Kenneth Arrow

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton
by Colin Read
Published 16 Jul 2012

Jacob Marschak, “Rational Behavior, Uncertain Prospects, and Measurable Utility,” Econometrica, 18(2) (1950), 111–41. 10. Ibid., p. 120. 11. Jacob Marschak, “Probability in the Social Sciences,” Cowles Commission Paper, 82 (1954), referring to a lecture given on December 6, 1950. 12. Ibid., p. 179. 13. Kenneth Arrow and Frank Hahn, General Competitive Analysis. San Francisco: Holden-Day, 1971, pp. 361 and 369. 6 Applications 1. Kenneth Arrow, “The Theory of Risk Aversion,” in Aspects of the Theory of Risk Bearing. Helsinki: Yrjo Jahnssonin Saatio, 1965. Reprinted in Essays in the Theory of Risk Bearing. Chicago: Markham, 1971, pp. 90–109. 182 Notes 183 2. J.W. Pratt, “Risk Aversion in the Small and in the Large,” Econometrica, 32(1/2) (1964), 122–36. 3.

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Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability waiting to be summed.1 The finance literature further clarified that there are calculable risks and that there are uncertainties that cannot be quantified. In the 1930s, John von Neumann set about producing a model of expected utility that permitted the inclusion of risk. Then, Leonard Jimmie Savage described how our individual perceptions affect the probability of uncertainty, and Kenneth Arrow was able to include these probabilities of uncertainty in a model that established the existence of equilibrium in a market for financial securities. With the existence of equilibrium and a better understanding of the meaning and significance of probability at hand, Harry Markowitz then packaged up these intuitions into a tidy set of insights we now call Modern Portfolio Theory.

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These are the questions that the pricing analysts sought to resolve. 2 A Roadmap to Resolve the Big Questions In the first half of the twentieth century, Irving Fischer described why people save. John Maynard Keynes then showed how individuals adjust their portfolios between cash and less liquid assets, while Franco Modigliani demonstrated how all these personal financial decisions evolve over one’s lifetime. John von Neumann, Leonard Jimmie Savage, and Kenneth Arrow then incorporated uncertainty into the mix, and Harry Markowitz packaged the state of financial science into Modern Portfolio Theory. However, none of these great minds provided a satisfactory explanation for how the price of individual securities evolve over time. By the 1960s, the finance discipline was begging for a revolution that could turn the theoretical into the quantitative and practical.

Gaming the Vote: Why Elections Aren't Fair (And What We Can Do About It)
by William Poundstone
Published 5 Feb 2008

Senate Collection. Center for Legislative Archives) To Scott Contents Prologue: The Wizard and the Lizard 3 THE PROBLEM 25 I. Game Theory Kurt Code! • Adolf Hitler· Albert Einstein· Oskar Morgenstern· Bambi· the u.s. Constitution· Joseph Goebbels • God· Kaiser Wilhelm II • John von Neumann" Kenneth Arrow" J\'larxism • Alfred Tarski • intransitivity· Harold Hotelling· ice cream· John Hicks· "Scissors, Paper. Stone" • Duncan Black· the "forty-seven-year-old wife of a machinist liVing in Dayton. Ohio" • the RAND Corporation· Condoleezzrl Rice· Olaf Helmer· Harry Truman· Joseph Stalin· Abram Bergson 2.

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The consequences are weakened mandates, loss of faith in the democratic process, squandered dollars, and sometimes squandered lives. This book asks a simple question: Is it possible to devise a fair way of voting, one immune to vote splitting? Until recently, any wellinformed person would have told you the answer was a most definite no. They would have cited the work of Nobel-laureate economist Kenneth Arrow and his famous impossibility theorem. In 1948 Arrow devised a logical proof saying (very roughly) that no voting system is perfect. Arrow was not talking about hanging chads, confusing ballot designs, hacked electronic machines, or any type of outright fraud. Such problems, though serious, can be fixed.

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They have gone largely unnoticed by the public, the media, and nearly everyone except the campaign strategists and their clients. The story of vote splitting is one of political hardball. It is equally a tale of attempts to improve the world through logic (and how rarely that works out). In both cases, the story properly begins with Kenneth Arrow's lauded, feared, and long-misunderstood impossibility theorem. 22 THE PROBLEM ONE Game Theory Kurt Giidel, the most brilliant logician of the twentieth century, had no interest in politics. He showed no apparent alarm when Hitler became chancellor of Germany. (Codel closed a 1936 letter with a cordial "Heil Hitler:') He was equally unconcerned when Hitler annexed Austria in 1938.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

To provide for economic equilibrium in the face of economic uncertainty, Kenneth Arrow had proposed in the 1950s that there needed to be securities for sale representing every possible state of the future. That seemed a purely theoretical ideal at the time, of course. By the mid-1970s, though, one of Arrow’s students, Steve Ross, was proclaiming that—thanks to option-pricing theory—the financial world was moving in that direction. Ross had majored in physics as an undergraduate at Caltech, and then studied economics at Harvard with Kenneth Arrow. He landed a teaching job at the University of Pennsylvania, and discovered options theory when Fischer Black gave a seminar on campus.

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In the 1980s he went over to managing money himself. Stephen Ross Student of Kenneth Arrow, co-originator of the binomial option pricing model. Argued that options and other derivatives were bringing the world closer to economic perfection. Founded a money management firm with Richard Roll. Mark Rubinstein Coauthor with Stephen Ross of the binomial option pricing model. Cofounder with Hayne Leland and John O’Brien of the portfolio insurance firm LOR. Paul Samuelson Greatest American economist of the second half of the twentieth century (although some might favor Kenneth Arrow or Milton Friedman). Finance was just a side interest for him, but he devised the first mathematical proof of the efficient market hypothesis and came close to solving the option-pricing puzzle.

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Herbert Simon Economist at Carnegie-Mellon University who theorized in the 1950s that humans didn’t optimize, as most of his colleagues assumed, but “satisficed”—that is, came up with simple but not always entirely rational solutions to his problems. Winner of the 1978 economics Nobel. Joseph Stiglitz Student of Paul Samuelson and Franco Modigliani who, influenced by the work of Kenneth Arrow, showed how the efficient market hypothesis could not be—in theory at least—entirely true. Co-winner of the 2001 economics Nobel. Lawrence Summers Nephew of Paul Samuelson and Kenneth Arrow. Author of sharp critiques of efficient market finance in the 1980s and early 1990s who went on to be Secretary of Treasury in the Clinton administration and top economic adviser to President Barack Obama.

Against the Gods: The Remarkable Story of Risk
by Peter L. Bernstein
Published 23 Aug 1996

Molly Baker, Peter Brodsky, Robert Ferguson, Richard Geist, and William Lee were good enough to read segments of early versions of the manuscript. They gave me the running start I needed in order to transform rough drafts into a finished material. The following people also made significant contributions to my work and warrant my deepest appreciation: Kenneth Arrow, Gilbert Bassett, William Baumol, Zalmon Bernstein, Doris Bullard, Paul Davidson, Donald Dewey, David Durand, Barbara Fotinatos, James Fraser, Greg Hayt, Roger Hertog, Victor Howe, Bertrand Jacquillat, Daniel Kahneman, Mary Kentouris, Mario Laserna, Dean LeBaron, Michelle Lee, Harry Markowitz, Morton Meyers, James Norris, Todd Petzel, Paul Samuelson, Robert Shiller, Charles Smithson, Robert Solow, Meir Statman, Marta Steele, Richard Thaler, James Tinsley, Frank Trainer, Amos Tversky,* and Marina von N.

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The late Fischer Black, a pioneering theoretician of modern finance who moved from M.I.T. to Wall Street, said, "Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles."2 Over time, the controversy between quantification based on observations of the past and subjective degrees of belief has taken on a deeper significance. The mathematically driven apparatus of modern risk management contains the seeds of a dehumanizing and self-destructive technology. Nobel laureate Kenneth Arrow has warned, "[O]ur knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in certainty."3 In the process of breaking free from the past we may have become slaves of a new religion, a creed that is just as implacable, confining, and arbitrary as the old.

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One might expect, as a result, that the history of utility theory and decision-making would be dominated by Bernoullians, especially since Daniel Bernoulli was such a well-known scientist. Yet such is not the case: most later developments in utility theory were new discoveries rather than extensions of Bernoulli's original formulations. Was the fact that Bernoulli wrote in Latin a problem? Kenneth Arrow has pointed out that Bernoulli's paper on a new theory of measuring risk was not translated into German until 1896, and that the first English translation appeared in an American scholarly journal as late as 1954. Yet Latin was still in common usage in mathematics well into the nineteenth century; and the use of Latin by Gauss was surely no barrier to the attention that his ideas commanded.

Adam Smith: Father of Economics
by Jesse Norman
Published 30 Jun 2018

(National Galleries Scotland) 10. Statue of Adam Smith by Alexander Stoddart, 2008. (Realy Easy Star/Giuseppe Masci/Alamy) 11. Statue of David Hume by Alexander Stoddart, 1995. (Chris Dorney/ Alamy) 12. John Maynard Keynes and Henry Morgenthau at Bretton Woods, New Hampshire, July 1944. (Alfred Eisenstaedt/Time/Getty) 13. Kenneth Arrow carrying his Nobel prize, Stockholm 1972. (AP/REX/Shutterstock) 14. Adam Smith medallion by James Tassie, 1787. (National Galleries of Scotland) 15. Back of a £20 banknote. (Copyright © The Governor and the Company of the Bank of England, 2006) INTRODUCTION Adam, Adam, Adam Smith Listen what I charged you with!

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In a wide range of areas, from markets to crony capitalism to inequality to the social foundations of our lives, there are profound lessons to be drawn from his thought, as we shall see. In the next chapter, we turn to his influence on economics itself. CHAPTER 7 SMITH’S ECONOMICS THINK OF IT AS AN ECONOMIC JUST-SO STORY. AT THE START OF their highly successful economics textbook, the dauntingly entitled General Competitive Analysis of 1971, Kenneth Arrow and Frank Hahn acknowledged the importance of Adam Smith: There is by now a long and fairly imposing line of economists from Adam Smith to the present who have sought to show that a decentralized economy motivated by self-interest and guided by price signals would be compatible with a coherent disposition of economic resources that could be regarded, in a well-defined sense, as superior to a large class of possible alternative dispositions… Adam Smith’s ‘invisible hand’ is a poetic expression of the most fundamental of economic balance relations… [But] Smith also perceived the most important implication of general equilibrium theory… Thus it can be maintained that Smith was a creator of general equilibrium theory, though the coherence and consistency of his work may be questioned.

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Decoded, however, its message is plain: Adam Smith was the first person to grasp, albeit vaguely, that individual self-interest working across different freely functioning markets under conditions of perfect competition can generate superior economic efficiency. It may not look like it, but this is a tribute to genius. This idea was and remains arguably the central insight of mainstream modern economics. But for the lead author of the book, Kenneth Arrow, widely regarded as one of the greatest economists of all time, there was another and more personal reason to start with Smith. In 1954, with the brilliant French mathematical economist Gérard Debreu—and alongside Lionel McKenzie, working separately—Arrow had discovered what many saw as the philosopher’s stone of modern economics.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

Rather than confining myself to expounding the arguments of Friedrich Hayek, Milton Friedman, and their fellow members of the “Chicago School,” I have also included an account of the formal theory of the free market, which economists refer to as general equilibrium theory. Friedman’s brand of utopian economics is much better known, but it is the mathematical exposition, associated with names like Léon Walras, Vilfredo Pareto, and Kenneth Arrow, that explains the respect, nay, awe with which many professional economists view the free market. Even today, many books about economics give the impression that general equilibrium theory provides “scientific” support for the idea of the economy as a stable and self-correcting mechanism. In fact, the theory does nothing of the kind.

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Many of the scholars associated with the Cowles Commission were mathematicians and natural scientists who had turned to economics mainly because it provided interesting technical problems to study. In 1948, Tjalling Koopmans, a Dutchman and naturalized American who had started out in theoretical physics, became the research director at Cowles, and he gathered around him an assortment of brilliant young minds. One belonged to Kenneth Arrow, who was born in New York City in 1921 to a family of European Jewish immigrants. During the Great Depression, Arrow’s parents lost almost everything. Arrow graduated from City College in 1940 and enrolled in the graduate program in statistics at Columbia. After taking a class in economics with Harold Hotelling, a noted mathematical economist, he switched subjects and did his Ph.D. in economics.

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From Walras onward, general equilibrium theorists had sought to start out with individual consumers and firms, each of them following a simple set of rules, and to build up a theory of how the economy as a whole behaves. Sonnenschein, Mantel, and Debreu essentially said this wasn’t possible: the whole could not be derived from the parts. “In the aggregate, the hypothesis of rational behavior has in general no implications,” Kenneth Arrow wrote in a 1986 article reviewing general equilibrium theory. The authors of a high-level textbook for Ph.D. students made the same point in a more lighthearted manner, entitling their section that deals with this body of research “Anything Goes: The Sonnenschein-Mantel-Debreu Theorem.” Some researchers are still trying to rescue the general equilibrium approach, but they face at least two formidable issues.

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor
by William Easterly
Published 4 Mar 2014

Hayek’s spontaneous order was related to an idea that was already a mainstream concept in economics—general equilibrium—which held that a system of uncontrolled markets in every possible consumer or producer product would be a self-regulating system that reconciled supply and demand in every market, with nobody in charge.45 Kenneth Arrow summed it all up in a sentence that sounds a lot like Hayek: “The notion that through the workings of an entire system effects may be very different from, and even opposed to, intentions is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes.”46 Lawrence Summers, a Harvard economist who was treasury secretary under Bill Clinton (and coincidentally Kenneth Arrow’s nephew), wrote about Hayek: “What’s the single most important thing to learn from an economics course today?

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But there was more to the risk that nationalism posed for freedom than just its threat to ethnic minorities. What exactly did the goal of “national development” mean? It could not make sense as just a unified aspiration of all individuals, when individuals have so many different goals of their own. Indeed, another Nobel laureate, Kenneth Arrow, was to demonstrate a famous “impossibility theorem” in 1950, showing that no method can exist to rank the choices of a collection of individuals in a way that satisfies the most elementary common-sense rules for consistency and coherence. Hayek was blunt that a “national goal” just covered up the fact that some goals for some groups were attained at the expense of other goals for other groups.

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Tacit knowledge is the kind of trained and mostly unconscious knowledge needed, for example, to ride a bicycle—it does not work to follow a recipe on how to balance and turn the pedals. Economics examples include on-the-job learning, which is the main reason workers’ earnings rise with experience. Even purely technical solutions often require experience with that technology, in particular times and places, to fix the bugs. Tacit knowledge can only be gained through what Kenneth Arrow later called “learning by doing.” Tacit knowledge can certainly not be accessed by centralized problem-solvers. For Hayek, the advantages of a spontaneous order of free individuals is that it creates the incentives for individuals to utilize their own localized or tacit knowledge, without any need for anyone else to access it.

Milton Friedman: A Biography
by Lanny Ebenstein
Published 23 Jan 2007

Columbia was home of the retired John Bates Clark—the most esteemed economist America had produced—Wesley Mitchell, Hotelling, and John Maurice Clark, son of John B. Clark. Like Mitchell, John Maurice Clark had studied and taught at Chicago. Friedman says that Hotelling “undoubtedly influenced me most”14 in the year at Columbia. Hotelling, primarily a mathematician, has been described by Kenneth Arrow, a student and future Nobel laureate, as a “creative thinker in both mathematical statistics and economics.”15Friedman remembers Hotelling as “concise, rigorous, and lucid.... [H]e also had an extraordinary instinct for picking problems and making contributions of the greatest practical importance.”16 Friedman describes the active leaders in economics at Columbia in this way: “Hotelling did for mathematical statistics what Jacob Viner had done for economic theory: revealed it to be an integrated logical whole, not a set of cook-book recipes....Wesley C.

