Kenneth Arrow, Nobel laureate and founding high-impact economist, dies at 95
Kenneth J. Arrow, Nobel Prize-winning economist and mathematical theorist who made fundamental contributions to social sciences as diverse as election theory and health economics and was one of the most influential economists of his generation , died on February 21 at his home in Palo. Alto, California. He was 95 years old.
His son Andrew Arrow confirmed the death, but he did not know the immediate cause.
Dr Arrow, who spent most of his career at Stanford University as a professor of economics, was the youngest recipient of the Nobel Prize in economics.
He was 51 when he shared the Nobel Prize with British economist Sir John Hicks in 1972 for their contributions to welfare economics and general equilibrium theory, a branch of economics that studies the behavior of supply and demand for several companies in a competitive market.
Dr. Arrow comes from a prodigious family of economists which includes his nephew Lawrence H. Summers, President Emeritus of Harvard University, former Secretary of the Treasury and former Director of the National Economic Council of the White House; and his late brother-in-law Paul A. Samuelson, the first American to win the Nobel Prize in economics, in 1970. His sister Anita and her late husband, Robert Summers, taught economics at the University of Pennsylvania.
Throughout his academic career, Dr. Arrow has mentored many graduate students, several of whom have gone on to become Nobel Laureates: John C. Harsanyi, Eric S. Maskin, Roger B. Myerson, A. Michael Spence and Joseph E. Stiglitz.
The evolution of the economy in the decades following World War II was “very inspired by Arrow’s results, his systematic thinking, the understanding he generated, the questions he raised and the ‘inspiration [his work] provided to young people, ”economist and Nobel Laureate Amartya Sen said in an interview with the Washington Post.
He was widely respected for the breadth and depth of his research, including its impact on disciplines as diverse as political science, philosophy and statistics.
“He is certainly one of the giants of 20th century economic theory,” said Nobel laureate Robert Aumann, mathematician. “More so, I think, in the second half of the 20th century, he absolutely had more of an impact than anyone.”
Dr Arrow helped transform economic theory into a mathematical science. He used his statistical and mathematical knowledge to develop theorems that better explained flaws in economic theory that had not been well defined or, in certain circumstances, discovered.
“I think my greatest hopes were methodological – to apply new developments in mathematics to economics,” he told Challenge: The Magazine of Economic Affairs, in 2000.
Dr. Arrow rose to prominence with his historic 1951 book, “Social Choice and Individual Values”. In it, he developed his doctoral thesis and explained his innovative impossibility theorem, which proved that no voting system can equitably aggregate voter preferences in an election involving three or more candidates while fulfilling simultaneously several reasonable conditions.
In his analysis, using simple and elementary mathematics, he evaluated and compared existing voting systems and exposed their unavoidable limitations, flaws and tradeoffs.
It “has proven that it is logically impossible for there to be an anomaly-free voting system, regardless of the type of system,” Aumann said. “You can say, ‘There isn’t really a right way to run an election,’ but that’s another thing to prove it. . . . It’s like proving that a bicycle cannot be stable.
His findings catalyzed research in the economic theory of social choice and influenced fields such as philosophy (particularly the philosophies of democracy and political economy), welfare economics, and political science ( in particular voting theory).
The Impossibility Theorem “fundamentally altered economic and political theory and practice,” Aumann said.
The theorem also encouraged people to think about what they expected from a democracy and how they thought it should work, Sen said. “It’s important to recognize that Arrow was not just establishing a theorem, he was opening up a whole subject for social choice.”
For his discoveries, Dr. Arrow received the American Economic Association’s John Bates Clark Medal in 1957, an honor bestowed every two years on the country’s most promising economist under 40.
The work that won him a Nobel Prize draws on the theoretical findings presented in John Hicks’ 1939 book, “Value and Capital”. Dr Arrow worked with future Nobel Laureate Gerald Debreu to co-design the Arrow-Debreu model in 1954.
It was the first rigorous mathematical proof of a market equilibrium equilibrium – or the price at which the supply of an item equals its demand. It discussed the behavior of competitive markets, explained how prices worked to balance supply and demand, and described how different producers could maximize their profits and efficiency.
“Their theory of value and price formation was really a fundamental part of economics,” Aumann said. “It’s the ABCs of economics and economic theory.”
