What Kenneth Arrow Taught the World
Kenneth Arrow, died February 21, can be said to have shaped the modern discipline of economics, along with late brotherin-law Paul Samuelson. It all began with his pioneering, densely mathematical Impossibility Theorem, which proved that no ranked voting system can produce a result consistent with some seemingly innocuous features such as non-dictatorship, taking into account everyone’s preferences, these being consistent at the collective level and independent of irrelevant alternatives. The implications of this work, published 1951, were vast: it opened up the field of social choice theory, which kept some of the finest economists, including Amartya Sen, engaged for the next 30 years. Arrow won the Nobel Prize, in 1972, the third and youngest recipient, for what came to be known as the Arrow-Debreau model, which incorporated competitive markets, with price taking players, functioning with full information: the basis of market economics. No sooner was this done, Arrow broke down each of the founding assumptions of the model, to demonstrate how markets could deliver suboptimal outcomes if, say, uncertainty or asymmetric information was at play. Thus, he founded the field of information economics that still dominates analysis of financial and other markets. He also spawned endogenous growth theory. Son of Romanian-Jewish immigrants, Arrow’s concerns about social and economic discrimination pioneered the analytics of affirmative action. It was his insight that public perception of a group (Blacks, Muslims or Dalits, say) would be formed on how the statistical aggregate of each group was ‘supposed’ to behave, rather than on tests of individual talent or ability. He was prescient: the toxicity of discrimination will continue, without affirmative action.