- Person
- Kenneth Arrow
- Lived
- 1921–2017
- Field
- Economics
- From
- American
The story
Since Adam Smith published The Wealth of Nations in 1776, economists had marvelled that millions of separate decisions to buy and sell somehow fit together, so that buyers can usually find what they want and sellers are rarely left with mountains of unsold goods. In the nineteenth century Léon Walras described an economy as a system of interlocking markets, but no one had shown mathematically that a set of prices balancing all of them must exist.
Kenneth Arrow, the son of Romanian-Jewish immigrants in New York, came to the problem after studying mathematics and then economics at Columbia University and joining the Cowles Commission at the University of Chicago, a centre for mathematically minded economists. Gérard Debreu, a French mathematician trained at the École Normale Supérieure, joined the Cowles Commission in 1950 after becoming fascinated by Walras's theory.
In 1954 Arrow, by then at Stanford, and Debreu published "Existence of an Equilibrium for a Competitive Economy" in the journal Econometrica. Using topological methods rather than ordinary calculus, they proved that under well-defined conditions, such as convex preferences and perfect competition, there must be a set of prices at which supply equals demand for every commodity at once. Lionel McKenzie reached a similar result independently the same year, and together this work offered the first rigorous proofs that market-clearing equilibrium prices exist.
Arrow went on to extend the analysis to uncertainty and to the question of stability: whether prices that start out of balance will actually move toward equilibrium. He also gave proofs of the two fundamental theorems of welfare economics, which link competitive markets with efficient outcomes, under more general conditions than before.
The Arrow-Debreu model became the standard framework of general equilibrium theory and a reference point for countless other economic models. Debreu received the Nobel Prize in 1983 for this and other work, and Arrow's 1972 prize honoured his contributions to general equilibrium theory. Arrow later explained the idea in plain terms: even distant parts of an economy, such as mortgage securities and car sales, influence one another, and prices tend to adjust until things balance. The framework remains a starting point for studying how a shock in one part of an economy ripples through the rest.
Why it matters
The model gave economists a common, rigorous language for tracing how a change in one market affects every other, informing policy analysis worldwide.
About Kenneth Arrow
Economist whose impossibility theorem, general-equilibrium proofs and work on risk, information and health care reshaped economics; still the youngest winner of the Nobel economics prize.
More about Kenneth Arrow
- Kenneth Arrow's 1963 paper launched health economicsKenneth Arrow's 1963 paper on uncertainty and medical care explained why health care markets behave differently, laying a foundation for health economics.
- Kenneth Arrow proved no voting system is perfectKenneth Arrow's 1951 book Social Choice and Individual Values introduced his impossibility theorem and founded modern social choice theory.
- Kenneth Arrow showed how learning by doing drives growthKenneth Arrow's 1962 papers on learning by doing and on markets for invention helped economists explain where innovation and growth come from.
- Kenneth Arrow helped create Stanford's operations researchKenneth Arrow co-wrote a 1951 classic on optimal inventory policy and helped establish Stanford's operations research department in the early 1960s.
- Kenneth Arrow used the winds to save wartime fuelAs a US Army Air Forces weather officer in the Second World War, Kenneth Arrow worked out flight paths that used prevailing winds to cut fuel use.
- Kenneth Arrow made the case for affordable malaria drugsIn 2004 Kenneth Arrow chaired an Institute of Medicine committee that called for a global subsidy so that effective malaria drugs could reach the world's poor.
Sources
- Arrow, Kenneth J. INFORMS
- Kenneth Arrow Wikipedia
- Arrow–Debreu model Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.