Everything about Kenneth Arrow totally explained
Kenneth Joseph "Ken" Arrow (born
August 23,
1921) is an
American economist, joint winner of the
Nobel Prize in Economics with
John Hicks in
1972, and the youngest person ever to receive this award, at 51. He is considered one of the founders of modern (post
World War II)
neo-classical economics.
His most significant works are his contributions to
social choice theory, notably "
Arrow's impossibility theorem", and his work on
general equilibrium analysis. He has also provided foundational work in many other areas of economics, including
endogenous growth theory and
the economics of information.
He graduated from
Townsend Harris High School and then earned a
Bachelor's degree from the
City College of New York in
1940. At
Columbia University, he received a
Master's degree in
1941. From 1946 to 1949 he spent his time partly as a graduate student at Columbia and partly as a research associate at the
Cowles Commission for Research in Economics at the
University of Chicago. During that time he also held the rank of Assistant Professor in Economics at the University of Chicago. In
1951 he earned his
Ph.D. from Columbia. He is currently the Joan Kenney Professor of Economics and Professor of Operations Research, Emeritus at
Stanford University. He was one of the recipients of the 2004
National Medal of Science, the nation's highest scientific honor, presented by President George W. Bush for his contributions to research on the problem of making decisions using imperfect information and his research on bearing risk. He is also a founding member of the
Pontifical Academy of Social Sciences. Ken Arrow's impact on the economics profession has been tremendous. For more than fifty years he's been one of the most listened to of all practicing economists.
He is a trustee of the Economists for Peace and Security. He was a convening lead author for the
Intergovernmental Panel on Climate Change.
Arrow's impossibility theorem
Arrow's monograph
Social Choice and Individual Values derives from his
Ph.D. thesis. In it he sets out a key result (in one final form).
General Possibility Theorem: It is impossible to formulate a social preference ordering that satisfies the following conditions (paraphrased):
- Unrestricted Domain: For each state X and Y, based on the social preference ordering, society prefers either state X to Y or Y to X. for example society can compare any pair of candidates. (completeness)
- Unanimity: If everyone in society prefers a to b, then society should prefer a to b.
- Non-Dictatorship: Societal preferences can't be based on the preferences of only one person regardless of the preferences of other agents and of that person.
- Transitive Property: If society prefers (based on social rule aggregation of individual preferences) state X to Y and prefers Y to Z then society prefers X to Z.
- Independence of Irrelevant Alternatives: If for some X, Y, and Z, X is preferred to Y, then changing the position in the ordering of Z doesn't affect the relative ordering of X and Y for example X is still preferred to Y. In other words, changing the position of Z in the preference ordering shouldn't be allowed to "flip" the social choice between X and Y.
- Universality: Any possible individual rankings of alternatives is permissible.
The theorem has tremendous implications for
welfare economics and theories of
justice. It was extended by
Amartya Sen to the
liberal paradox which argued that given a status of "Minimal Liberty" there was no way to obtain
Pareto optimality, nor to avoid the problem of social choice of neutral but unequal results.
An example of this would be to have the following choices to divide a cake between three people. Let us call them A, B and C.
Choice 1: A gets nothing, B and C get half each.
Choice 2: B gets nothing, A and C get half each.
Choice 3: C gets nothing, A and B get half each.
Choice 4: divide the cake equally.
Thus choice 4 would be third from the top in everyone's list, and would, in any direct choice lose 2 to 1 against an unequal distribution. Since all of these choices are Pareto-optimal - no one's welfare can be improved without reducing the welfare of others - choice 4 wouldn't be chosen, since there would always be other preferred choices.
General equilibrium theory
Working with
Gerard Debreu (who won the Nobel prize for this work in
1983), Arrow produced the first rigorous proof of the existence of a market clearing equilibrium, given certain restrictive assumptions. See
general equilibrium. Arrow went on to extend the model to deal with issues relating to uncertainty, stability of the equilibrium, and whether a competitive equilibrium is efficient.
Endogenous growth theory
Arrow was instrumental in kick-starting research into
endogenous growth theory (also known as
new growth theory) which sought to explain the source of technical change, which is a key driver of economic growth. Until this theory came to prominence, technical change was assumed to occur
exogenously - that is, it was assumed to occur with no explanation of
why it occurred. Endogenous growth theory provided standard economic reasons for why firms innovate - so innovation and technical change are determined
endogenously - that is, within the model (hence the name). A vast literature on this theory has developed subsequently to Arrow's pioneering work.
Information economics
In other pioneering research, Arrow investigated the problems caused by
asymmetric information in markets. In many transactions, one party (usually the seller) has more information about the product being sold than the other party. Asymmetric information creates incentives for the party with more information to cheat the party with less information; as a result, a number of market structures have developed, including
warranties and third party
authentication, which enable markets with asymmetric information to function. Arrow analysed this issue for medical care (a 1963 paper entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review); later researchers investigated many other markets, particularly second-hand assets, online auctions and insurance.
Works
1951, “Alternative approaches to the theory of choice in risk-taking situations,” Econometrica, 19: 404-437
2nd ed. 1963
1953, “Hurwicz’s optimality criterion for decision making under ignorance,” Technical Report 6, Stanford University
1959, “Functions of a theory of behaviour under uncertainty,” Metroeconomica, 11: 12-20
1959, “Toward a Theory of Price Adjustment.” In Moses Abramovitz et al., eds. The Allocation of Economic Resources: Essays in Honor of Bernard Francis Haley. Stanford: Stanford University Press
1968, “Economic Equilibrium.” In D. L. Sills (ed.) International Encyclopedia of the Social Sciences 4: 376–88. London and New York: Macmillan and the Free Press.
1972, and Hurwicz, L., “Decision making under ignorance,” in C. F. Carter and J.L. Ford (eds.), Uncertainty and Expectations in Economics. Essays in Honour of G.L.S. Shackle. Oxford: Basil Blackwell.
1987, “Rationality of self and others in an economic system,” in R. M. Hogarth and M. W. Reder (eds.), Rational Choice. Chicago: The University of Chicago Press.
Trivia
Arrow and Paul Samuelson are related by marriage and they're both uncles of former United States Secretary of the Treasury Larry Summers. Arrow is the brother of Summers's mother, and Samuelson is the brother of Summers's father, who changed his family name.
Further Information
Get more info on 'Kenneth Arrow'.
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