Kenneth Arrow

Kenneth Arrow 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 social choice theory, endogenous growth theory, collective decision making, the economics of information and the economics of racial discrimination, among other topics.

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 impossibility theorem. He later published a book on the same subject. Arrow is also known as one of the first economists to recognize the learning curve.

In what he called the General Impossibility Theorem, Arrow theorized that it was impossible to formulate a social preference ordering that satisfies all of the following conditions:

1. Nondictatorship: The preferences of an individual should not become the group ranking without considering the preferences of others.
2. Individual Sovereignty: each individual should be able to order the choices in any way and indicate ties
3. Unanimity: If every individual prefers one choice to another, then the group ranking should do the same
4. Freedom From Irrelevant Alternatives: If a choice is removed, then the others' order should not change
5. Uniqueness of Group Rank: The method should yield the same result whenever applied to a set of preferences. The group ranking should be transitive.

The General Impossibility Theorem carries 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 was it possible to avoid the problem of social choice of neutral but unequal results.

The importance of 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. For example, his assumptions ruled out the existence of third-party effects. An example of such of an effect would be the idea that a sale of a product by Harry to Joe would not affect the well-being of Sally. However, this assumption is routinely violated in the real world by the sale of products that harm the environment, for example.

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 February 21, 2017.