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According to Lester Telser, now the senior continuous member of the faculty in the Department of Economics, who came to Chicago as a research assistant on the Cowles Commission in 1952: “While Cowles was here, the economics of Chicago was unparalleled in the world. I would say it was the leading center in economics. No one else even came close.”3 The only comparable gathering of scholars, according to Telser, was the Niels Bohr Institute of Physics in Copenhagen. According to Nobel laureate Kenneth Arrow, who was also at Chicago with the Cowles Commission, a “truly exceptional group of people was assembled in Chicago during the late 1940s. I doubt that such a group could ever be put together again in economics.”4 Here Arrow is not referring to the economists of Friedman’s perspective. Friedman wrote that he, as well as the rest of the economics department, significantly benefited from the location of Cowles at Chicago.

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Christ, “The Cowles Commission’s Contributions to Econometrics at Chicago, 1939–1955,” Journal of Economic Literature (March 1994), for the perspective of a participant. Daniel Bell and Irving Kristol (eds.), The Crisis in Economic Theory (New York: Basic Books, 1981), is an excellent snapshot of where the economics profession was at that time. Contributors include, in addition to the editors, Kenneth Arrow, Peter Drucker, and Allan Meltzer. Friedman, though he does not contribute an essay, is the most discussed contemporaneous economist. James Dean notes in his essay that behind Friedman’s idea of a fixed rule for monetary growth is a “fundamental premise of pre-Keynesian laissez faire economics, namely that the private sector is self-stabilizing.

The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)
by Phil Thornton
Published 7 May 2014

Much of that period saw him sparring with Friedman in particular. Although Samuelson said he was nervous of debating directly with Friedman – who was also a close personal friend – he represented the Keynesian tradition of government intervention and regulation against his counterpart’s strong free-market views. Verdict: credits and debits Kenneth Arrow, a fellow Nobel laureate economist, said in the introduction to the collection of essays celebrating Samuelson’s work that ‘modern economics is inconceivable without his accomplishments’. Paul Krugman, another laureate, said Samuelson had ‘literally created’ at least eight whole fields of economics, any one of which would have earned him a place among history’s greatest economic thinkers.

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The idea that discrimination is costly to the discriminator is both common sense among economists today, and part of the reason why governments insist that employers and service providers cannot discriminate on the basis of prejudice. It has also fuelled future research. Nobel laureates Edmund Phelps and Kenneth Arrow built on Becker’s work to show that the beliefs held by employers, teachers and other influential groups that minority members are less productive can be selffulfilling, for these beliefs may cause minorities to under-invest in their education, training and work skills and this underinvestment does make them less productive.

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Bush 139 influence on Margaret Thatcher 138–9 influence on Ronald Reagan 139 influence on the monetarists 138–9 key economic theories 122–36 key ideas 142 libertarian views 134–6, 140 long-term legacy 137–41 nature of the free market system 131–3 Nobel Prize (1974) 137 opposition to central state planning 134–6, 140 out of fashion 129–31 prices and knowledge 131–3 Prices and Production (1931) 126, 130 rejection of government control of the economy 120 study of philosophy and economics 121–22 The Road to Serfdom (1944) 135, 138, 140 time and the value of capital 124–6 verdict 141–2 Hegel, Georg 51–2, 54 herd behaviour 105 heuristics and bias in decision making 222–5 Hicks, John 173 High Speed 2 train line from London to the North 125 hindsight bias 227 242Index Hobbes, Thomas 5 hubris hypothesis 227 human behaviour, Becker’s approach 212–15 human capital theory (Becker) 200–2, 210 human decision making processes (Kahneman) 221–5 Hume, David 4, 97 Hutcheson, Francis 3–4 illusion of validity concept 220, 224 income inequality in the present day 64–6 individualism, view of Friedman 155–7 industrial districts 84–6, 87 industrial economics 84–6, 87 Industrial Revolution 11 inflation 107, 110 actions of the central banks 161 and Keynesian policies 127 and money supply 151–2 relationship with unemployment 153–5 Institute of Economic Affairs 138, 161 interest rates effects of adjustments 103–4 effects of credit expansion 123–4 natural rate of interest (Hayek) 123 intergenerational economics 178–80 International Bank of Reconstruction and Development 109 international economics and trade, view of Samuelson 183–7 International Monetary Fund (IMF) 108–9, 113, 186 international trade and comparative advantage (Ricardo) 35–8 international trade theory 184–5 intervention during economic depression, view of Keynes 92–3, 94, 105–6 investment, volatility caused by uncertainty 104–5 invisible hand concept (Smith) 7–9 Johnson, Harry 94 Johnson, Lyndon B. 110, 190 joint-stock companies 86 Kahneman, Daniel (1934– ) 206, 217–36 behavioural economics 218–19, 233–6 biases and errors in financial decision making 225–32 cognitive biases 222–5 decision making under risk 228–32 early life and influences 219–20 economic writings and theories 221–32 from psychology to economics 225–32 gambler’s fallacy (misconception of chance) 224 heuristics and bias in decision making 222–5 human decision making processes 221–5 illusion of validity concept 220, 224 long-term legacy 233–4 loss aversion 230–2 multidisciplinary approach to economics 218 Nobel Prize for economic sciences (2002) 218, 220 optimism bias and overconfidence 226–7 Prospect Theory 228–32, 234 Thinking, Fast and Slow (2012) 226–7, 234 verdict 235–6 Kennedy, John F. 110, 190 Keynes, John Maynard (1883–1946) 19, 73, 86, 91–116, 171 aggregate demand and the role of government 102–4 Bretton Woods agreement 95, 108–9 causes of unemployment 101 challenging the classical consensus 99–106 Index243 clash with Hayek 120, 126–31 criticism from monetarists 110–11 criticism of self-correction of markets 99, 105–6 criticism of the gold standard 95, 98, 107 criticism of the quantity theory of money 97 drivers of recession 101 early life and influences 93–4 effects of changes in money supply 97 effects of interest rate adjustments 103–4 effects of reducing wages 101–2 elevation to the House of Lords 106 end of the Keynesian revival 113–14 First World War and aftermath 95–7 focus on demand side economics 127 General Theory 99–106 Great Crash (1929) 98, 99 Great Depression (1930s) 99–100 International Bank of Reconstruction and Development 109 International Monetary Fund 108–9 investments as King’s College Bursar 98, 114 investor expectations and uncertainty 104–5 key ideas 115–16 liquidity preference theory 105, 113 long-term legacy 109–14 marginal propensity to consume (MPC) 103 marginal propensity to save (MPS) 103 move into economics 94–8 multiplier concept 103 national economist to international statesman 106–9 paradox of thrift 101 periods in and out of favour 92–3 plans for post-WWII international economy 107–9 popularity of Keynesianism 109–10 revival in the 2008 financial crisis 111–13 savings and investment 100–1 Second World War and aftermath 106–9 severe falls in output 101–2 state intervention during economic depression 92–3, 94, 105–6 Treaty of Versailles 95–6 and investment volatility 104–5 unpopularity beginning in the 1970s 110–11 verdict 115 Keynes, John Neville 93 Klaus, Vaclav 140 Kotlikoff, Laurence 179 Krugman, Paul 180, 191 Kuznets, Simon 148 Laar, Mart 140 labour-intensive goods, effects of increase in wages 33 labour market, human capital concept 200–2, 210 laissez-faire economic system 9 rejection by Keynes 105–6 law of diminishing returns 31 Lehman Brothers collapse (2008) 42, 67 Leviathan (Hobbes) 5 Levitt, Steve 234 libertarian views Friedman 157 Hayek 134–6, 140 life choices, economic perspective 203–6 Lindbeck, Assar 168 liquidity preference theory 105, 113 London School of Economics (LSE) 122, 126, 128 loss aversion 230–2 Lucas, Robert 202 244Index Mackintosh, William 109 Malthus, Thomas Robert 31, 33, 169 marginal analysis 80–2 marginal change concept (Marshall) 80–2 marginal propensity to consume (MPC) 103 marginal propensity to save (MPS) 103 marginal rate of substitution 180 market equilibrium price 76–7 market mechanism (Smith) 15–16 market price, supply and demand factors 15–16 market self-correction, criticism by Keynes 99, 105–6 marriage, economic perspective 203–6 Marshall, Alfred (1842–1924) 71–89, 170 and the business world 84–6 ceteris paribus approach to economic analysis 79–80 concept of time in supply and demand 77–9 early life and influences 73–4 economics as a science 73, 86 economics theories 75–86 elasticity of demand 82–4 geographical effects in economics 84–6 industrial districts 84–6, 87 industrial economics 84–6, 87 influence on Keynes 93, 95 interaction between costs and value 75–7 key ideas 88–9 long-term legacy 86–8 marginal analysis 80–2 marginal change concept 80–2 mathematical approach to economics 72 microeconomics 72, 86 political economy 74 price as interaction of supply and demand 75–9 Principles of Economics (1890) 72, 76, 77–8, 87–8, 188 supply and demand model 75–84 verdict 88 Marx, Karl (1818–83) 19, 49–68 and the global financial crisis (2008) 61–3 capitalist exploitation of the working class 56–8, 62–3 capitalist production process 54–6 communism 50 Communist Manifesto (Marx and Engels) 52, 58–61 Das Kapital 52, 53–4, 59–61, 62, 67–8 distribution of economic value 54–6 downfall of capitalism 56–8, 61–3 early life and influences 51–3 economics theories 53–8 ‘fictitious capital’ concept 62 income inequality in the present day 64–6 key ideas 68 long-term legacy 63–7 surplus value of labour 54–6 verdict 67–8 view of Marxist governments 66 mass production 11 Massachusetts Institute of Technology (MIT) 170 mathematical approach to economics Marshall 72 Samuelson 169–70 mercantilism 7–8, 22–3 mergers and acquisitions 226–7 Merton, Robert 187 microeconomics 172–3, 174, 196 work of Marshall 72, 86 Microsoft 233 middle class, rise of 64 Mieses, Ludwig von 121–2 Mill, James 30–1 Mill, John Stuart 30, 181 The Principles of Political Economy (1848) 188 Modigliani, Franco 173 monetarism 110, 138–9, 146, 151–2 monetarist rule 152 Index245 money supply and the Great Depression (1930s) 150–2 effects of changes in (Keynes) 97 role in running the economy 151–2 monopolies evil of 10–11 regulation to prevent 21–2 multiplier effect 103, 174–5 Murphy, Kevin 201, 210–12 NAIRU (non-accelerating inflation of unemployment) 153–5 Nashat, Guity 206 neoclassical synthesis 174 neo-Keynesianism 168–9, 173–5 net profit 81 New Classical Economics 159 New Deal (Franklin D. Roosevelt) 148 New Keynesianism 159, 163 New Neoclassical Synthesis 111 Nicholas I, Tsar 52 NINJA (No Income, No Job, No Assets) homebuyers 61–2 Nixon, Richard 109, 146 Nobel laureates Kenneth Arrow (1972) 191, 213 Gary Becker (1992) 194, 195–6 Ronald Coase (1991) 73 Peter Diamond (2010) 179 Eugene Fama (2013) 160, 187 Milton Friedman (1976) 146, 147–8, 154, 161 Lars Peter Hansen (2013) 160 Friedrich Hayek (1974) 137 Daniel Kahneman (2002) 218, 220 Paul Krugman (2008) 180, 191 Simon Kuznets (1971) 148 Robert Lucas (1995) 202 Robert Merton (1997) 187 Edmund Phelps (2006) 213 Paul Samuelson (1970) 168 Myron Scholes (1997) 187 Vernon Smith (2002) 218 non-accelerating inflation of unemployment (NAIRU) 153–5 Nordhaus, William 171, 178 North American Free Trade Agreement 41, 187 North, Lord 23 Obama, Barack 162, 190 offshoring of jobs 41 OPEC 22 opportunity cost concept 201, 205 optimism bias and overconfidence 226–7 outsourcing 21 overlapping generations (OLG) model 178–80 Pareto, Vilfredo 182 Pareto efficiency 182 pensions and pension funds 178 permanent income hypothesis (Friedman) 148–50 Perot, Ross 41 Phelps, Edmund 154, 213 Philip, Prince 158 Pigou, A.C. 95 Pinochet, Augusto 161 political economy 28, 74, 93 population growth theories Malthus 31 Ricardo 31, 32–3 Posner, Richard 215 Predictably Irrational (Ariely, 2009) 234 prejudice economic perspective of Becker 196–7, 198–9 views of Friedman 157 price, as interaction of supply and demand (Marshall) 75–9 prices and knowledge (Hayek) 131–3 Prices and Production (Hayek, 1931) 126, 130 Principles of Economics (Marshall, 1890) 72, 76, 77–8, 87–8, 188 private savings, influence of taxation policy 43–4 private sector windfalls, impact of stimulus measures 43–4 privatisation of state-owned monopolies 21 246Index productivity, and division of labour 11–14 Prospect Theory (Kahneman) 228–32, 234 protectionism 22–3, 33–5, 41–2, 185 public goods economics 175–8 purchasing price parity (PPP) measures 186 quantitative easing 162, 163 quantity theory of money, criticism by Keynes 97 Rae, John 23 rational choice model (Becker) 197, 212–15, 216 challenge from Kahneman 221–33 rational expectations hypothesis 111, 137 Reagan, Ronald 19, 20, 139, 146, 158, 160 recession drivers of (Keynes) 101 see also Great Recession (2009) reflection effect 229 revealed preference theory 180–1 reverse elasticity 84 Ricardo, Abraham 28–9 Ricardo, David (1772–1823) 27–46, 183 attack on the Corn Laws 33–5 early life and influences 28–30 from finance to economics 30–1 global free trade 40–2 government debt 38–9 influence of Adam Smith 30 international trade and comparative advantage 35–8 key ideas 46 long-term legacy 40–4 on the general workings of the economy 31–3 on wealth creation and distribution 31–3 political career 30 population growth theories 31, 32–3 The Principles of Political Economy and Taxation (1817) 28, 31–3, 188 Ricardian equivalence 38–9 Ricardo effect 33 verdict 45–6 wine and cloth example 35, 37, 40–1 Ricardian equivalence 38–9 Ricardo effect 33 Robbins, Lionel 122, 129 Rogeberg, Ole 211 Rogoff, Kenneth 189–90 Roosevelt, Franklin D. 148 Samuelson, Paul (1915–2009) 37, 106, 137, 159, 167–92 autarky concept 184 early life and influences 169–70 economics in action 190–1 Economics: An Introductory Analysis (1948) 168, 171–3, 188–9 efficient markets 187 ethical judgements in economics 182–3 explaining trade imbalances 184–5 factor price equalisation theorem 186–7 financial economics 187 Foundations of Economic Analysis (1947) 168, 169–70 global public goods 177–8 influence of Keynes 171–2 influence on economic theory 189–90 intergenerational economics 178–80 international economics and trade 183–7 key economic theories and writings 171–87 long-term legacy 188–91 mathematical approach to economic issues 169–70 microeconomic market system 172–3, 174 multiplier effect 174–5 Index247 neoclassical synthesis 174 neo-Keynesianism 168–9, 173–5 Nobel Prize in economic sciences (1970) 168 oscillator model of business cycles 174–5 overlapping generations (OLG) model 178–80 public goods and public finance 175–8 public goods economics 175–8 revealed preference theory 180–1 understanding consumer behaviour 180–1 verdict 191–2 warrant pricing 187 welfare economics 181–3 Scholes, Myron 187 Schwartz, Anna 150–1, 162 Scottish Enlightenment 3 Second World War 95, 96 self-interest theory of Adam Smith 2–3, 6, 8–9, 20 Skidelsky, Robert 114, 128 slavery 10–11 Smith, Adam (1723–90) 1–25, 97, 230–1 A Theory of Moral Sentiments (1759) 2, 5–6 division of labour and productivity 11–14 drivers of rates of pay 12–13 early life and character 3–5 free-market mechanism of supply and demand 8–9 free international trade 13–14 from philosophy to economics 6–7 functions funded by general taxation 16 functions of the state 16–18 functions that users should pay for 16–17 idea of ‘natural liberty’ 8 idea of ‘sympathy’ of people for each other 6 key ideas 25 long-term legacy 19–23 market price of a commodity 15–16 on slavery 10–11 personal legacy 23 pin factory example 11–13 role of the state in the economy 9, 10 self-interest theory 2–3, 6, 8–9, 20 taxation principles 17–18 the evil of cartels and monopolies 10–11 the invisible hand 7–9 the market mechanism 15–16 The Wealth of Nations (1776) 2–3, 6, 7–25, 188 verdict 23–4 Smith, Vernon 218 Smoot-Hawley Tariff Act (US) 42 social security systems 179 social welfare function 182–3 socialism 134–6 sovereign debt crisis in Greece 113–14 Soviet Union, collapse of 140, 158 Sraffa, Piero 130–1 stagflation in the 1970s 154, 173–4 Standard Oil Company of New Jersey 21 state-owned monopolies, privatisation programmes 21 Statecraft (Thatcher, 2002) 19 status quo bias 227–8 stimulus measures, debate over effects of 43–4 stimulus versus austerity debate 43–4, 140–1 Stockholm School of Economics 168 Stolper, Wolfgang 184–5 Stolper–Samuelson theorem 184–5 Strachey, Lytton 94 structural unemployment 155 substitution effect, response to price change 82, 83 Summers, Anita 190 Summers, Lawrence 190 Summers, Robert 190 Sunstein, Cass 234 248Index supply and demand market mechanism 8–9, 15–16, 75–84 supply side economics 127, 201 surplus value of labour (Marx) 54–6 taxation policy influence on private savings 43–4 views of Adam Smith 16–18 taxpayers, view of government debt (Ricardo) 38–9 Thaler, Richard 232, 234, 235 Thatcher, Margaret 19, 138–9, 155, 160–1 The General Theory of Employment, Interest and Money (Keynes, 1936) 99–106 The Principles of Political Economy (Mill, 1848) 188 The Principles of Political Economy and Taxation (Ricardo, 1817) 28, 31–3, 188 The Road to Serfdom (Hayek, 1944) 135, 138, 140 The Wealth of Nations (Smith, 1776) 2–3, 6, 7–25, 188 Thinking, Fast and Slow (Kahneman, 2012) 226–7, 234 time factor and the value of capital (Hayek) 124–6 in the supply and demand model 77–9 Townshend, Charles 5, 6–7 Toyota, production systems 21 trade barriers 22–3, 41–2, 185 Corn Laws 33–5 trade imbalances, Samuelson’s explanation 184–5 trade unions 19 transient income concept 149 Treatise on Human Nature (Hume) 4 Treaty of Versailles 95–6 Tversky, Amos 218, 220, 221–5, 228–33, 235 Ulam, Stanislaw 37 uncertainty and investment volatility 104–5 unemployment causes of (Keynes) 101 frictional 155 ‘natural’ rate of (Friedman) 153–5 relationship with inflation 153–5 structural 155 United States housing market crisis (2008) 61–2, 112 import tariffs after the Wall Street Crash 42 savings and investment imbalance with China 113 trade imbalance with China 45 US Federal Reserve 111–12 action to control inflation 161 and the 2008 financial crisis 235 influence of monetary policy 159 money supply and the Great Depression (1930s) 150–2 quantitative easing (2009 onward) 162 role in the Great Depression (1930s) 159 utilitarianism 31, 182 value and costs of production 75–7 distribution of economic value (Marx) 54–6 surplus value of labour (Marx) 54–6 Voltaire 7 wages drivers of wage rates (Smith) 12–13 effects of reducing (Keynes) 101–2 relationship to rents and profits 32–3 surplus value of labour (Marx) 54–6 Wall Street Crash (1929) 23, 42 Wallich, Henry 190–1 warrant pricing (Samuelson) 187 wealth creation and distribution, view of Ricardo 31–3 Index249 welfare economics 181–3 White, Harry Dexter 108 Wilberforce, William 10 Wittgenstein, Ludwig 121 women in the workforce 202 Wood, Kingsley 106 Woolf, Leonard 94 World Bank Group 109 World Trade Organization (WTO) 22, 40–1, 185 

