Kenneth Arrow
Economist who sought a rational basis for collective decisions in healthcare and other programmes
KENNETH ARROW, the economist, who has died aged 95, shared the 1972 Nobel Memorial Prize in Economics with John Hicks for his contribution to general equilibrium theory and welfare economics; he was the youngest-ever recipient of the prize.
In 1951, in Social Choice and Individual Values, Arrow expounded what became known as his “Impossibility Theorem”, by which he sought to prove that the type of collective decision making used by Keynesians and communists alike could not produce results that respected the full panoply of a population’s individual preferences.
Later, working with the French economist Gerard Debreu, Arrow proposed a “general equilibrium theory” which provided mathematical proof that under certain economic assumptions there must be a set of prices such that aggregate supply will meet aggregate demand for every commodity in the economy.
The impossibility theorem sent shock waves through welfare economics, while the Debreu-Arrow general equilibrium theory was held to have laid the basis for a resurgence in free-market conservatism in the McCarthy era, giving the stamp of approval to unfettered markets.
Yet as the development economist Amartya Sen observed, Arrow was deeply involved in issues of social justice and was trying to find a rational system for combining the divergent preferences of individuals into a systematic theory of social choice.
Far from providing ammunition to McCarthyism, Arrow was engaged in trying to find a reasoned evaluative system for a humane and equitable society. When his mathematical exercise yielded an analytical impossibility, his famous theorem was born. But his vision of a society based on equitable social choice was one that inspired generations of economic thinkers. Many of his former graduate students went on to win the Nobel Memorial Prize themselves.
Much of Arrow’s later work touched on the role of government and regulators within the market. He helped kick-start research into endogenous growth theory, which holds that investment in human capital, innovation, and knowledge are significant contributors to economic growth and therefore that the longrun growth rate of an economy partly depends on policy measures to promote such investment.
In other pioneering research, Arrow investigated the problems caused by asymmetries of information in markets, where, for example, one party (usually the seller) has more information about the product being sold than the other party, creating incentives to cheat the party with less information – a situation that requires the development of market structures and regulations to enable markets with asymmetric information to function.
Arrow analysed an extreme example of this problem in 1963 in his most cited paper, “Uncertainty and the Welfare Economics of Medical Care”, published in the American Economic Review. Written before the creation of America’s Medicare and Medicaid programs, it demolished the theory that a competitive market in health will lead to an allocation of resources that is best for society.
The basic problem, Arrow pointed out, is that unless a patient knows as much about medicine as his doctor, he cannot evaluate the quality of advice he is given. Moreover unlike other goods and services, no one can really predict when health expenditures will incur, so when the need arises, as in the instance of a heart attack, there is no room for a market solution based on consumer choice.
In later life Arrow became part of a trend in economic theory which aims to include factors such as longevity and environmental change in economic theorising, a concept known as “comprehensive wealth”. Among other things he served as a member of the UN Intergovernmental Panel on Climate Change.
Kenneth Arrow was born in New York City on August 23 1921 to parents of Romanian Jewish origin. He took a degree in Mathematics at the City College of New York in 1940, then a Master’s degree at Columbia University, where he changed to Economics for subsequent graduate work.
His graduate studies were interrupted by the Second World War in which he served as a weather officer in the US Army Air Corps, rising to the rank of Captain. His first published paper, “On the Optimal Use of Winds for Flight Planning”, was the result of that work.
After the war he resumed his graduate research at Columbia while also working as a research associate at the Cowles Commission for Research in Economics at the University of Chicago, in the rank of assistant professor in Economics. He took his PhD in 1951.
In 1949 Arrow was appointed acting assistant professor of Economics and Statistics at Stanford University and remained there until 1968, becoming professor of Economics, Statistics, and Operations Research and serving as head of department. In 1968 he accepted an appointment as professor of Economics at Harvard University, where he remained until 1979 when he returned to Stanford as Joan Kenney Professor of Economics and Professor of Operations Research. He retired in 1991.
He had a number of short-term appointments including a fellowship at Churchill College, Cambridge, in 1963-64 and again in 1970, and a visiting fellowship at All Souls, Oxford, in 1996. he was a founding member of the Pontifical Academy of Social Sciences, a trustee of Economists for Peace and Security and editor of the Annual Review of Economics.
Arrow was elected a Fellow of the American Academy of Arts and Sciences in 1959 and in 2004 was awarded the National Medal of Science presented by President George W Bush.
He married, in 1947, Selma Schweitzer, with whom he had two sons. Kenneth Arrow, born August 23 1921, died February 21 2017