Saturday, 25 February 2017

Kenneth Arrow, 1921-2017

Last week one of the greatest minds in economics passed away. In 1972 at the age of 51, Kenneth Arrow was the youngest ever to win the Nobel Prize in economics (a record he still holds), and five of his students have gone on to win Nobel Prizes as well, including Eric Maskin, John Harsanyi, Michael Spence, and Roger Myerson. Maskin's student Jean Tirole has also won a Nobel Prize, so that is a 'family tree' that is really unmatched (at least in economics).

Arrow's contributions are really too many to describe in detail (A Fine Theorem has made a start - the first of four promised posts is here), but I see four main areas:

  1. Social choice theory - Arrow's impossibility theorem, which we discuss in ECON110, details how there can be no 'perfect' majority-rule voting system that satisfies a set of axioms that most people would expect from a 'fair' voting system;
  2. General equilibrium - Arrow, along with Gerard Debreu, proved the (theoretical) existence of a market-clearing equilibrium set of prices across all markets, and that the resulting equilibrium would be efficient (this is one of the bases for economists' claims that competitive markets are efficient);
  3. Health economics - Arrow wrote the first paper that teased out the complexities of health care as a good (which we discuss in ECON110), including the fundamentals of asymmetric information that Spence and others built on; and
  4. Measurement of risk - Arrow outlined the mathematical concepts that economists use to measure risk.
Of course, he made many other contributions than those outlined above. Tim Harford has a great post here, and the New York Times obituary is here. And here is a recent (2016) interview with the great man. He will be missed.

[Update: The second post from A Fine Theorem is here]

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