In 1972 American economist Kenneth Arrow, jointly with Sir John Hicks, was awarded the Nobel Prize in economics for “pioneering contributions to general equilibrium theory and welfare theory.” Arrow is probably best known for his Ph.D. dissertation (on which his book Social Choice and Individual Values is based), in which he proved his famous “impossibility theorem.” He showed that under certain assumptions about people’s preferences between options, it is always impossible to find a voting rule under which one option emerges as the most preferred. The simplest example is Condorcet’s paradox, named after an eighteenth-century French mathematician. Condorcet’s paradox is as follows: There are three candidates for office; let us call them Bush (B), Clinton (C), and Perot (P). One-third of the voters rank them B, C, P. One-third rank them C, P, B. The final third rank them P, B, C. Then a majority will prefer Bush to Clinton, and a majority will prefer Clinton to Perot. It would seem, therefore, that a majority would prefer Bush to Perot. But in fact a majority prefers Perot to Bush. Arrow’s more complicated proof is more general.
Arrow went on to show, in a 1951 article, that a competitive economy in equilibrium is efficient and that any efficient allocation can be reached by having the government use lump-sum taxes to redistribute and then letting the market work. One clear-cut implication of this finding is that the government should not control prices to redistribute income, but instead, if it redistributes at all, should do so directly. Arrow’s insight is part of the reason economists are almost unanimously against price controls.
Arrow also showed, with coauthor Gerard Debreu, that under certain conditions an economy reaches a general equilibrium—that is, an equilibrium in which all markets are in equilibrium. Using new mathematical techniques, Arrow and Debreu showed that one of the conditions for general equilibrium is that there must be futures markets for all goods. Of course, we know that this condition does not hold—one cannot buy a contract for future delivery of many labor services, for example.
Arrow was also one of the first economists to note the existence of a learning curve. His basic idea was that as producers increase output of a product, they gain experience and become more efficient. “The role of experience in increasing productivity has not gone unobserved,” he wrote, “though the relation has yet to be absorbed into the main corpus of economic theory.” More than forty years after Arrow’s article, the learning curve insight has still not been fully integrated into mainstream economic analysis.
Arrow has also done excellent work on the economics of uncertainty. His work in that area is still a standard source for economists.
Arrow has spent most of his professional life on the economics faculties of Stanford University (1949–1968 and 1980–present) and Harvard University (1968–1979). He earned his B.A. in social science at the City College of New York and his M.A. and Ph.D. in economics from Columbia University.
About the Author
David R. Henderson is the editor of The Concise Encyclopedia of Economics. He is also an emeritus professor of economics with the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford University. He earned his Ph.D. in economics at UCLA.