Economic theory can admittedly be simultaneously boring and incomprehensible at times, but is critical to our understanding of the functioning of markets, businesses, and consumers.
Its concepts inform the structure and actions of governments and central banks, improve policies and social services, and enhance job markets. From the most rudimentary barter systems of trade centuries ago to the complex, multifaceted transactions common in the world today, economic concepts are essential to social progress and opportunity.
Few people have ever contributed as much to our understanding of economic theory as Kenneth J. Arrow, who recently passed away at the age of 95. Dr. Arrow taught at the University of Chicago, Stanford, Harvard, and other elite institutions. He also served on the staff of the U.S. Council of Economic Advisors and in other important advisory capacities. He was already legendary by 1972, when he was among the first recipients of the Nobel Prize in Economics, and his groundbreaking work continued for decades thereafter.
While still a graduate student and before I was born, Dr. Arrow developed one of his most well-known ideas, his “impossibility theorem.” Essentially, the theorem says that in situations where there are multiple options, there is no process whereby the options can be satisfactorily placed in order through collective decision making (such as majority voting). That’s oversimplified and the theory is more complex than I have space to describe, but suffice it to say that it opened up the academic field of social choice theory and questioned the sustainability of majority rule societies under very general and reasonable conditions.
Several of Dr. Arrow’s contributions involve translating relatively straightforward ideas into mathematical proofs which can then serve as the foundation for further work by other economists, mathematicians, and other social scientists. For example, he was among the first economists to describe a “learning curve” whereby experience can increase productivity.
He also developed key aspects of some of the most basic tools in use by economists such as relationships between supply and demand and equilibrium. He built on the ideas of earlier economists such as Leon Walras in describing markets, deriving equations to explain the interactions of producers and consumers. This work formed the basis for Dr. Arrow’s Nobel Prize for “pioneering contributions to general economic equilibrium theory and welfare theory.”
In later years, Dr. Arrow looked at information as an economic variable, how the market encourages innovation, and the problems of attempting to redistribute wealth through price controls. His work in describing the market for medical care and health insurance helped shape policy including the Affordable Care Act. My personal favorite was his work on the limits of organization, which I often cite (though not exactly correctly) as mathematical proof that I am incapable of keeping a neat workspace.
He was an impressive intellect whose creative ideas formed the basis for research in fields ranging from social science to finance and beyond. He taught at the most prestigious universities and won awards and accolades from far and wide. A number of later Nobel Prize winners in Economics and other fields credit Kenneth Arrow, tracing portions of their work back to his ideas (and several were his former students). Through his sister’s marriage, he also ended up in a family of noted economists, including fellow Nobel Laureate Paul Samuelson and his nephew, former Treasury Secretary Robert Summers.
Dr. Arrow not only knew his economics, but also was well versed on virtually every subject you can imagine. Few before or since have contributed more to our understanding, and he was one of the truly great minds of the past century. Even so, he was known for his kindness. I remember all of my encounters with him fondly, including the first one in the late 1970s or early 1980s which, by a strange set of circumstances, ended up with us being at Beach Blanket Babylon in San Francisco (which is somewhat like Esther’s Follies in Austin). I never got accustomed to calling him “Ken,” and it was always a pleasure to listen to him on any subject. His noted nephew recently said that he “knew more about everything than most know about anything.” That just about says it all. In his gentle manner, he had a profound impact on all of our lives, and we are so much the better for his remarkable intellectual journey.