Reinventing the Bazaar: A Natural History of Markets
by John McMillan
Published 1 Jan 2002

Each seller is a little monopolist. Because of the buyers’ cost of searching, the merchants make a large profit. Big effects can come from small transaction costs. Today’s economics has the problem of information at its core. The “biggest new concept in economics in the last thirty years,” Kenneth Arrow said in 2000, “is the development of the importance of information, along with the dispersion of information.”4 Two kinds of market frictions arise from the uneven supply of information. There are search costs: the time, effort, and money spent learning what is available where for how much. And there are evaluation costs, arising from the difficulties buyers have in assessing quality.

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As a purchasing manager said, if an issue comes up, you telephone your counterpart “and deal with the problem. You don’t read legalistic clauses at each other if you ever want to do business again.”13 “The freedom and extent of human commerce depend entirely on a fidelity with regard to promises,” said David Hume in 1739. Two and a half centuries later, Kenneth Arrow said, “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time.” As a result, “much of the economic backwardness in the world can be explained by a lack of mutual confidence.”14 A well-designed market has a range of mechanisms to build mutual confidence.

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Léon Walras took the first big step toward answering this question in the late nineteenth century, formulating a mathematical model of an economy in which, for each good or service in the economy, there was an equation representing the balance of supply and demand. Walras left unanswered the key question of whether it was possible for supply to equal demand simultaneously in every market. This stayed unresolved until 1954, when Kenneth Arrow and Gerard Debreu, in a densely mathematical article that was to earn them Nobel Prizes, “confirmed the internal logical consistency of Smith’s and Walras’s model of the market economy” (to quote the Nobel committee).11 One of the supreme achievements of economics, the Arrow-Debreu theory identifies certain precise conditions under which individuals’ separate decisions add up to a consistent overall outcome.

A Beautiful Mind
by Sylvia Nasar
Published 11 Jun 1998

” — Brian Hayes, The Sciences “A must-read with something for everyone.” — Keith Devlin, New Scientist “Fascinating, complicated, and studious.” — Mark H. Fleisher, JAMA “A deeply moving love story, an account of the centrality of human relationships.” — Richard Wyatt and Kay Jamison, The New England Journal of Medicine “A gripping narrative.” — Kenneth Arrow, Nobel Laureate, The Times Higher Education Supplement Simon & Schuster Paperbacks A Division of Simon & Schuster, Inc. 1230 Avenue of the Americas New York, NY 10020 www.SimonandSchuster.com Copyright © 1998 by Sylvia Nasar All rights reserved, including the right of reproduction in whole or in part in any form.

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At that point, the military was the only government sponsor of pure research in the social sciences — a role later taken over by the National Science Foundation — and it bankrolled a great many ideas that turned out to have little true relevance for the military but a great deal for other endeavors. RAND attracted a younger generation of mathematically sophisticated economists who embraced the new methods and tools, including the computer, and attempted to turn economics from a branch of political philosophy into a precise, predictive science. Take Kenneth Arrow, one of the early Nobel Laureates in economics. When Arrow came to RAND in 1948, he was an unknown youngster.17 His famous thesis, written in the as-yet-unfamiliar language of symbolic logic, was a product of a RAND assignment. The assignment was to demonstrate that it was okay to apply game theory, which is formulated in terms of individuals, to aggregations of many individuals, namely nations.

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By the time Nash arrived, a “trust” of game theory research had grown up at RAND including such game theorists as Lloyd S. Shapley, J. C. McKinsey, N. Dalkey, F. B. Thompson, and H. F. Bohnenblust, such pure mathematicians as John Milnor, statisticians David Blackwell, Sam Karlin, and Abraham Girschick, and economists Paul Samuelson, Kenneth Arrow, and Herbert Simon.13 Most of the RAND military applications of game theory concerned tactics. Air battles between fighters and bombers were modeled as duels.14 The strategic problem in a duel is one of timing. For each opponent, having the first shot maximizes the chance of a miss. But having the better shot also maximizes the chance for being hit.

The Inner Lives of Markets: How People Shape Them—And They Shape Us
by Tim Sullivan
Published 6 Jun 2016

As with Samuelson, they focused on questions that were central to the development of economics as a science, but not necessarily for the reasons you might think—not just because they intended to advance the field of economics but because they were looking for challenging problems to solve, and to solve them first. It turned out that some of the fundamental building blocks of the discipline provided exactly the tough nuts they were after. One of the foremost among this postwar group was Kenneth Arrow, a brilliant mathematical mind in search of hard economics problems to solve. And he helped solve some of the hardest, all of which related in one way or another to Radford’s experiences in Stalag VII-A. But there is a difference between Radford’s observation of a particular market and what Arrow and his colleagues accomplished: the mathematical modeling of the general idea of a market.

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At the Toulouse School of Economics, where he has worked since 1996, graduate students joked that there must be a dozen little Jean Tiroles hidden in his basement writing the manuscripts, given the rate at which they appeared. Tirole wrote the book, quite literally, on industrial organization, the field within economics that aims to understand why markets are organized as they actually appear—why some industries consist of two dominant players (like Coke and Pepsi), while others more closely resemble Kenneth Arrow’s perfectly competitive ideal. You can only confront these questions if you consider the strategic choices companies like Microsoft or Coke might make to try to ensure they’re the only game in town, and the regulatory decisions an enlightened government might choose to make sure they aren’t. Tirole’s Theory of Industrial Organization remains the standard reference on the topic, despite being published nearly three decades ago.

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We’d also like to thank Benjamin Adams, our editor, and his colleagues at PublicAffairs, including Melissa Veronesi, our project manager, Kate Mueller, our copyeditor (who saved us from more than one embarrassing mistake), and Tony Forde, our publicist. We’d also like to thank Iain Campbell, our publisher in the United Kingdom, and his team at John Murray. We’d like to thank the following people who read the manuscript, or parts of it, or who graciously agreed to talk with us about ideas in the book: George Akerlof, Kenneth Arrow, Pierre Azoulay, Seth Dicthick, Frank Dobbin, Ben Edelman, Teppo Felin, Ronald Findlay, Todd Fitch, Margo Beth Fleming, Walter Frick, Joshua Gans, Ed Glaeser, Andrei Hagiu, Matthew Kahn, Judd Kessler, Barbara Kiviat, Scott Kominers, Ilyana Kuziemko, Kevin Li, Roger Martin, Eric Maskin, Dan McGinn, Ben Olken, Joel Podolny, Jeff Pontiff, Canice Prendergast, Paul Romer, Marc Rysman, Peng Shi, Paolo Siconolfi, Paulo Soumaini, Michael Spence, Kendall Sullivan, Morgan Sword, Steve Tadelis, Jonas Vlachos, Ania Wieckowski, and Feng Zhu.

Capital Ideas: The Improbable Origins of Modern Wall Street
by Peter L. Bernstein
Published 19 Jun 2005

The investor’s sensitivity to changing wealth and risk is known as the utility function, and the elements that determine the shape of the utility function are obscure. As Roy put it, “A man who seeks advice about his actions will not be grateful for the suggestion that he maximize his expected utility.”19 The complexity of the subject has attracted the attention of some of the best thinkers of our time, including Kenneth Arrow, a Nobel Prize-winner, and Oskar Morgenstern and John von Neumann, famous for having invented game theory. But this is not the only feature of the Markowitz paradigm with controversial implications. The calculation of the Efficient Frontier is a task that would defy the abilities and capabilities of many investors, and even the capacities of many computers. so it is fair to ask whether the relationship between risk and return is as neat as Markowitz postulates.

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But, of course, not all that is beautiful in science need also be practical. And surely, not all that is practical in science is beautiful. Here we have both.”19 Although it bears an unmistakable resemblance to the Capital Asset Pricing Model, Merton’s theory has philosophical roots in the work of Kenneth Arrow and Gerard Debreu, both Nobel Prize winners. Arrow and Debreu describe a world in which everything is tradable, from the value of an education to the housewife’s ironing of the family sheets, and under an infinite variety of conditions, or “states of nature.” The continuous-time model provides a framework for converting such “pure” securities into a form that will permit them to be traded.

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He graduated from Berkeley in the class of 1963 with a degree in economics. While still a senior, he was fortunate enough to take Gerard Debreu’s graduate course sequences in statistics, economics, and mathematical economics. Debreu was already a distinguished scholar who would subsequently be awarded the Nobel Prize in economic sciences for his work with Kenneth Arrow in these areas. Rosenberg went on to earn a master’s degree in mathematical economics and econometrics at the London School of Economics. He continued to pursue those studies while working for his doctorate at Harvard. Econometrics in particular caught his fancy; this was the field of study that Alfred Cowles had helped to launch and that brings sophisticated statistical techniques to the measurement of economic variables.

Misbehaving: The Making of Behavioral Economics
by Richard H. Thaler
Published 10 May 2015

Briefly stated, the argument is that even if people are not capable of actually solving the complex problems that economists assume they can handle, they behave “as if” they can. To understand the “as if” critique, it is helpful to look back a bit into the history of economics. The discipline underwent something of a revolution after World War II. Economists led by Kenneth Arrow, John Hicks, and Paul Samuelson accelerated an ongoing trend of making economic theory more mathematically formal. The two central concepts of economics remained the same—namely, that agents optimize and markets reach a stable equilibrium—but economists became more sophisticated in their ability to characterize the optimal solutions to problems as well as to determine the conditions under which a market will reach an equilibrium.

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Rationalists and behavioralists were to come together and try to sort out whether there was really any reason to take psychology and behavioral economics seriously. If anyone had been laying odds on who would win this debate, the home team would have been considered the strong favorite. The behavioral team was led by Herb Simon, Amos, and Danny, and was buttressed by Kenneth Arrow, an economic theorist who, like Paul Samuelson, deserved to win several Nobel Prizes in economics, though he had to settle for just one. The younger behavioral crowd, which included Bob Shiller, Richard Zeckhauser, and me, were given speaking roles as discussants. The rationalists’ team was formidable, with Chicago locals serving as team captains: Robert Lucas and Merton Miller.

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The economists thought that fairness was a silly concept mostly used by children who don’t get their way, and the skeptics just brushed aside our survey data. The Ultimatum Game experiments were a bit more troubling, since actual money was at stake, but of course it wasn’t all that much money, and all the usual excuses could be raised. The talk that gave me the most to think about, and the one I have gone back to read again most often, was by Kenneth Arrow. Arrow’s mind goes at light speed, and his talks tend to be highly layered fugues, with digressions inserted into digressions, sometimes accompanied by verbal footnotes to obscure scholars from previous centuries, followed by a sudden jump up two or three levels in the outline that he has in his head.

