Bounded Rationality and Tacit Knowledge in the Organizational Capabilities Approach: An Assessment and a Reevaluation

The famous three chapters in Nelson and Winter (1982) that focus on firm routines and capabilities are often taken to be solidly founded on an assumption of bounded rationality. I argue that, in actuality, bounded rationality plays a rather limited role in Nelson and Winter (1982), that the very different assumption of tacit knowledge is much more central, and that the links between bounded rationality and routines/capabilities are not clear. I then argue that the absence in Nelson and Winter of a clear methodological individualist foundation for notions such as routines, capabilities, competencies, etc. have resulted in certain explanatory difficulties in the modern organizational capabilities approach that has taken so much inspiration from their work.