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  Kenneth Arrow and What’s Important

  By James Annable | Jun 21, 2019

  In my considered opinion (with apologies to my MIT colleague Paul Samuelson), Ken Arrow (1921-2017) was the most accomplished economic theorist of the second half of the 20^th century. I am especially impressed that he tackled only really important problems. It was like anything else was a waste of time. Steve Pressman’s essay on Arrow in Fifty Major Economists (2006) identifies four areas of research in his “Works by Arrow”: Social Choice and Individual Values (1951); “Existence of Equilibrium for a Competitive Economy,” Econometrica (1963); Essays in the Theory of Risk Bearing (1970); and The Limits of Organization (1974).

  All four are fundamental contributions to economic theory. The brief descriptions that follow are, for convenience, taken out of order so as to better emphasize their connections to the GEM Project. Social Choice works through Arrow’s proof and demonstrated consequences of the his famous impossibility theorem. He shows that it is not possible to aggregate individual preferences in a way that always preserves each person’s rank ordering. “There cannot be a completely consistent meaning to collective rationality.” Economics can usefully explain individual choice but it cannot always explain group decision-making. It makes sense that heterogeneous preferences cannot be merged. The impossibility theorem, however, does not compromise the use of rationality to motivate generalized-exchange behavior. GEM modeling takes care to establish effective employee-preference priority attached to equitable treatment by management.

  Essays collects Arrow’s pioneering work on what turned out to be the most consequential subject in economic research in the 20^th century, i.e., information asymmetries and related problems. He illustrated his analysis mainly with health-related markets. Imperfect information needs no elaboration for readers of the GEM Blog.

  Existence is fundamental to mainstream New Keynesian macroeconomics, which is constructed on market-centric general-equilibrium theory. Arrow elegantly demonstrated the existence of single-venue general equilibrium (SVGE). It was a great achievement in economic theory that had eluded theorists since Adam Smith ably outlined the analysis of rational marketplace exchange. Mainstream theorists occasionally point...

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