- Person
- Kenneth Arrow
- Lived
- 1921–2017
- Field
- Economics
- From
- American
The story
For much of the twentieth century, economic models treated technological progress as something that simply happened, outside the economy. Growth models could describe its effects but offered no economic reason why firms and workers became more productive over time, even though technical change was recognised as a key driver of rising living standards.
By the early 1960s Kenneth Arrow was a professor of economics, statistics and operations research at Stanford, already known for his work on social choice and general equilibrium. In 1962 he also spent time on the staff of the President's Council of Economic Advisers. That year he published two influential papers that moved beyond the work later cited for his Nobel Prize.
"The Economic Implications of Learning by Doing," published in the Review of Economic Studies in June 1962, argued that people and firms get better at production as they gain experience, so knowledge builds up as a by-product of economic activity itself. The model introduced a mechanism by which an economy's output need not run into diminishing returns as it grows. A second paper asked how efficiently markets encourage invention, since new knowledge is costly to produce but hard to own and easy to share.
These ideas became precursors of endogenous growth theory, which treats innovation as the result of decisions made inside the economy rather than as a gift from outside. Paul Romer's landmark 1986 paper, which launched the theory, borrowed from Arrow's learning-by-doing model, and a large literature followed. Arrow described much of his life's research as treating information as an economic variable, from how it is produced to how it is used, and later studied the demand for information and its effects on returns to scale.
The insight that experience, research and accumulated knowledge drive productivity now runs through modern thinking about economic growth, and it informs debates about education, training and public support for science and invention.
Why it matters
Arrow's work helps governments understand why research, education and on-the-job experience pay off, informing policies that support innovation.
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 and Gérard Debreu proved markets can balanceIn 1954 Kenneth Arrow and Gérard Debreu published the first rigorous proof that a competitive economy can have a set of prices at which every market clears.
- 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 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
- Kenneth Arrow Wikipedia
- Kenneth J. Arrow: Biographical NobelPrize.org
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.