Arrow: Why Shouldn't I Go to the Highest Bidder?
By David Henderson
Harold Hotelling, an economist, taught some of the statistics courses and “gave a course in mathematical economics” that Arrow said he took “out of curiosity.” But because it began to hook him on economics, when his cash ran down Arrow approached Hotelling. The economist told Arrow that he had no influence over the math department’s financial awards, but he could help him if he switched to economics. “So I switched to economics. People get very shocked by this. I said, ‘You’re all economists–why shouldn’t I go to the highest bidder?'” he recalled in a recent interview in his office at Stanford University, where he spent most of his professional life.
This is from Janet Stotsky, “Path Breaker,” Finance & Development, September 2014, Vol. 51, No. 3. It’s her lengthy profile of Kenneth J. Arrow. Quite fun.
There’s an interesting tension, though, between parts of the article. Early in the piece, she writes:
In nearly all his endeavors Arrow introduced mathematical rigor and was a major influence in making economic theory as mathematically oriented as it is today.
Later she writes:
Arrow’s 1963 paper on uncertainty and the welfare economics of medical care explained the difficulties in designing a well-functioning market for medical care both because some participants know more than others–for example, the gap in medical knowledge between doctors and their patients–and because there is an absence of price competition in this market. He demonstrated the central importance of moral hazard in the medical marketplace–for example, greater demand for medical care by patients with insurance. A committee of leading economists said the article was one of the 20 most influential in the first century of the American Economic Review, the flagship publication of the American Economic Association.
Where’s the tension? This 1963 article became a classic. A committee of leading economists counts it as one of the 20 most influential in 100 years of publication of one of the two top U.S. economics journals. (The other is the Journal of Political Economy.) Here’s the thing. There’s not an ounce of math in that article. It’s all words. And if I recall correctly, there isn’t even a graph. That doesn’t contradict her statement that Arrow helped mathematize economics. But it does mean that a huge part of his influence had nothing to do with math.
By the way, Arrow’s 1963 classic is very nicely done. In fact, it was the subject of one of my earliest blog posts.
Interestingly, his first paper was published in the Journal of Meteorology.