Termites of the State: Why Complexity Leads to Inequality
by Vito Tanzi
Published 28 Dec 2017

I had also spent another two years working for a CongressionalPresidential Commission (the Outdoor Recreation Resources Review Commission) that was tasked with determining the optimal use for the extensive public land owned by the US federal government. This commission produced several reports that set the stage for the future use of public land. During the years I spent at Harvard, in the first half of the 1960s, some of the leading economists of the time – Paul Samuelson, Robert Solow, Simon Kuznets, Kenneth Arrow, Franco Modigliani, Wassily Leontief, Kenneth Galbraith, Robert Dorfman, Alvin Hansen, Otto Eckstein, James Duesenberry, and several others – were in the Boston area, either at Harvard or at MIT. Richard Musgrave, who was then considered the leading public finance economist in the United States, would come to Harvard a little later and would be the second reader of my doctoral dissertation; I thus completed my public finance preparation under a third refugee from Nazi Germany.

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The work of most, though not all, of the aforementioned economists reflected an optimistic view that the government could do more and better than it had been doing in the past in the economic sphere, and that, with its action, it could improve the lives and the welfare of many citizens. Some of the aforementioned economists, especially Kenneth Arrow, had raised some fundamental questions about the difficulties that would need to be dealt with, if the government increased its economic role, to promote social welfare. The identification of what was the “public interest” or “social welfare” was a particularly difficult enterprise. Nevertheless, the optimistic view had become the prevailing view in Cambridge, Massachusetts, both at Harvard and at MIT.

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These works included the writings 8 Termites of the State of Adam Smith and of other famous philosophers and political scientists of the past, such as Thomas Hobbes, John Locke, J. J. Rousseau, Edmund Burke, and Alexis de Tocqueville, and also of classical French economists of the nineteenth century, as well as more recent works by F. A. Hayek, John Maynard Keynes, Richard Musgrave, Milton Friedman, James Buchanan, Kenneth Arrow, Amartya Sen, Robert Nozick, and others. The aforementioned works were always illuminating, but I had the feeling that today’s world had become different from that of the past, especially, but not only, because of the growth in the frequency and importance of negative externalities, and because of the impact of globalization and new technological developments on economic activities and on the power of national states.

Economists and the Powerful
by Norbert Haring , Norbert H. Ring and Niall Douglas
Published 30 Sep 2012

In reality, the market will not necessarily find this equilibrium because there is always trading going on at the wrong prices. This trading at offequilibrium prices can take the economy away from the equilibrium and there is no guarantee that equilibrium will be reached or that it will be optimal in some sense (Screpanti and Zamagni 1993). Nobel Memorial Prize winners Kenneth Arrow and Gerard Debreu later were able to prove that under certain conditions a unique equilibrium did exist (Arrow and Debreu 1954), with these conditions later taking the unwieldy moniker of the “Sonnenschein–Mantel–Debreu theorem” better known to postgraduate students as the “SMD conditions.” However, this proof of equilibrium should rather have been recorded as proof of its non-existence because the conditions are extremely demanding and hardly ever fulfilled in reality.

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According to Mirowski (2002), it was RAND who pushed the Commission to abandon (unsuccessful) efforts to find empirical evidence for neoclassical theory in favor of an THE ECONOMICS OF THE POWERFUL 23 abstract axiomatic approach pursued by RAND scholar and later Nobel Memorial Prize laureate Kenneth Arrow, against substantial resistance from its members. In 1953, Oskar Morgenstern proposed in a letter that it should be a requirement for membership in the Econometric Society (Econometrics is the statistical study of economic behavior) that a researcher had come “in one way or another in actual contact with data.”

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The other major influence of RAND on economic doctrine was through its support of the rational choice movement from the very beginning, which laid the foundation for the strictly individualistic approach of the modern economic mainstream. Several of the canonical works of the rational choice approach to economics and politics were devised either at RAND or in close association with its researchers. The most notable one is Kenneth Arrow’s Social Choice and Individual Values (1951), containing his famous impossibility theorem. It is one of the most often cited modern texts in economics. Other examples are An Economic Theory of Democracy (1957) by Arrow’s student Anthony Downs and Mancur Olson’s The Logic of Collective Action (1965).

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities
by Mancur Olson

In distributional struggles, by contrast, none can gain without others losing as much or (normally) more, and this can generate resentment. Thus when special-interest groups become more important and distributional issues accordingly more significant, political life tends to be more divisive. Moreover, as Dennis Mueller,' I building on the work of Kenneth Arrow,'-' has shown, the increased emphasis on distributional issues due to accumulations of special-interest groups can also increase the likelihood that a democratic political system can repudiate its prior choices, even if all the individuals in the electorate have the same preferences as before-it can (for some reasons that cannot be explained briefly or without technical language) encourage intransitive or irrational and cyclical political choices.

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Fifth, an adequate macroeconomic theory must be consistent with booms as well as with busts-with periods of unusual prosperity and with periods of underutilized productive capacity. It must be consistent with what we loosely call the "business cycle," although the absence of strong regularities in the length and extent of periods of prosperity and recession suggests that "business fluctuations" would perhaps be a better term. In other words, as Kenneth Arrow points out,' 2 the theory must be consistent with the observation that neither depressions nor fullemployment levels of production appear to sustain themselves indefinitely. Sixth, the theory should be able to explain, without ad hockery, the really dramatic differences across societies and historical periods in the nature of the macroeconomic problem.

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See also Harvey Leibenstein on Xefficiency, Inflation, Income Distribution and X-Efficiency Theory (London: Croom Helm; New York: Harper and Row, Barnes and Noble, 1980). 10. To the best of my recollection, in a guest lecture at Princeton University in the 1960s. 11. See Dennis C. Mueller's concluding essay in the book he edited on The Political Economy of Growth (New Haven: Yale University Press, 1983). 12. Kenneth Arrow, Social Choice and Individual Values, 2d ed. (New Haven: Yale University Press, 1963). For a more accessible proof of Arrow's theorem and a survey of related issues, see Dennis Mueller, Public Choice (Cambridge: At the University Press, 1979). 13. See, for example, Morris Fiorina, "The Decline of Collective Responsibility in American Politics," Daedalus 109 (Summer 1980):25-46; this issue has the title The End of Consensus.

Anarchy State and Utopia
by Robert Nozick
Published 15 Mar 1974

At an arbitrarily given set of prices, a producer may find it profitable to offer an infinite supply; the realization of his plans will, of course, require him to demand at the same time an infinite amount of some factor of production. Such situations are of course incompatible with equilibrium, but since the existence of equilibrium is itself in question here, the analysis is necessarily delicate.” Kenneth Arrow, “Economic Equilibrium,” International Encyclopedia of the Social Sciences, vol. 4, p. 381. 3 See John Rawls, A Theory of Justice (Cambridge, Mass.: Harvard University Press, 1971), chap. 9, sect. 79, “The Idea of a Social Union,” and Ayn Rand, Atlas Shrugged (New York: Random House, 1957), pt.

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bu Such risks could not be insured against for every project. There will be different estimates of these risks; and once having insured against them there will be less incentive to act fully to bring about the favorable alternative. So an insurer would have to watch over or monitor one’s activities to avoid what is termed the “moral hazard.” See Kenneth Arrow, Essays in the Theory of Risk-Bearing (Chicago: Markham, 1971). Alchian and Demsetz, American Economic Review (1972), pp. 777-795, discuss monitoring activities; they arrive at the subject through considering problems about estimating marginal product in joint activities through monitoring input, rather than through considerations about risk and insurance.

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Corresponding to the different decision criteria discussed by decision theorists are different principles of institutional design. The talk of designing institutions so that bad men at their head can do little harm, and of checks and balances, can be interpreted as prompted by a minimax principle, or, more accurately, by minimax considerations built into a less stringent principle. [See Kenneth Arrow and Leonid Hurwicz, “An Optimality Criterion for Decision-Making Under Ignorance,” in Uncertainty and Expectations in Economics, ed. C. F. Carter and J. L. Ford (Clifton, N.J.: Augustus M. Kelley, 1972), pp. I-II.] Everyone who has considered the matter agrees that the maximax principle, which chooses the action that has of its many possible consequences one which is better than any possible consequence of any other available action, is an insufficiently prudent principle which one would be silly to use in designing institutions.

The Economics of Enough: How to Run the Economy as if the Future Matters
by Diane Coyle
Published 21 Feb 2011

The adjustments made in these early estimates fall short of the ideal—improvements in human capital due to improved health are left out, as are losses of fish stocks—but it is certainly the avenue to pursue. Kirk Hamilton and Michael Clemens (1999) and the World Bank (2006) estimated comprehensive investment in the period 1970–2000 in over 120 countries. Their analysis is inevitably preliminary. Still, it is a start. Kenneth Arrow and his coauthors (2007) also used estimates of comprehensive wealth and concluded that economic development had gone backward in a large number of developing countries in the years 1970–2000. China was one exception; other countries, including India and Pakistan, had seen total comprehensive wealth rise, but not in per capita terms because of their high rates of population growth.

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James Buchanan, one of the originators of public choice theory, put it this way: he noted that the focus in economics tends to be on choices by individuals, whereas seeing the economy through the lens of contracts between people is equally illuminating.8 Another conclusion is therefore that the “market versus government” opposition is not a fruitful way to think about what institutional framework for the economy is best, and we should also consider households, firms, and perhaps other organizational types such as co-ops or residents’ associations. Kenneth Arrow said: “Truly among man’s innovations, the use of organization to accomplish his ends is among both his greatest and his earliest.”9 The literature of institutional economics is rich with examples of how collective arrangements of many kinds evolve in different contexts. Two key aspects of the context are the regulatory framework and the availability of information and in particular asymmetries of information—things that some people do know and others can’t know.

…

Indeed, there seems to be a pattern of swings from periods of inequality and social tension, coinciding with innovation and a dynamic economy (the 1870s, 1920s, 1960s) to periods of sobriety and cohesion (1890s, 1930s, 1970s). If there is a “trilemma,” which means only two of the three elements of social welfare are attainable at the same time, this chimes with a wider “impossibility theorem” in social welfare theory. Famously, in 1951 economist Kenneth Arrow asked whether individual tastes and preferences could be aggregated in a way that was logically consistent, obeying a set of seemingly innocuous conditions—and concluded that the answer was “no.” Among the assumptions were that citizens had free choice and a range of credible alternatives before them.

Green Philosophy: How to Think Seriously About the Planet
by Roger Scruton
Published 30 Apr 2014

But they have also created moral hazards that seem fully to justify the anger and scorn that so many people (and not only those on the left) feel towards the unbridled capitalist economy. By separating ownership from control, and insulating both the shareholder and the director from the full costs of their mistakes, these legal devices encourage risk-taking beyond anything that the market would otherwise allow. In the words of Kenneth Arrow, ‘the law steps in and forces a risk shifting not created in the market-place’.193 Hence in the last two years we have seen bankers carelessly destroying the savings entrusted to them, and paying themselves vast bonuses at the very moment of doing so. Whatever the adverse effects of limited liability and shareholding, however, we should not take them as a reason for welcoming the intrusion of the state.

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But see Chapter 10 below, where I discuss the work of Robert Putnam, documenting the decline of volunteers in America. 187 Such situations have been explored in the various ‘impossibility theorems’ in social choice theory, for example those of K. J. Arrow and Amartya Sen. For a brief summary see entries for Arrow’s Theorem and Paretian Liberal in Roger Scruton, The Palgrave Macmillan Dictionary of Political Thought, London, 2007. For a full account of Arrow’s Theorem see Kenneth Arrow, Social Choice and Individual Values, New Haven, 1990. 188 Hence the proliferation, under Labour governments in Britain, of quasi-autonomous non-government organizations (quangos), through which government appointees expropriate one by one the affairs of self-regulating communities. As of 23 May 2010 it was reported that there were 1,162 such organizations, employing more than 100,000 people, some with salaries as high as £624,000, at a total cost to date of £64 billion.

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David, ‘The Historical Origins of “Open Science”: An essay on Patronage, Reputation and Common Agency Contracting in the Scientific Revolution’, Capitalism and Society, November 2008. See www.bepress.com/cas/vol3/iss2/art5 for download of the full article, and www.bepress.com/cas/announce/20081103 for the whole issue that contains Kenneth Arrow’s ‘Discussion’ of this article. See also Richard R. Nelson, ‘The Market Economy, and the Scientific Commons’, working paper to the Laboratory of Economics and Management at Sant’Anna School of Advanced Studies in Pisa, www.lem.sssup.it/WPLem/2003-24.html. 370 See Lee Lane et al., ‘Institutions for Developing New Climate Solutions’, Proceedings of the International Seminars on Planetary Emergencies, 42nd Session, 19 August 2010. 371 Cf. the notorious patenting of basmati rice by RiceTec.

Plenitude: The New Economics of True Wealth
by Juliet B. Schor
Published 12 May 2010

If we continue to compromise atmosphere, climate, water, and other species, we jeopardize life itself. In 2004 what many had hoped would be a breakthrough paper was published by The Journal of Economic Perspectives. A collaboration of some of the world’s most distinguished environmental economists and ecologists, such as Kenneth Arrow, Partha Dasgupta, Lawrence Goulder, Paul Ehrlich, Stephen Schneider, and Gretchen Daily, asked a question that had been off the table since the debate about limits: “Are we consuming too much?” This type of collaboration itself was rare (perhaps a first). The paper stayed within the standard economic framework that takes human well-being as the ultimate goal, and asked if we are consuming too much either to reproduce today’s levels of well-being into the future or to maximize well-being.

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The New York Times Magazine, May 21. Available from http://www.nytimes.com/2009/05/24/magazine/24labor-t.html (accessed September 7, 2009). Daily, Gretchen C. 1997. Nature’s services: Societal dependence on natural ecosystems. Washington, D.C.: Island Press. Daily, Gretchen C., Tore Soderqvist, Sara Aniyar, Kenneth Arrow, Partha Dasgupta, Paul R. Ehrlich, Carl Folke, et al. 2000. The value of nature and the nature of value. Science 289 (5478) (July 21): 395-96. Daly, Herman E. 2005. Economics in a full world. Scientific American 293 (3) (September): 100-107. ———. 1996. Beyond growth: The economics of sustainable development.

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It
by Stephen Davis , Jon Lukomnik and David Pitt-Watson
Published 30 Apr 2016

• Give explicit consideration to human desires, how they affect our behavior, and how this in turn affects economic decisions. • Focus on an understanding of institutions, the checks and balances that regulate economic relations. A market of buyers and sellers needs some degree of trust if it is to thrive. The economist and Nobel laureate Kenneth Arrow pointed out that “ethical elements enter in some measure into every contract; without them no market could function.” He also noted that “trust and similar values, loyalty or truth telling, are … not commodities for which trade on the open market is technically possible or even meaningful.”44 In finance, we would do well to note this.

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As leading participants in the corporate governance movement that encouraged some of these actions, the authors themselves must accept some of the blame for encouraging this form of contracting. 42. Smith, Wealth of Nations, bk. 5, chap 1. 43. Alfred Marshall, Principles of Economics (Macmillan, 1946), 303. 44. Kenneth Arrow, Information and Economic Behaviour (Federation of Swedish Industries, 1973), 24. For discussion, see O. Williamson, The Economic Institutions of Capitalism (Free Press, 1985), 405. 45. John R. Hicks, “ ‘Revolutions’ in Economics,” in Spiro J. Latsis, ed., Method and Appraisal in Economics (Cambridge University Press, 1976), 207–18.

