What Ken­neth Ar­row Taught the World

The Economic Times - - The Edit Page -

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.

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