Definition of Kenneth Arrow
Who is Kenneth Arrow?
Kenneth Arrow was an American neoclassical economist who won the Nobel Prize in Economics 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 information economy, and the economics of racial discrimination, among other topics.
Understanding Kenneth Arrow
Born in New York in 1921, Kenneth Arrow has taught at Stanford University, Harvard, and the University of Chicago. He got his doctorate. from Columbia University, with an essay that discussed his theorem called the General Impossibility Theorem. Arrow determined in this theorem that the outcome could not be decided fairly in an election. This is because, he said, ideal voting methods did not exist when more than two candidates were trying to meet certain criteria. Arrow describes the criteria as follows:
- Non-dictatorship: One person should not be the deciding factor. This means that everyone’s wishes must be taken into account.
- Individual sovereignty: Voters should be able to rank their choices as they see fit. They should also be able to note if they feel indecisive or if there is a tie.
- Unanimity: If each individual prefers one candidate over another, the group ranking should do the same.
- Freedom and independence from irrelevant alternatives: If one option is removed, the results of the others should not change. So if the first candidate is in the lead and the third candidate gives up, the first candidate should always be ahead of the second.
- Uniqueness of the group classification: Whatever the preferences, the result should be the same.
The application of Arrow’s general impossibility theorem went beyond democracy and election results. It has also been used for both welfare economics and (social) justice. It has also been linked to the liberal paradox, developed by economist Amartya Sen.According to Sen and his paradox, there is generally a conflict between the distribution of goods and services in a society and individual freedom in which both cannot. exist at the same time.
Arrow later published a book on the same subject. Arrow is also known as one of the first economists to recognize the learning curve.
Kenneth Arrow’s Legacy
The importance of Arrow’s theoretical insight has proven its importance over the decades, but he argued that his conclusions about how competitive markets work were only true under ideal – that is, unrealistic – assumptions. . For example, its assumptions ruled out the existence of third party effects. An example of such an effect would be the idea that selling a product by Harry to Joe would not affect Sally’s well-being. However, this assumption is regularly violated in the real world by the sale of products that are harmful to the environment, for example.
Arrow’s subsequent research translated simple ideas into elegant mathematics, which other economists extended in unforeseen directions. One of those notions was “learning by doing,” an idea that Arrow explored in the early 1960s. The basic idea was that the more a company produced, the smarter it became. Decades later, economists incorporated this idea into sophisticated theories of “endogenous growth,” which assert that economic growth depends on internal company policies that promote innovation and education.
Kenneth Arrow passed away on February 21, 2017.