A Little History of Economics
by Niall Kishtainy
Published 15 Jan 2017

Often we’re only really made aware of the issue of economic coordination when things go wrong: when a firm making computer components goes out of business and you discover that the laptop you want is out of stock. But under our noses something really rather extraordinary is going on, week in, week out. Most of the time the economy works well without anyone setting a timetable for it. Why isn’t it in constant chaos, then? In the 1950s a group of economists led by the American Kenneth Arrow (b. 1921) and the French-born Gérard Debreu (1921–2004) tried to answer the question. The basic theory of markets perfected by Alfred Marshall in the nineteenth century looked at supply and demand in a single market. The demand and supply for headphones depend on the price of headphones, those for oil on the price of oil.

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Economists are sometimes accused of not taking a strong position on the distribution of income. Some of them say that it’s better to be in a wealthy society where a few people are much richer than the rest, than in a poor one where we’re all equal but live on scraps. And a lot of modern economics is about efficiency rather than distribution. In Chapter 25 we met Kenneth Arrow and Gerard Debreu, who proved the First Welfare Theorem: under certain conditions markets are efficient in the sense that no resources are wasted. The problem is that many outcomes are efficient, including very unequal ones. They also proved something else. Suppose that out of the efficient outcomes there was one that society preferred, that with an even distribution of incomes.

The Case Against Education: Why the Education System Is a Waste of Time and Money
by Bryan Caplan
Published 16 Jan 2018

Students who value worldly success therefore strive to impress educators with their brilliance and industry—or at least avoid appalling us with their stupidity and sloth. Practical relevance makes little difference: you won’t use Shakespeare on the job, but without the right credentials, the job you crave will forever elude you. Basics of Signaling Signaling is no fringe idea. Michael Spence, Kenneth Arrow, Joseph Stiglitz, Thomas Schelling, and Edmund Phelps—all Nobel laureates in economics—made seminal contributions.13 The Nobel committee hailed Michael Spence’s work on signaling as his prize-winning discovery and added: An important example is education as a signal of high individual productivity in the labor market.

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Signaling=100% signaling. The most egregious straw man treats signaling as all-or-nothing. Critics then “refute” signaling by pointing out that schools teach reading, writing, and arithmetic. What a devastating objection . . . to a version of the signaling model no one holds. Nobel Prize winner Kenneth Arrow anticipated and disavowed “100% signaling” way back in 1973: Perhaps I should make clear that I personally do not believe that higher education performs only a screening purpose. Clearly professional schools impart real skills valued in the market and so do undergraduate courses in the sciences.

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But so does an IQ test.28 Why should employers insist on a four-year degree if a three-hour exam is equally revealing?29 Firms that refused to test would pointlessly cull qualified applicants. The right lesson to draw is not that the signaling model is wrong, but that education signals more than intelligence. Most of the model’s friends learned this lesson long ago. Kenneth Arrow, as usual, knew it from the start. “Higher Education as a Filter” calls education a signal of ability, and explicitly states that ability depends on “socialization” as well as intelligence.30 Or as Peter Wiles succinctly said one year later, “What employers need is intelligent conformism, or great independence and originality within a narrow range.”31 Signaling shouldn’t take years.

Radical Uncertainty: Decision-Making for an Unknowable Future
by Mervyn King and John Kay
Published 5 Mar 2020

In addition to his principle of comparative advantage, David Ricardo developed a model of economic rent: the amount received by the supplier of an input in excess of the amount necessary to ensure its supply (many people in the sports and financial services industries would surely work there for lower rewards than they currently receive). It is no longer fashionable to tell a story with illustrative calculations in the manner of Smith and Ricardo. More formal mathematical expression is required, and sometimes the maths can be sophisticated. In the early 1950s, an American, Kenneth Arrow, and a Frenchman, Gerard Debreu, used fixed point theorems (drawn from the latest advances in topology) to prove, under certain assumptions, the existence and efficiency of an equilibrium of a competitive market economy. 9 But although their mathematics is complicated, the conclusions are not; the authors provided a clear statement of the conditions under which a decentralised economy could successfully match supplies and demands, and offered a further expression of the conditions under which that equilibrium might be in a certain sense efficient.

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In the nineteenth century, Leon Walras, a French economist working at the University of Lausanne, attempted to express in a system of equations the idea that the uncoordinated decisions of millions of people might produce aggregate outcomes that were not only coherent but efficient. 10 But Walrasian analysis only reached fruition when, as described in chapter 14 , new and powerful mathematical tools were applied to economics by Kenneth Arrow and Gerard Debreu. 11 For some devotees of laissez faire, this was the analysis they had been waiting for – a rigorous mathematical demonstration of the maxim that ‘you can’t buck the market’. Building on Walras, Arrow and Debreu envisaged a ‘grand auction’, to which consumers brought their demand curves, workers and resource owners their supply curves, and producers their technical capabilities.

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If you said ‘in that case I will have the fish’ you would violate the independence of irrelevant alternatives axiom (although with a little ingenuity you may be able to think up reasons for such a decision). Independence of irrelevant alternatives gained significance and prominence because the American economist Kenneth Arrow showed that most social and political decision rules, such as majority voting, produce preferences for the group that violate that requirement. 4 The Allais paradox noted in chapter 8 reflected violation of the independence axiom. Maurice Allais initially posed the following question: would you prefer an 11% probability of winning 100 million FF (otherwise nothing), or a 10% probability of winning 500 million FF and otherwise nothing?

The Wealth of Networks: How Social Production Transforms Markets and Freedom
by Yochai Benkler
Published 14 May 2006

Because no competitors are permitted into the market for copies of War and Peace, the publishers can price the contents of the book or journal at above their actual marginal cost of zero. They can then turn some of that excess revenue over to Tolstoy. Even if these laws are therefore necessary to create the incentives for publication, the market that develops based on them will, from the technical economic perspective, systematically be inefficient. As Kenneth Arrow put it in 1962, "precisely to the extent that [property] is effective, there is underutilization of the information." 7 Because welfare economics defines a market as producing a good efficiently only when it is pricing the good at its marginal cost, a good like information (and culture and knowledge are, for purposes of economics, forms of information), which can never be sold both at a positive (greater than zero) price and at its marginal cost, is fundamentally a candidate for substantial nonmarket production. 80 This widely held explanation of the economics of information production has led to an understanding that markets based on patents or copyrights involve a trade-off between static and dynamic efficiency.

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This insures optimal utilization of the information but of course provides no incentive for investment in research. In a free enterprise economy, inventive activity is supported by using the invention to create property rights; precisely to the extent that it is successful, there is an underutilization of information." Kenneth Arrow, "Economic Welfare and the Allocation of Resources for Invention," in Rate and Direction of Inventive Activity: Economic and Social Factors, ed. Richard R. Nelson (Princeton, NJ: Princeton University Press, 1962), 616-617. 8. Suzanne Scotchmer, "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives 5 (1991): 29-41. 9.

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He concluded that an altruistic blood procurement system is both more ethical and more efficient than a market system, and recommended that the market be kept out of blood donation to protect the "right to give." 31 Titmuss's argument came under immediate attack from economists. Most relevant for our purposes here, Kenneth Arrow agreed that the differences in blood quality indicated that the U.S. blood system was flawed, but rejected Titmuss's central theoretical claim that markets reduce donative activity. Arrow reported the alternative hypothesis held by "economists typically," that if some people respond to exhortation/moral incentives (donors), while others respond to prices and market incentives (sellers), these two groups likely behave independently--neither responds to the other's incentives.

The Price of Inequality: How Today's Divided Society Endangers Our Future
by Joseph E. Stiglitz
Published 10 Jun 2012

At the time, it was still thought that there were major trade-offs between inequality and growth, and Jim Mirrlees was just then beginning his work on how one could design optimal redistributive taxes (work for which he would later receive the Nobel Prize). Another of my teachers at MIT (and then a fellow visitor at Cambridge in 1969–70) was Kenneth Arrow, whose work on information greatly influenced my thinking. Later, his work, paralleling my own, would focus on the impact of discrimination; how information, say about relative abilities, affects inequality; and the role of education in the whole process. A key issue that I touch upon in this volume is the measurement of inequality.

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Craig Romaine, “Preserving Monopoly: Economic Analysis, Legal Standards, and Microsoft,” George Mason Law Review 4, no. 7 (1999): 617–1055. 38. See Microsoft’s annual report. 39. As the late Oxford professor and Nobel Prize winner John Hicks said, “The best of all monopoly profits is a quiet life.” J. R. Hicks, “Annual Survey of Economic Theory: The Theory of Monopoly,” Econometrica 1, no. 8 (1935). Kenneth Arrow pointed out that because monopolists restrict production, the saving they get from reducing costs is diminished. See Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton: Princeton University Press, 1962), pp. 609–26.

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Shaun Donovan, secretary of the Department of Housing and Urban Development, argues that “only about 10 or 15 percent of Americans who can still pay their mortgages try to walk away from their debt.” Ibid. The general theory of moral hazard was developed in the midsixties and seventies by Arrow, Mirrlees, Ross, and Stiglitz. See, e.g., Kenneth Arrow, Aspects of the Theory of Risk Bearing (Helsinki, Finland: Yrjö Jahnssonin Säätiö, 1965); James Mirrlees, “The Theory of Moral Hazard and Unobservable Behaviour I,” Review of Economic Studies 66, no. 1 (1999): 3–21; S. Ross, “The Economic Theory of Agency: The Principal’s Problem,” American Economic Review 63, no. 2 (1973): 134–39; and J.

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car
by Tim Harford
Published 15 Mar 2006

But even if they had believed that private markets were more efficient, this was neither here nor there in the 1940s: the postwar Labour government in Britain would have been content to live with some inefficiency if it meant a fairer society. But the old dilemma between efficiency and fairness was about to be shattered by a young New Yorker called Kenneth Arrow, who knew all about unfairness after watching helplessly as a teen-ager while his father lost his successful business and all his savings in the Great Depression. The desire for social justice stayed with Arrow, but intellectually he couldn’t just ignore the question of efficiency. The young economist set his logical mind to wrestling with the tension between the unerring efficiency of the free market and the imperative that some kind of fairness should prevail.

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So although this situation might seem more “fair,” there would be neither the tax revenue, nor the basketball game: the problem of the cappuccino sales tax all over again. So how is it reasonable to call a distribution of income “fair” when everybody concerned, both fans and player, would prefer the “unfair” outcome? Thanks to Kenneth Arrow, we now know that, when faced with a modern-day sports star like Tiger Woods, the solution is • 75 • T H E U N D E R C O V E R E C O N O M I S T to levy a one-time lump-sum tax of several million dollars on him. He would still have the incentive to earn money by playing golf, since he could not avoid the tax by playing less, as he would have to do in order to avoid a heavy income tax.

Radical Markets: Uprooting Capitalism and Democracy for a Just Society
by Eric Posner and E. Weyl
Published 14 May 2018

For example, if restoration of Louis XVI would cost Antoine his head, while execution of the king would cause a revolution that greatly harmed all three of our voters albeit at different levels, then letting Louis XVI go free is the best outcome from the standpoint of the three voters. Regular voting can’t pick this outcome. Kenneth Arrow, a student of Vickrey’s, Nobel Laureate, and perhaps the most eminent economist of the twentieth century, would later formalize and generalize this argument in his famous “impossibility theorem,” showing that no voting rule in which individuals rank candidates could overcome problems of this sort.16 Note, in contrast, that in market transactions it is possible for people to signal the intensity of their preferences for goods and services—by offering to pay more or less.

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Spanish mathematician and philosopher Ramon Llull had anticipated many of Condorcet’s later ideas in the thirteenth century, but his manuscripts were lost from the time of his life until the early part of the new millennium and thus he had very little impact on the subsequent development of ideas about voting. 16. Kenneth Arrow, Social Choice and Individual Values (Yale University Press, 1970) (originally published in 1951). 17. Witness, for example, the frequent citation of this theorem in a recent poll of economists asking whether an ideal voting system exists. IGM Forum, Primary Voting (March 7, 2016), http://www.igmchicago.org/surveys/primary-voting.

Rise of the Robots: Technology and the Threat of a Jobless Future
by Martin Ford
Published 4 May 2015

Many people would like to believe that health care is a normal consumer market: if only we could get insurance companies, and especially the government, out of the way and instead push decisions and costs onto the consumer (or patient), then we’d get innovations and outcomes similar to what we’ve seen in other industries (Steve Jobs might be mentioned again here). The reality, however, is that health care is simply not comparable to other markets for consumer products and services, and this has been well understood for over half a century. In 1963, the Nobel laureate economist Kenneth Arrow wrote a paper detailing the ways in which medical care stands apart from other goods and services. Among other things, Arrow’s paper highlighted the fact that medical costs are extremely unpredictable and often very high, so that consumers can neither pay for them out of ongoing income nor effectively plan ahead as they might for other major purchases.

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Both of these approaches, in various combinations, are used successfully by other advanced countries. The bottom line is that a pure “free market” approach in which we cut government out of the loop and expect patients to operate like consumers shopping for groceries or smart phones is never going to work. As Kenneth Arrow pointed out over fifty years ago, health care is simply different. This is not to say that there are no significant dangers associated with either approach. Both strategies rely on regulators to either control premiums or set the prices paid to providers. There is an obvious risk of regulatory capture; powerful companies or industries may exert influence that bends government policy in their favor.

Deaths of Despair and the Future of Capitalism
by Anne Case and Angus Deaton
Published 17 Mar 2020

Or by our own comparison, the cancer that used to be confined to a small healthcare system has metastasized all over the economy. Why Is Healthcare So Difficult? The financing and organization of healthcare is difficult everywhere, not just in the United States. One remedy for most goods and services, but that is no remedy for healthcare, is to leave it to the market. Kenneth Arrow, one of the greatest economists of the twentieth century, proved the master theorems of economics that tell us what the market can and cannot do, and under what circumstances. Arrow’s theorems give a more precise account of the arguments made long ago by Adam Smith. It is no accident that Arrow also wrote the key paper in health economics,50 explaining why a market solution for healthcare would be socially intolerable.

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Healthcare The generally powerful arguments for the social benefits of free markets do not apply to healthcare.7 Unregulated markets for health are not socially beneficial, and regulated markets can work well; in Britain, NICE appears to have resisted the political pressures that could have either closed it or turned it into a magnet for rent seekers.8 America should follow other rich countries in providing universal insurance and in controlling healthcare costs; the former is important, and the latter even more so. America currently has the worst of both worlds, where government interference, instead of controlling costs, creates opportunities for rent-seeking that inflate costs. It is not possible for an unregulated market to provide a socially acceptable degree of coverage; as Kenneth Arrow noted long ago, “The laissez-faire solution for medicine is intolerable.”9 Some amount of compulsion is required, as are subsidies for those who cannot pay. Reforms that deny those facts are doomed. While there are many difficulties, there is a hugely positive aspect to a better healthcare system, at least in principle.

Human Compatible: Artificial Intelligence and the Problem of Control
by Stuart Russell
Published 7 Oct 2019

The nineteenth-century British logician and economist William Stanley Jevons (also the inventor of an early mechanical computer called the logical piano) argued in 1871 that interpersonal comparisons are impossible:15 The susceptibility of one mind may, for what we know, be a thousand times greater than that of another. But, provided that the susceptibility was different in a like ratio in all directions, we should never be able to discover the profoundest difference. Every mind is thus inscrutable to every other mind, and no common denominator of feeling is possible. The American economist Kenneth Arrow, founder of modern social choice theory and 1972 Nobel laureate, was equally adamant: The viewpoint will be taken here that interpersonal comparison of utilities has no meaning and, in fact, there is no meaning relevant to welfare comparisons in the measurability of individual utility. The difficulty to which Jevons and Arrow are referring is that there is no obvious way to tell if Alice values pinpricks and lollipops at −1 and +1 or −1000 and +1000 in terms of her subjective experience of happiness.

