The Nobel Prize in economics was awarded yesterday to Carnegie-Mellon University professor Herbert A. Simon, who two decades ago did pioneer work challenging some of the fundamental assumptions economists make about how companies and individuals behave.
Simon contested the traditional economic theory that businesses seek to maximize their profits, indivdiuals seek to maximize their satisfaction and that society is best off when they behave in this way.
Simon, using a more pschycological approach, postulated that individuals and companies cannot know what actions will maximize their profits or their satisfaction. Instead, he said, they set goals that represent reasonable levels of achievement and try to reach those goals.
But such "satisficing" behavior, as Simon called it, does not guarantee that by acting in their own best interests individuals and firms will leave the economy in its best possible position.
Few economists have supported Simon's theories. Many expressed surprise at the award because Simon had done little work in economics in the last two decades and no longer teaches economics or business. He holds a joint appointment in the psychology and political science departments at the Pittsburgh university.
Simon also made important contributions to the study of how decisions are made within businesses and in his work at Carnegie-Mellon helped turn business school education away from technique courses and developed courses that scientifically and mathematically analyzed business administration.
"I was a little astonished at first," Simon said in a telephone interview.
"Then I was very pleased."
Simon, who has been at Carnegie-Mellon 29 years, authored what has become a classic business decifion-making text, "Organization Theory." In recent years, he said, he has turned his interests toward more general problem-solving research, using computers to simulate human though processes.
Simon, who Carnegie-Mellon President Richard Cyert called close to a Renaissance man, taught undergraduate history courses last year.
In citing the 62-year-old professor the Swedish Academy of Scriences noted his research into the "decision-making process within economic organizations."
The academy noted that the economist has done research into a wide variety of fields ranging from statistics to applied mathematics to 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 has developed his ideas to such an extent that it has been possible to use them as a basis for empirical studies." the academy said.
"But he is, most of all an economist - in the widest sense of the word - and his name is associated most of all with publications in structure and decision-making within economic organization, a relatively new area of economic research."
The Nobel Prize carries with it a tax-free stipend of $165,000. The economics prize was the third of six to be awarded this year.
Last week American author Isaac Bashevis Singer received the literature prize, while three microbiologists shared the prize for medicine - Johns Hopkins University professors Daniel Nathans and Hamilton O. Smith and University of Basel scientist Werner Arber.
Yet to be awarded are prizes for peace, physics and chemistry.
All but the economics award were set up by the will of the inventor of dynamite, Alfred Nobel, in 1901. The economics award is funded by the Swedish award is funded by the Swedish Central Bank and was first awarded in 1969.
"Some younger economists may not have heard of Simon," said Paul A. Samuelson, professor of enconomics at the Massachusetts Institute of Technology and, in 1970, the first American Nobel laureate in enconomics. "I wouldn't have predicted it, but it makes sense now that he has been nominated."
Samuelson noted that in addition to his work in decision-making, which challenges "that each man calculates down to the nth decimal place" what is the best course of action to take. Simon also made other important conmon also made other importation contributions to economic theory.
He was the first to come up with a scientific explanation of the "well-known fact" that presidents of big corporations make more than presidents of smaller corporations and why and how the the difference in salaries can be explained, Samuelson said.
Simon and British physicist David Hawkins also developed a set of conditions that guarantees the interdependence of industries in the gigantic model of the economy developed by American economist Wassily Leontief. Leontief won a Nobel prize in 1973 for his input-poutput model of the economy.
Harvey Leibenstein. a Harvard professor who is doing research on decision-making similar to Simon's said that most of those who pursued Simon's behavioral approach have drifted away.
Leibenstein said that current economic theory is a rationalization of competitive capitalism and the competitive market system that says when "markets work well and people maximize the economy does as well as it possibly could."
Leibenstein, who is on a year's leave at Princeton University's Center for Advanced Study, said Simon's theories poke holes in the long-standing approach to micro-economic theory that has its roots in Adam Smith.