Their results have given economists a better understanding of monetary policy, economic cycles, international trade, market forecasts and the evaluation of public and government investment policies, and even extended to urban economic development.
“You cannot fully understand the behavior of any part of the economy without understanding its reaction to other parts,” Dr. Arrow told the New York Times in 1972.
Dr Arrow also laid the foundation for modern healthcare economics by identifying special market characteristics and issues with healthcare markets, as well as the underlying issues in the medical insurance industry, in his influential 1963 article “Uncertainty and the Welfare Economics of Medical Care.”
He found that the delivery of health care was fundamentally different from the traditional competitive market and, for this reason, was a non-market relationship.
For example, in a perfect market, the buyer and the seller in theory have access to the same information about the market price and value. However, in the healthcare market, the provider (doctor) typically has superior knowledge of the quality, delivery and distribution of healthcare services, which puts the consumer (patient) at a relatively disadvantage.
This creates a problem of information asymmetry. “The customer cannot test the product before consuming it, and there is an element of trust in the relationship,” he wrote in 1985.
Consumers also don’t always know when they will need health care until the time they need it (such as a stroke or heart attack). So when consumers buy insurance, the cost can be prohibitive.
Insurance companies fear that offering coverage to protect consumers from loss creates moral risks, such as risk-taking and irresponsible behavior.
As a result, the government, insurance companies and health maintenance organizations are stepping in to tackle the abuse and overuse of property.
“The economics of insurance, medical care, prescription drug testing. . . will never be the same after Arrow, ”Samuelson wrote in 1972.
Dr Arrow has also contributed to basic research in other areas of economics. Among them: the new growth theory, which emphasizes the economic role of innovation and new ideas; risk aversion, an economic and financial concept based on human behavior when exposed to uncertainty; and the information economy, the study of how information and information systems affect the economy.
Dr Arrow served on President John F. Kennedy’s White House Council of Economic Advisers alongside economists and future Nobel Laureates James Tobin and Robert Solow and taught economics at Harvard from 1968 to 1979.
He then returned to Stanford – where he joined the faculty in 1949 – and was professor of economics, statistics, and operations research until his retirement in 1991.
Sense of order
Kenneth Joseph Arrow was born in New York on August 23, 1921 to Jewish immigrants from Romania. He was placed in an accelerated program at Townsend Harris High School, a magnetic school in New York City that also produced Nobel Prize winners Herbert Hauptman, a chemist; and Julian Schwinger, physicist.
“I was an omnivorous reader, and I added to that a desire to systematize my understanding,” Dr. Arrow said at an academic conference in 1984. “As a result, history, for example, doesn’t wasn’t just a collection of dates and colorful stories; I could understand it as a sequence in which one event flows from another. This sense of order has crystallized. . . with a predominant interest in mathematics and mathematical logic.
He graduated from City College of New York in 1940 and the following year, at age 20, received a master’s degree in mathematics from Columbia University. After a stint as a meteorological officer in the US Army Air Forces during World War II, he returned to Colombia and obtained a doctorate in economics in 1951.
Dr. Arrow received the National Medal of Science, the country’s highest scientific honor, from President George W. Bush in 2004. He has served as president of the American Economic Association, the Econometric Society, the American Association of the Advancement of Science and the International Economic Association.
He was editor-in-chief of the Annual Review of Economics and administrator of what is now Economists for Peace & Security, an organization that promotes non-military solutions to global problems. Pope John Paul II appointed him to the Pontifical Academy of Social Sciences, a group of scholars who help advise the Vatican.
His wife, Selma Schweitzer Arrow, died in 2015. Survivors include two sons, actors David Arrow of Manhattan and Andrew Arrow of Los Angeles; a sister; and a grandson.
Dr. Arrow was known as a skillful storyteller with a sharp wit. While serving in the Air Force, he was responsible for producing long-range weather forecasts. He and his colleagues soon realized that the dominant techniques were no more accurate than random guessing.
His team brought this to the attention of his supervisors, and Dr Arrow published his first scientific paper on how optimal flight formulas could be improved. His efforts were rejected by his boss.
“The commanding general is well aware that the forecasts are not good,” he was told. “However, he needs it for planning purposes.”