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A standard text on sequential decisions under uncertainty: Martin Puterman, Markov Decision Processes: Discrete Stochastic Dynamic Programming (Wiley, 1994). 46. On axiomatic assumptions that justify additive representations of utility over time: Tjalling Koopmans, “Representation of preference orderings over time,” in Decision and Organization, ed. C. Bartlett McGuire, Roy Radner, and Kenneth Arrow (North-Holland, 1972). 47. The 2019 humans (who might, in 2099, be long dead or might just be the earlier selves of 2099 humans) might wish to build the machines in a way that respects the 2019 preferences of the 2019 humans rather than pandering to the undoubtedly shallow and ill-considered preferences of humans in 2099.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

On the 4th of July 2012, the ATLAS and CMS experiments at CERN’s Large Hadron Collider discovered the Higgs boson, the elementary particle that explains why particles have mass. It was, and will be, one of the most important scientific discoveries of the century. 11Some of the early trailblazers who combined the study of complexity theory with economics include, Kenneth Arrow (economist), Philip Anderson (physicist), Larry Summers (economist), John Holland (physicist), Tom Sargent (economist), Stuart Kauffman (physicist), David Pines (physicist), José Scheinkman (economist), William Brock (economist) and of course, W. B. Arthur (economist), who coined the term complexity economics and has been largely responsible for its initial growth and exposure to mainstream academia. 12Knightian uncertainty is an economic term that refers to risk.

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The rule is based on three factors: (i) Targeted versus actual inflation levels; (ii) Full employment versus actual employment levels; (iii) The short-term interest rate appropriately consistent with full employment (Investopedia). Its mathematical interpretation is: r = p + 0.5y + 0.5(p - 2) + 2. Where, r = the federal funds rate, p = the rate of inflation, y = the percent deviation of real GDP from a target (Bernanke, 2015). 16Contract theory was first developed in the late 1960’s by Kenneth Arrow (winner of the 1972 Nobel prize in economics), Oliver Hart and Bengt R. Holmström. The latter two shared the Nobel prize in economics in 2016. 17 https://www.federalreserve.gov/econresdata/frbus/us-models-about.htm 18As per Turner, Monetary finance is defined as a fiscal deficit which is not financed by the issue of interest-bearing debt, but by an increase in the monetary base - i.e. of the irredeemable fiat non-interest-bearing monetary liabilities of the government/central bank.

Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann
Published 9 Sep 2019

Another challenge was the growing prestige and influence of Keynesian economics, which was skeptical of the kinds of economic remedies—direct regulation of the activities of corporations—that Berle and his allies had been advocating for decades. Probably the most important economics publication of the 1950s was a paper called “Existence of an Equilibrium for a Competitive Economy.” Using dozens of dense mathematical formulas, its authors, Kenneth Arrow and Gerard Debreu, endeavored to demonstrate that under the right economic conditions, prices will always find their natural level—which made their findings a far cry from Berle’s, Means’s, and Galbraith’s argument that it was a good idea for government to set prices. No one who was not an academic economist may have read the Arrow-Debreu article, but from 1948 on, millions of college students learned about economics from an introductory textbook by Arrow’s relative by marriage, Paul Samuelson, which presented Keynesian economic management as gospel and was highly skeptical of Berle-style planning (and, in later editions, specifically made fun of Galbraith for being an unrigorous popularizer).

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Not long afterward, he took up a senior position at Citigroup, his friend Sanford Weill’s firm, whose rise to the status of financial superpower he had helped from his government position. Summers succeeded Rubin as Treasury secretary, and it fell to him to complete the work on derivatives that Brooksley Born’s attack had made necessary. Summers was an academic economist, the scion of an economics royal family—the Nobel Prize winners Kenneth Arrow and Paul Samuelson were both his uncles. The inventors of modern derivatives were the kind of people for whom he had the greatest respect. “Larry thought I was overly concerned with the risks of derivatives,” Rubin, who had run the trading floor at Goldman Sachs and thought of himself as an expert on prudent assessment of risk, wrote in his memoir.

Finance and the Good Society
by Robert J. Shiller
Published 1 Jan 2012

But now such practitioners are so numerous—look at all the graduate programs in mathematical nance, or attend one of the Institute for Quantitative Research in Finance (Q Group) conferences—that they compete heavily against one another, thus bringing options prices closer to their fundamental values. Justifications for Derivatives Markets In a classic 1964 article, economic theorist Kenneth Arrow argued that a major source of economic ine ciency is the absence of markets for risks. 4 Financial theorist Stephen Ross made Arrow’s theory the raison d’être for options markets. In his 1976 article “Options and E ciency,” he argued that nancial options have a central place because an immense variety of useful complex contracts can be “ ‘built up’ as portfolios of simple options.”5 But in fact only a small fraction of our risks are traded in any derivatives markets.

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Legal and nancial advisers who are committed to serving their customers’ interests will easily see through such a sales pitch, and will in fact warn their clients away from it. If we move to a world in which people have access to better nancial advice, then the options market could move closer to the ideal market initially envisioned by theorists like Kenneth Arrow and Stephen Ross. The market might even expand further in its usefulness, by aligning itself more squarely with the real interests of real people. Options could be created that represent genuine, personally signi cant risks to individuals, like the risks of a decline in home prices or a decline in career incomes.

The Limits of the Market: The Pendulum Between Government and Market
by Paul de Grauwe and Anna Asbury
Published 12 Mar 2017

.* This is an example in which the introduction * Another effect of commercializing blood donation has been a drop in the quality of blood, since the blood donors now tend to come from lower income groups, people who  THE L IMI TS OF TH E MAR KET of financial incentives corrupts the nature of the act. Financial reward, an extrinsic motive, suppresses the sense of responsibility. The other school states that the triumph of the market does not necessarily lead to suppression of intrinsic motivation. A representative of this school is Kenneth Arrow, winner of the Nobel Prize in Economics in . In his view both motivations can coexist in a market system.10 Take the example of art. Today market mechanisms play a large role, perhaps the most significant role in the market for paintings. Top painters such as Luc Tuymans are millionaires. The extrinsic motivation to work as an artist is exceptionally high, but this does not necessarily mean that the intrinsic motivation is suppressed.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor
by John Kay
Published 24 May 2004

But to vote strategically, you must guess not just at the preferences of others, but at their own strategic behavior. Voting mechanisms have their own problems of incentive compatibility. Condorcet demonstrated two hundred years ago that majorities can easily be assembled for inconsistent proposals. Kenneth Arrow-coauthor of the Arrow-Debreu results-generalized this to an "impossibility theorem": no voting mechanism can derive consistent social preferences from conflicting views about how society should be organized. Arrow, who lives in California, must have recognized the practical force of his impossibility theorem as the lights flickered and faded.

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As Mankiw himself observes, quoting Paul Samuelson, the most successful of all writers of economics textbooks: "I don't care who writes a nation's laws, or crafts its advanced treaties, if I can write its economics textbooks." 23 (This is before Mankiw took a position in the Bush administration.) Current Policy Controversies ••••••••••••••••••••••••••••••••••••• But a majority of working economists-including the leaders of the neoclassical tradition, such as Kenneth Arrow and Paul Samuelsonwere, like most social scientists, predominantly liberal. Many economists found a means of reconciling their neoclassical economics with liberal sentiments in redistributive market liberalism, a doctrine described in a previous chapter and, as I noted there, popular with economists but with few other people.

The End of Alchemy: Money, Banking and the Future of the Global Economy
by Mervyn King
Published 3 Mar 2016

For over two hundred years, economists tried to formalise Smith’s proposition and discover under exactly what conditions a competitive market economy would allocate resources efficiently. In the nineteenth century, important contributions came from Frenchman Léon Walras, who taught in Lausanne, and Englishman Alfred Marshall, who taught in Cambridge. Then, in the early 1950s, two economists, Kenneth Arrow and Gerard Debreu, both working in America, finally produced a rigorous explanation of the invisible hand (for which they were subsequently awarded the Nobel Prize).47 They imagined a hypothetical grand auction held at the beginning of time in which bids are made for every possible good and service that people might want to buy or sell at all possible future dates.

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How could one explain this apparent paradox? Keynes was less than clear on this point, and it was his misfortune to write The General Theory some twenty years before economic theorists provided a rigorous framework within which it was possible to understand his intuition. As explained in Chapter 2, Kenneth Arrow and Gerard Debreu described how a grand auction could indeed equate supply and demand overall if, and only if, all of the markets for future goods and services were incorporated into the auction process. Self-evidently, that world is fictional – radical uncertainty means that many of the markets for future goods and services are simply missing.

Against Intellectual Monopoly
by Michele Boldrin and David K. Levine
Published 6 Jul 2008

The original theoretical argument was sketched by Allyn Young before the Second World War and developed in greater detail by Joseph Schumpeter during the war. The first formal treatment of the idea that competitive markets are intrinsically incapable of handling innovations can be found in writings by Kenneth Arrow and subsequently Karl Shell, published in the early and middle 1960s. In the second half of the 1980s, Robert Lucas, Paul Romer, and many followers used new analytical instruments to apply this P1: KNP head margin: 1/2 gutter margin: 7/8 CUUS245-07 cuus245 978 0 521 87928 6 May 21, 2008 16:55 Defenses of Intellectual Monopoly 159 point of view to the problem of economic development, creating a theory now known as the new growth theory.

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The conventional notion that ideas are a nonrivalrous public good is a major theme of Romer’s work (1986, 1990a, 1990b), and is reflected also in Lucas (1988). Variations on this theme in the setting of monopolistic competition can be found in the work of Grossman and Helpman (1991). These ideas build on the earlier ideas of Allyn Young (1928), and especially the work of Kenneth Arrow (1962), further developed by Karl Shell (1966, 1967). To give credit where it belongs, we should point out that Arrow’s original argument was meant to lead to the conclusion that R&D, because it produced a public good (nonrivalrous knowledge), ought to be financed by public expenditure. There is nothing in Arrow’s seminal paper, nor in his subsequent writings on the topic, that suggests he had in mind intellectual monopoly as a solution to the allocational inefficiency that he – in our view, incorrectly – detected in the production of knowledge.

The Accidental Theorist: And Other Dispatches From the Dismal Science
by Paul Krugman
Published 18 Feb 2010

Earth in the Balance Sheet: Economists Go for the Green Like most people who think at all about how much burden their way of life places on Spaceship Earth, I feel a bit guilty. But on Earth Day in 1997 my conscience was clearer than usual—and so were those of 2,500 other economists. A few months earlier, an organization called Redefining Progress enlisted five economists—the Nobel laureates Robert Solow and Kenneth Arrow, together with Harvard’s Dale Jorgenson, Yale’s William Nordhaus, and myself—to circulate an “Economists’ Statement on Climate Change,” calling for serious measures to limit the emission of greenhouse gases. To be honest, I agreed to be one of the original signatories mainly as a gesture of goodwill, and never expected to hear any more about it; but the statement ended up being signed by, yes, more than 2,500 economists.

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State
by Paul Tucker
Published 21 Apr 2018

The idea of a Pareto improvement is, nevertheless, useful because it captures the thought that if we can make some people better off (improve their well-being) without making anyone worse off, we should. Over the middle decades of the last century, economists pinned down the circumstances under which Adam Smith’s invisible hand can bring about efficiency in this sense. In their famous “welfare theorems,” Kenneth Arrow, Gerard Debreu, and Lionel McKenzie uncovered the ideal or abstract conditions under which a market economy (the price mechanism) would deliver an efficient allocation of resources, with no gains from trade—no potential Pareto improvements—left unexploited and, therefore, with everyone left with their well-being as high as possible given the original distribution of resources.

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If this can be accomplished in a way that reveals the General Will, all is well. More prosaically, if administrative power is to be delegated, we need a rigorous mechanism for determining a social welfare function that everyone can accept (chapter 3). In the middle of the twentieth century, however, Kenneth Arrow demonstrated that, analytically, it is impossible to square democracy, as opposed to dictatorship, with a series of apparently innocuous prerequisites for collective decision making, including consistency, the contemplation of all conceivable options, and a person’s choice between two options being unaffected by other options.10 This generalized a phenomenon identified two hundred years earlier by French political economist Nicolas de Condorcet: that individual preferences can be such that there is a majority for A over B and B over C, but also for C over A, leaving the electorate locked into a never-ending cycle.

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Fortified by a battery of further analytical “impossibility results” on collective decision making, this intellectual juncture caused degrees of panic and delight in different parts of the academy, as it seemed to show that democracy cannot be relied upon to track the people’s collective purposes. Here, it was said, was the basis for preferring constrained liberal democracy over democratic populism, and also for prioritizing choice via competitive markets over choice via politics given Kenneth Arrow’s parallel welfare theorems (chapter 3). Needless to say, democracy carried on oblivious. Maybe that was because we do not expect to have all conceivable options on the table when choices are made. Democracies try things out in the firm expectation that experience will reveal options that had been obscured or ignored.11 In that spirit, the less analytical variant of the voting conception of democracy sees it as a way of making fallible, for-the-time-being choices in the face of disagreement, with the prospect of those choices being revisited down the road in light of experience or swings in public opinion.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

This in turn piqued his interest in fundamental economic research, which led to his financial support toward the establishment of the commission, with an initial budget of $12,000. The Cowles Commission would become known for its leadership in economic thought and the incredible number of Nobel laureates it was to produce: Kenneth Arrow, Tjalling Koopmans, Milton Friedman, Herbert Simon, Lawrence Klein, James Tobin, Gerard Debreu, Franco Modigliani, and, of course, Harry Markowitz. “If you count the number of Nobel Prizes which have been given to people who were at the Cowles Commission … you might say ‘Oh, this must be a huge player cranking out thousands of dissertations, and two percent of them get to be Nobel Prizes.’

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In 1968, he started working jointly with Samuelson to extend Samuelson’s earlier research into the pricing of warrants, resulting in another publication (and another dissertation chapter) in 1969.21 In the fall of 1968, Merton gave his first academic seminar presentation at the inaugural MIT-Harvard Mathematical Economics seminar. The audience included future economics Nobel laureates Kenneth Arrow (who would win the prize in 1972) and Wassily Leontief (who would win in 1973). Merton continued his publication success even before completing his dissertation. In one paper, he tackled the important issue of the decision faced by every investor, known formally as the “portfolio selection problem”: deciding how much to consume today versus saving for tomorrow and allocating those savings between risky and risk-free investments (for example, buying Treasury bills), all the while trying to maximize lifetime utility or satisfaction.22 In another paper, published just after completing his dissertation, he examined the same problem using a more realistic “continuous-time” framework, in which prices are constantly changing.23 Merton’s experience and knowledge of the financial markets inspired many of the assumptions that were incorporated into his models: “Because I traded markets, I knew something about the idea that even if you were watching the [ticker] tape very, very close to it, it’s still the case that you couldn’t predict the next price.

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite
by Duff McDonald
Published 24 Apr 2017

“[More] often than not,” wrote Nohria in the same article as above, “managers are thrown into situations in which they must act quickly and without certainty. To quote economist Kenneth Arrow, in many situations, ‘we must simply act, fully knowing our ignorance of possible consequences.’” Likewise if the forecast calls for a 50 percent chance of rain, we must simply choose to take an umbrella or not, fully knowing our ignorance of possible weather. What Nohria is arguing is that the case method gives one the ability to choose how to proceed in a given situation. With all respect to Kenneth Arrow, most of us don’t need an economist to tell us that we don’t always know what’s going to happen next, and that we sometimes have to make a decision before we’d like to.

