that simply responds to supply and demand. Instead, he argued that a firm is a complex entity made up of various individuals, whose personal needs and motivations may be in conflict with one another.

Simon's View of the Firm as a Composition of Individuals

While both Herbert Simon and Friedrich Hayek were concerned with how societies can prosper amidst uncertainty, they proposed starkly different solutions. Hayek championed the price mechanism as a supreme, decentralized information-processing system for coordinating large-scale economic activity. In contrast, Simon argued that the price mechanism alone is insufficient and must be supplemented, or even replaced, by institutions and governments. He believed these alternative 'authority mechanisms' are better suited to manage uncertainty and rapid change because they can harness complex aspects of human psychology.

Intellectual Contrast: Simon and Hayek on Societal Resilience to Uncertainty

The field of behavioural economics has its origins in Herbert Simon's efforts to construct economic theories that were grounded in empirical evidence about how people actually behave, rather than purely abstract assumptions.

Simon's Influence on Behavioural Economics

Herbert Simon argued that economics should not be treated as a self-sufficient science. He believed that an economist must combine the skills of a mathematician, who works with formal structures like decision sets and utilities, with those of a social psychologist, who investigates the motivations behind human relationships.

Simon's View on the Interdisciplinary Nature of Economics

To illustrate that much of the economy operates outside of markets, Herbert Simon proposed a thought experiment of a Martian viewing Earth's economy from space. This visitor would see large green areas, representing firms, connected by thin red lines, which represent market transactions. This perspective highlights that firms are the dominant features of the economic landscape and that many resource allocation decisions are made internally within these 'green areas,' rather than through the 'red lines' of the market.

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