Who Was Kenneth Arrow?

Kenneth Arrow (1921-2017) was an American neoclassical economist who won the Nobel Memorial Prize in Economics along with John Hicks in 1972 for his contributions to general equilibrium analysis and welfare economics.

Arrow's research has also explored the social choice theory, endogenous growth theory, collective decision making, the economics of information, and the economics of racial discrimination, among other topics.

Understanding Kenneth Arrow

Born in New York City in 1921, Kenneth Arrow taught at Stanford University, Harvard, and the University of Chicago. He earned his Ph.D. from Columbia University, with a dissertation that discussed his theorem called the General Impossibility Theorem. Arrow determined in this theorem that results could not be decided fairly during an election. That's because, he stated, ideal voting methods did not exist when there are more than two candidates trying to satisfy certain criteria.

1. Nondictatorship: One person shouldn't be the deciding factor. This means everyone's wishes should be considered.
2. Individual sovereignty: Voters should have the ability to order their choices any way they choose. They should also be able to mark down if they feel undecided or if there's a tie.
3. Unanimity: If every individual prefers one candidate over another, then the group ranking should do the same.
4. Freedom and independence from irrelevant alternatives: If one option is removed, then results for the others shouldn't change. So if the first candidate is leading and the third candidate drops out, the first candidate should still be ahead of the second.
5. Uniqueness of group rank: Regardless of the preferences, the result should be the same.

The application of Arrow's General Impossibility Theorem has gone beyond democracy and election results. It has been used for both welfare economics and (social) justice, and linked to the liberal paradox, which was developed by economist Amartya Sen. According to Sen and his paradox, there is generally a conflict between the distribution of goods and services in a society, and individual freedom, as both cannot exist at the same time.

Arrow later published a book on the same subject. Arrow is also known as one of the first economists to recognize the so-called learning curve.

Legacy of Kenneth Arrow

Arrow’s theoretical insight has proven its importance over the decades, but he contended that his conclusions about the workings of competitive markets held true only under ideal—that is to say, unrealistic—assumptions. These assumptions ruled out the existence of third-party effects. An example of such an effect would be the idea that the sale of a product by Harry to Joe would not affect the well-being of Sally. However, this idea is routinely violated in the real world by the sale of products that harm the environment, among other effects.

Arrow's later research translated simple ideas into elegant mathematics, which other economists extended into unanticipated directions. One of those notions was “learning by doing,” an idea that Arrow examined in the early 1960s. The basic idea was that the more a company produced, the smarter it got. Decades later, economists incorporated this idea into sophisticated theories of “endogenous growth,” which state that economic growth depends on internal company policies that promote innovation and education.

Kenneth Arrow died on Feb. 21, 2017.