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On the other hand, there was this feeling of bewilderment that the lives of so many men should add up to no more than two simple columns.”28 The late Robert Bellah, an influential sociologist and moral philosopher, points to flaws in rational choice theory, which originated at the RAND Corporation, found support from the Ford Foundation, and an enthusiastic practitioner in Robert McNamara, as the sources of McNamara’s failure. The theory, which assumes that social life can be explained as the outcome of rational choices by individual actors, found an early foothold in economics with Kenneth Arrow’s 1951 book, Social Choice and Individual Values, and it remains the dominant economic idea at the University of Chicago. But the theory didn’t come from economics departments. It originated at the RAND Corporation in response to the desire of policy makers to mathematically model the decisions the Soviet Union might make during the Cold War.

Economics Rules: The Rights and Wrongs of the Dismal Science
by Dani Rodrik
Published 12 Oct 2015

Yet it was the price system, not any central authority, that managed to coordinate their actions so that the pencil would end up in the hands of the consumer.3 Compared to Adam Smith’s and Milton Friedman’s explications, the First Fundamental Theorem itself entails a logic that is highly abstract and almost impenetrably dense. It was first formulated fully in the early 1950s by Kenneth Arrow and Gerard Debreu, using mathematics that was then unfamiliar to most economists.4 The first sentence of Debreu’s 1951 article gives a sense of the nature of the exercise: “The activity of the economic system we study can be viewed as the transformation by n production units and the consumption by m consumption units of l commodities (the quantities of which may or may not be perfectly divisible).”† Even though the Arrow and Debreu articles are foundational, having earned each economist a Nobel Prize, they are rarely read.

The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor
by David S. Landes
Published 14 Sep 1999

—John Kenneth Galbraith “David Landes’s new historical study of the emergence of the current distribution of wealth and poverty among the nations of the world is a picture of enormous sweep and brilliant insight. The sense of historical contingency does not detract from the emergence of repeated themes in the encounters which led to European economic leadership. The incredible wealth of learning is embodied in a light and vigorous prose which carries the reader along irresistibly.” —Kenneth Arrow “David Landes has written a masterly survey of the great successes and failures among the world’s historic economies. He does it with verve, broad vision, and a whole series of sharp opinions that he is not shy about stating plainly. Anyone who thinks that a society’s economic success is independent of its moral and cultural imperatives obviously has another think coming.”

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Crane Brinton, Alexander Gerschenkron, Richard Pipes, David and Aida Donald, Benjamin Schwartz, Harvey Leibenstein, Robert Fogel, Zvi Griliches, Dale Jorgensen, Amartya Sen, Ray Vernon, Robert Barro, Jeff Sachs, Jess Williamson, Claudia Goldin, Daniel Bell, Nathan Glazer, Talcott Parsons, Brad DeLong, Patrice Higonnet, Martin Peretz, Judith Vichniac, Stephen Marglin, Winnie Rothenberg). Nor should I forget the extraordinary stimulation I received from a year at the Center for Advanced Study in the Behavioral Sciences in Palo Alto. This was in 1957-58, and I was the beneficiary of a banner crop of economists: Kenneth Arrow, Milton Friedman, George Stigler, Robert Solow (four future winners of the Nobel Prize!). Get a paper past them, and one was ready for any audience. And then, in addition to those colleagues mentioned above, others at home and abroad. In the United States: William Parker, Roberto Lopez, Charles Kindleberger, Liah Greenfield, Bernard Lewis, Leila Fawaz, Alfred Chandler, Peter Temin, Mancur Olson, William Lazonick, Richard Sylla, Ivan Berend, D.

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Although he died shortly after his final trip, to ironworks in eastern and central France (1768-69), he was able to communicate his findings personally to a number of ironmasters and technicians, among them Ignace de Wendel. Part of his reports was published by his brother, also named Gabriel, as Voyages métallurgiques (1774-81)—Woronoff, L’industrie sidérurgique, p. 16. Also Harris, Essays in Industry, pp. 87-88. * This is what Michael Polanyi called tacit knowledge. Kenneth Arrow speaks of learning-by-doing. See Polanyi, The Tacit Dimension; Arrow, “The Economic Implications of Learning by Doing”; J. Howells, “Tacit Knowledge.” * The classic example is the request made of Richard Roberts, partner in the machine-making firm of Sharp, Roberts, by a group of Lancashire spinners to build a self-acting mule, that is, a machine that would bring the spindle carriage back to begin a new stretch-and-wind cycle.

The Penguin and the Leviathan: How Cooperation Triumphs Over Self-Interest
by Yochai Benkler
Published 8 Aug 2011

In comparing the two systems, the sociologist Richard Titmuss found that the British system had higher-quality blood (as measured by the likelihood of recipients contracting hepatitis from transfusions); less blood waste; and fewer blood shortages at hospitals (Titmuss also argued that the U.S. system was less equitable, because the rich exploited the poor and those who are desperate by buying their blood). Ethics aside, he concluded that a voluntary system was safer and more efficient than a market-based one. Predictably, Titmuss’s argument came under immediate attack from economists. Most famously, Nobel laureate Kenneth Arrow agreed that the U.S. blood system was flawed but refused to concede that it was because payments reduced the voluntary donations. Arrow admitted that some donors might be responding to moral or intrinsic incentives (giving blood because it’s the right thing to do), but a completely different group of people was responding to prices and market incentives (giving blood to make money).

Sabotage: The Financial System's Nasty Business
by Anastasia Nesvetailova and Ronen Palan
Published 28 Jan 2020

They believed, instead, in controlling the market. By whatever means possible. It would take a bit longer for mainstream economists to reach a broadly similar conclusion, albeit with polite refrain from the negative connotations associated with terms such as sabotage. The subsequent revision yielded two ideas. One was offered by Kenneth Arrow, the Nobel laureate. Inquiring into the nature of the market, Arrow argued that conventional models of the economy are flawed because they assume companies to be passive agents, where ‘each individual participant… is supposed to take prices as given and determine his choices as to purchase and sales accordingly’.6 In reality, he says, market participants are not passive at all; they try to turn the tables on the market and become not price takers, but price givers.

Trust: The Social Virtue and the Creation of Prosperity
by Francis Fukuyama
Published 1 Jan 1995

Indeed, in some high-trust relationships, parties do not even have to worry about maximizing profits in the short run, because they know that a deficit in one period will be made good by the other party later. In fact, it is very difficult to conceive of modern economic life in the absence of a minimum level of informal trust. In the words of the economist and Nobel laureate Kenneth Arrow, Now trust has a very important pragmatic value, if nothing else. Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people’s word. Unfortunately this is not a commodity which can be bought very easily.

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Sen further argues that users of the revealed-preference concept make use of a hidden assumption that preferences are self-interested, whereas people in reality also have a social side and typically act out of mixed motives. See “Behaviour and the Concept of Preference,” Economics 40 (1973): 214-259. 17F. Y. Edgeworth, as quoted by Amartya Sen in “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,” Philosophy and Public Affairs 6 (1977): 317-344. 18See Kenneth Arrow’s critique of the assumption of many economists that consumers are rational in their choices. Arrow, “Risk Perception in Psychology and Economics,” Economic Inquiry 20 (1982): 1-9. 19Hence, for example, we decide to buy a brand name like Kellogg’s Corn Flakes rather than the store brand because we assume, in the absence of detailed research, that it is of higher quality. 20See Becker (1976), p. 11. 21Mark Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness” American Journal of Sociology 91 (1985): 481-510. 22See World Bank, The East Asian Miracle (Oxford: Oxford University Press, 1993), pp. 304-316.

Hive Mind: How Your Nation’s IQ Matters So Much More Than Your Own
by Garett Jones
Published 15 Feb 2015

Acemoglu describes this best of all practical worlds as one in which a “political Coase theorem” holds. If the government is patient enough, the government and the private sector find a way to think win-win. Governments: Overcoming Temptation with Patience It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence. Kenneth Arrow, “Gifts and Exchanges”10 Most mathematical models of politics that focus on the long run include a role for patience. But political scientists and economists who create these models usually treat patience as a fixed value, something not up for debate. Acemoglu is one important exception to the rule; let’s look at another.

Thinking, Fast and Slow
by Daniel Kahneman
Published 24 Oct 2011

Allais’s Paradox In 1952, a few years after the publication of von Neumann and Morgenstern’s theory, a meeting was convened in Paris to discuss the economics of risk. Many of the most renowned economists of the time were in attendance. The American guests included the future Nobel laureates Paul Samuelson, Kenneth Arrow, and Milton Friedman, as well as the leading statistician Jimmie Savage. One of the organizers of the Paris meeting was Maurice Allais, who would also receive a Nobel Prize some years later. Allais had something up his sleeve, a couple of questions on choice that he presented to his distinguished audience.

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It is both much simpler and actually a stronger violation than the original paradox. The left-hand option is preferred in the first problem. The second problem is obtained by adding a more valuable prospect to the left than to the right, but the right-hand option is now preferred. sorely disappointed: As the distinguished economist Kenneth Arrow recently described the event, the participants in the meeting paid little attention to what he called “Allais’s little experiment.” Personal conversation, March 16, 2011. estimates for gains: The table shows decision weights for gains. Estimates for losses were very similar. estimated from choices: Ming Hsu, Ian Krajbich, Chen Zhao, and Colin F.

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown
by Philip Mirowski
Published 24 Jun 2013

The constant bewailing of the size of government is a win-win situation for neoliberals: they complain about recent growth of government, which they have themselves fostered, use the outrage they fan to “privatize” more functions, which leads only to more spending and a more intrusive infrastructure of government operations. The same dynamic is now at play in the further privatization and “rationalization” of European state health care systems. 86 Hayek, “The Moral Element in Free Enterprise.” 87 In this regard, the nominally left-liberal tradition of “social-choice theory” (Kenneth Arrow, Amartya Sen, John Rawls) by this criterion is virtually as neoliberal as the right-wing tradition of the “public-choice theory” of Buchanan and Tullock and the Virginia School. See Amadae, Rationalizing Capitalist Democracy; Arnsperger, Critical Political Economy. 88 Plant, The Neoliberal State. 89 Foucault, The Birth of Biopolitics, p. 226. 90 Davis, The Theory of the Individual in Economics and Individuals and Identity in Economics. 91 Milton Friedman in Friedman and Samuelson, Discuss the Responsibility of Government, p. 5. 92 “Neoliberalism figures interest as both a psychology that drives rational choices, and as the good achieved by those choices.

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There’s a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance” (Krugman, “How Did Economics”). 49 Lo, “Reconciling Efficient Markets with Behavioral Finance”; Caplin and Schotter, The Foundations of Positive and Normative Economics; Harrison, “The Behavioral Counter-revolution.” 50 Ernst Fehr interview in Rosser et al., European Economics at a Crossroads, pp. 72–73. 51 Rabin, “A Perspective on Psychology and Economics,” p. 659. Yet even this divergence went too far for the Old Guard of the orthodoxy, such as Kenneth Arrow. The dividing line between the postwar generation of neoclassical economists and the post-1980 cohort is that the former believed they could abjure all dependence on academic psychology, whereas the latter believed they could pick and choose among psychological doctrines to elevate those that seemingly reinforced the neoclassical orthodoxy. 52 Foer, “Nudge-ocracy.” 53 Gennaioli, Shleifer, and Vishny, “Neglected Risks, Financial Innovation and Financial Fragility.”

The Nature of Technology
by W. Brian Arthur
Published 6 Aug 2009

Brid Arthur helped me plan the flow of the book, and Niamh Arthur helped edit the final draft. One of the joys of the project has been the company of friends and colleagues who have provided intellectual stimulation and moral support over the years. I thank in particular Cormac McCarthy and my SFI co-conspirator David Lane; also Kenneth Arrow, Jim Baker, John Seely Brown, Stuart Kauffman, Bill Miller, Michael Mauboussin, Richard Palmer, Wolfgang Polak, Nathan Rosenberg, Paul Saffo, Martin Shubik, Jan Vasbinder, and Jitendra Singh. Not least, I am deeply grateful to my partner, Runa Bouius, for her patience and support during the time this book was being written.

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes
by Mark Skousen
Published 22 Dec 2006

The invisible hand idea, that laissez-faire leads to the common good, has become known as the first fundamental theorem of welfare economics (as noted in chapter 1). Welfare economics deals with the issues of efficiency, justice, economic waste, and the political process in the economy. Since the late 1930s, when welfare economics was popularized by John Hicks, Kenneth Arrow, Paul Samuelson, and Ronald Coase (all of whom became Nobel Prize winners), the technique of welfare economics has been extended to issues of monopoly and government policies. In most cases, the welfare economists have demonstrated that government-imposed monopoly and subsidies lead to inefficiency and waste.

Social Democratic America
by Lane Kenworthy
Published 3 Jan 2014

Creating an Opportunity Society. Washington, DC: Brookings Institution Press. Hauser, Robert M., John Robert Warren, Min-Hsiung Huang, and Wendy Y. Carter. 2000. “Occupational Status, Education, and Social Mobility in the Meritocracy.” Pp. 179–229 in Meritocracy and Economic Inequality. Edited by Kenneth Arrow, Samuel Bowles, and Steven Durlauf. Princeton, NJ: Princeton University Press. Hays, Sharon. 2003. Flat Broke with Children. New York: Oxford University Press. Heckman, James J. 2008. “Schools, Skills, and Synapses.” Working Paper 14064. Cambridge, MA: National Bureau of Economic Research. Heckman, James J. and Paul A.

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One
by Meghnad Desai
Published 15 Feb 2015

The idea that Keynesian macroeconomics lacked suitable microeconomic foundations was now generally accepted in academia. Meanwhile the reputation of the Walrasian general equilibrium had been reestablished by the new tools of mathematics which had been developed in the postwar period. Students in the 1960s and 1970s had absorbed the works of Kenneth Arrow and Gerard Debreu, who had given a rigorous foundation to the Walrasian general equilibrium theory. They saw the world as the “Arrow-Debreu economy.” There were multiple markets for commodities which all came into equilibrium at the same time for the present and for all instances in the future.

The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment
by Guy Spier
Published 8 Sep 2014

An Amazing Way to Deal with Change in Your Work and in Your Life by Spencer Johnson Working Together: Why Great Partnerships Succeed by Michael Eisner with Aaron Cohen Economics Modern International Economics by Shelagh Heffernan and Peter Sinclair Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely The Economy as an Evolving Complex System by Philip Anderson, Kenneth Arrow, and David Pines The Rational Optimist: How Prosperity Evolves by Matt Ridley Games 500 Master Games of Chess by S. Tartakower and J. du Mont Homo Ludens: A Study of the Play Element in Culture by Johan Huizinga Reality Is Broken: Why Games Make Us Better and How They Can Change the World by Jane McGonigal Winning Chess Tactics for Juniors by Lou Hays Wise Choices: Decisions, Games, and Negotiations by Richard Zeckhauser, Ralph Keeney, and James Sebenius Investing A Zebra in Lion Country by Ralph Wanger with Everett Mattlin Active Value Investing: Making Money in Range-Bound Markets by Vitaliy Katsenelson Beating the Street by Peter Lynch Common Stocks and Uncommon Profits by Philip Fisher Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb Fooling Some of the People All of the Time: A Long Short Story by David Einhorn and Joel Greenblatt Fortune’s Formula: The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street by William Poundstone Investing: The Last Liberal Art by Robert Hagstrom Investment Biker: Around the World with Jim Rogers by Jim Rogers More Mortgage Meltdown: 6 Ways to Profit in These Bad Times by Whitney Tilson and Glenn Tongue More Than You Know: Finding Financial Wisdom in Unconventional Places by Michael Mauboussin Of Permanent Value: The Story of Warren Buffett by Andrew Kilpatrick Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment by David Swensen Security Analysis by Benjamin Graham and David Dodd Seeking Wisdom: From Darwin to Munger by Peter Bevelin Short Stories from the Stock Market: Uncovering Common Themes behind Falling Stocks to Find Uncommon Ideas by Amit Kumar The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai The Manual of Ideas: The Proven Framework for Finding the Best Value Investments by John Mihaljevic The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot and Richard Hudson The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks The Warren Buffett Way by Robert Hagstrom Value Investing: From Graham to Buffett and Beyond by Bruce Greenwald, Judd Kahn, Paul Sonkin, and Michael van Biema Where Are the Customers’ Yachts?

The Plundered Planet: Why We Must--And How We Can--Manage Nature for Global Prosperity
by Paul Collier
Published 10 May 2010

It is known as “Green Accounting.” In essence, the depletion of natural assets is subtracted from apparent income unless offset by the accumulation of other assets. To date, the most convincing attempt at Green Accounting for the countries of the bottom billion has been done by a team led by Nobel laureate Kenneth Arrow. They have built a more comprehensive measure of wealth for the period 1970–2000, one that included natural assets alongside all the man-made assets. I rely on their estimates, as recently adapted by Professor Sir Partha Dasgupta, a distinguished Indian economist at Cambridge University. What happens when Africa’s national accounts are redone on this basis?

Cogs and Monsters: What Economics Is, and What It Should Be
by Diane Coyle
Published 11 Oct 2021

In principle, the concept of a social welfare function (SWF) (Bergson 1938; Samuelson 1983) explicitly reintroduced ethical judgements about distribution. The policy-maker can specify an objective function—say equal outcomes, or improving things the most for the worst-off person (the maximin criterion)—and aggregate individual utilities with appropriate weights. However, in his famous (Im)possibility Theorem, Kenneth Arrow (1950) established that there is no way of consistently adding up individual utilities to calculate social welfare that will satisfy the Pareto criterion, and a few other seemingly reasonable assumptions. Arrow’s theorem is really a formal statement of the obvious truth that there are unavoidable conflicts of interest or dilemmas in society.

What's Wrong With Economics: A Primer for the Perplexed
by Robert Skidelsky
Published 3 Mar 2020

To sum up: without making unrealistic assumptions about human behaviour, and without assuming stationary conditions, the existence of an equilibrium of supply and demand, either in single markets, or in the system as a whole, cannot be demonstrated. There is nothing in the ‘market’ akin to the law of gravity. There is no coercive force behind the policeman’s authority. In a famous exercise, Nobel Laureates Kenneth Arrow (1921–2017) and Gerard Debreu (1921–2004) specified with great mathematical rigour the conditions under which a market economy could achieve perfect allocation of resources. These included perfect information, no frictions, no public goods, consistent preferences, as well as complete competitive markets which include all contingent and future contracts.11 Theirs was a formidable intellectual feat.

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit
by Marina Krakovsky
Published 14 Sep 2015

See David Karp, “New California Law Aims to Rid Farmers Markets of Cheaters,” Los Angeles Times, September 29, 2014. 31.David Karp, “Produce Inspectors Keep Farmers Markets Honest,” Los Angeles Times, December 26, 2013. 32.Interview with Carol Shamon, April 2, 2014. 33.Michael Neff, “Poise, Tenacity, and Clancy: An Interview with Deborah Grosvenor,” Algonkian Writer Conferences, retrieved from http://webdelsol.com/Algonkian/interview-dgrosvenor.htm. 34.Michael Neff, “A View from the Top: An Interview with Robert Gottlieb, Chairman of Trident Media Group,” Algonkian Writer Conferences, retrieved from http://webdelsol.com/Algonkian/interview-rgottlieb.htm. 35.Richard Whately, quoted in Richard S. Howey, The Rise of the Marginal Utility School, 1870–1889 (New York: Columbia University Press, 1989), 4. 36.Richard Whately, Introductory Lectures on Political Economy (London: B. Fellowes, 1831), 253. 3 THE ENFORCER: KEEPING EVERYONE HONEST 1.This term comes from the economist Kenneth Arrow. Hidden information can lead to the problem of adverse selection (the lemons problem), while hidden action can lead to moral hazard. For a discussion of hidden information (also called hidden characteristics) and hidden action, see Mark Bergen, Shantanu Dutta, and Orville C. Walker Jr., “Agency Relationships in Marketing: A Review of the Implications and Applications of Agency,” Journal of Marketing 56, no. 3 (July 1992): 1–24. 2.Avinash Dixit, “Governance Institutions and Economic Activity (AEA Presidential Address),” American Economic Review 99, no. 1 (March 2009): 5–24. 3.One cattle breeder in Palermo told Gambetta, “When the butcher comes to me to buy an animal, he knows that I want to cheat him.

The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care
by T. R. Reid
Published 15 Aug 2009

But how much good was achieved, for the patient, for her family, for society as a whole? What does the number of bedridden ninety-five-year-olds tell us about the quality of a nation’s health care? Questions like that are largely the province of a relatively new academic discipline, health care economics. This field was started in the 1960s by the American Nobel laureate Kenneth Arrow. As with many other areas of contemporary economics, most of its leading lights are Americans—not surprising, given that health care spending now represents about one-sixth of the entire American economy.The analytic studies and the mathematical models of the health care economists are essential to the design of effective health care systems; they were extremely helpful to me during my global medical odyssey.

The Armchair Economist: Economics and Everyday Life
by Steven E. Landsburg
Published 1 May 2012

Third, a third-party candidate with no chance of winning should not be able to affect the outcome of a two-way race. This rules out the simple "plurality wins" rule. With plurality rule, a candidate's prospects can improve when a third-party candidate draws votes from his opponent. In the early 1950s, the economist Kenneth Arrow (subsequently a Nobel prize winner) wrote down a list of reasonable requirements for a democratic voting procedure. They all have the flavor of the three I've just listed. Then Arrow set out to find all of those voting procedures that meet the requirements. It turns out that there aren't many.

Social Life of Information
by John Seely Brown and Paul Duguid
Published 2 Feb 2000

The first thing to remember, of course, is that Crusoe is a fictional character. 32. Marx, 1947, p. 48. 33. Sartre, 1957, quoted in Warnock, 1960, pp. 127 28. 34. See Feenburg (1995) for an insightful discussion of the social character of illness. 35. These examples are from Dorothy Leonard-Barton and Silvia Sensiper (1998) and Kenneth Arrow (1984), respectively. 36. See van Maanen and Barley (1984) for "occupational communities"; Strauss (1978) and the following chapter for "social world." 37. Listservs are e-mail lists that forward messages sent to a single address to everyone who subscribes to that list. Members of large lists rarely know who the other members are.

Twilight of the Elites: America After Meritocracy
by Chris Hayes
Published 11 Jun 2012

For Harvard numbers, Ho cites a statement from the university’s Office of Career Services in 2005, indicating that close to half of Harvard students go through “the recruiting process to vie for investment banking and consulting jobs.” 34 “American CEOs looked very different”: Benjamin Wallace-Wells, “The Romney Economy,” New York, October 23, 2011. 35 “It’s the easiest way to see who was lucky enough to get a good elementary school education”: Quoted in Belinda Zhou, “Graduation Speech Ignites Heated Debate,” What’s What, October 26, 2010. 36 “The idea of meritocracy may have many virtues”: Amartya Sen, “Merit and Justice,” in Meritocracy and Economic Inequality, ed. Kenneth Arrow et al. (Princeton, N.J.: Princeton University Press, 2000), p. 5. 37 “meritocratic feedback loop”: Ho, Liquidated, p. 57. 38 Grover Norquist likened progressive taxation … to Hitler’s treatment of the Jews: The dialogue is quoted in Michael J. Graetz and Ian Shapiro, Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth (Princeton, N.J.: Princeton University Press, 2006), pp. 213–14. 39 “Our workers’ organization has become an end in itself”: Cited in John Kilcullen, “Robert Michels: Oligarchy,” http://www.humanities.mq.edu.au/Ockham/y64l11.html, accessed January 6, 2012. 40 “The most formidable argument against the sovereignty of the masses”: Robert Michels, Political Parties: A Sociological Study of the Oligarchical Tendencies of Modern Democracy, trans.

The Journey of Humanity: The Origins of Wealth and Inequality
by Oded Galor
Published 22 Mar 2022

In line with his thesis, recent evidence suggests that kinship ties do indeed differ significantly across Italian regions, as they do more generally across countries. Likewise, tighter nuclear family bonds do tend to adversely affect levels of social trust, political participation, the status of women in the workforce and geographic mobility.[17] And since, as the Nobel Prize–winning American economist Kenneth Arrow noted, business deals often rely on trust while its absence harms trade, lower levels of trust outside of the family setting might have diminished the level of economic development in southern Italy compared to the north.[18] But how did these differences in trust levels and family ties emerge in the first place?

Outnumbered: From Facebook and Google to Fake News and Filter-Bubbles – the Algorithms That Control Our Lives
by David Sumpter
Published 18 Jun 2018

All of them were trying to do the right thing. Whenever we turn to mathematics to find the right thing to do, it gives us the same answer: fairness doesn’t come from logic alone. There are many other examples of problems of fairness escaping definition to be found in the history of mathematics. Kenneth Arrow’s ‘impossibility theorem’ tells us there is no system for choosing between three political candidates under which all voters’ preferences are fairly represented.13 Peyton Young’s book Equity, which uses mathematical game theory to treat the subject matter, is by the author’s own admission ‘a stock of examples that illustrate why equity cannot be reduced to simple, all-embracing solutions’.14 And Cynthia Dwork and her colleagues’ 2012 work ‘Fairness through Awareness’, resorts to looking at how we can best balance affirmative action for groups with fairness to the individual.15 Like in Jon Kleinberg and his colleagues’ work on bias, when these authors did the maths they found paradoxes instead of rational certainty.

Restarting the Future: How to Fix the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 4 Apr 2022

It was first used in Samuelson’s famous economic textbook in 1948. The economist Ronald Coase pointed out the fact that lighthouses were privately provided; nonetheless, the lighthouse, as an example of a public good, seems to have remained in many textbooks. 27. Levitt 2020. 28. Van Zandt 1993. The economist Kenneth Arrow (1962) argued that there is a second economic difficulty: unless the lighthouse owner could commit to an acceptable price in advance (for example, by publishing a price schedule), the ship owner might worry about being charged a high price and so not use the lighthouse at all. 29. Lindberg (2013) notes that King James I did not recognise Trinity House’s exclusive right to build lighthouses.

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded)
by Michael J. Mauboussin
Published 1 Jan 2006

Too many investors cling to attribute-based approaches and wring their hands when the market doesn’t conform to what they think it should do. 5 Risky Business Risk, Uncertainty, and Prediction in Investing The practical difference between . . . risk and uncertainty . . . is that in the former the distribution of the outcome in a group of instances is known . . . while in the case of uncertainty, this is not true . . . because the situation dealt with is in high degree unique. —Frank H. Knight, Risk, Uncertainty, and Profit Our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in certainty. —Kenneth Arrow, “ ‘I Know a Hawk from a Handsaw’ ” Rocket Science Cognitive scientist Gerd Gigerenzer noted something unusual when he took a guided tour through Daimler-Benz Aerospace, maker of the Ariane rocket. A poster tracking the performance of all ninety-four launches of Ariane 4 and 5 showed eight accidents, including launches sixty-three, seventy, and eighty-eight.

Capitalism Without Capital: The Rise of the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 7 Nov 2017

One way of doing this is to try to build or nurture dynamic clusters—places where innovative businesses and people are more likely to come together and share ideas. As we saw in chapter 4, clusters have played an important but occasional role in the history of economic thought, not least in the work of Alfred Marshall, Kenneth Arrow, Paul Romer, and Edward Glaeser. But clusters are absolute catnip for policymakers and pundits. It is rare to see a modern government that does not have some sort of strategy for supporting or building local clusters, especially in high-innovation sectors. (Witness the dozens of Silicon-soundalike names that have been coined around the world in homage to northern California’s tech cluster—from Silicon Roundabout in London and Silicon Wadi in Israel, to any number of more aspirational variants elsewhere.)

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance)
by Feng Gu
Published 26 Jun 2016

These prevalent investors’ mistakes—dubbed Sloan’s “accruals anomaly”—were, however, corrected in the 2000s, as shown by the evidence that large accruals (earnings higher than cash flows) no longer attract investors’ funds; see Jeremiah Green, John Hand, and Mark Soliman, “Going, Going, Gone? The Apparent Demise of the Accruals Anomaly,” Management Science, 57 (2011): 797–816. 4. Someone cynically quipped: History doesn’t repeat itself, only historians do. 5. See, for example, Kenneth Arrow, “Path Dependence and Competitive Equilibrium,” in History Matters: Essays on Economic Growth, Technology, and Demographic Change, ed. William Sundstrom, Timothy Guinnane, and Warren Whatley (Stanford, CA: Stanford University Press, 2003). 6. Even a far larger disaster, British Petroleum’s (BP) 2010 oil spill in the Gulf of Mexico, costing the company tens of billions of dollars, didn’t dethrone BP from its membership in the group of major international oil companies.

The Classical School
by Callum Williams
Published 19 May 2020

Neither is choosing sushi. Nor a burrito. The cycle goes on for ever, and we can never find a democratic choice. Pizza politics But why does this insight matter? In the 19th century the paradox was not much discussed. The reason it is so influential today is probably because of the impact it had on Kenneth Arrow (1921–2017), an economist who devised something called the “impossibility theorem” in the 1950s. Without going into the details of this theory, which is more complicated than Condorcet’s, Arrow showed that under fairly mild assumptions it becomes quite difficult to collect individual preferences and then shape them into collective decisions.

Free culture: how big media uses technology and the law to lock down culture and control creativity
by Lawrence Lessig
Published 15 Nov 2004

One made the argument I've already described: A brief by Hal Roach Studios argued that unless the law was struck, a whole generation of American film would disappear. The other made the economic argument absolutely clear. This economists' brief was signed by seventeen economists, including five Nobel Prize winners, including Ronald Coase, James Buchanan, Milton Friedman, Kenneth Arrow, and George Akerlof. The economists, as the list of Nobel winners demonstrates, spanned the political spectrum. Their conclusions were powerful: There was no plausible claim that extending the terms of existing copyrights would do anything to increase incentives to create. Such extensions were nothing more than "rent-seeking"—the fancy term economists use to describe special-interest legislation gone wild.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
by Nassim Nicholas Taleb
Published 1 Jan 2001

Taken at a more extreme level, whenever numerous viable possibilities exist, the world splits into many worlds, one world for each different possibility—causing the proliferation of parallel universes. I am an essayist-trader in one of the parallel universes, plain dust in another. Finally, in economics: Economists studied (perhaps unwittingly) some of the Leibnizian ideas with the possible “states of nature” pioneered by Kenneth Arrow and Gerard Debreu. This analytical approach to the study of economic uncertainty is called the “state space” method—it happens to be the cornerstone of neoclassical economic theory and mathematical finance. A simplified version is called “scenario analysis,” the series of “what-ifs” used in, say, the forecasting of sales for a fertilizer plant under different world conditions and demands for the (smelly) product.

Superforecasting: The Art and Science of Prediction
by Philip Tetlock and Dan Gardner
Published 14 Sep 2015

In 1984, with grants from the Carnegie and MacArthur foundations, the National Research Council—the research arm of the United States National Academy of Sciences—convened a distinguished panel charged with nothing less than “preventing nuclear war.” The panelists included three Nobel laureates—the physicist Charles Townes, the economist Kenneth Arrow, and the unclassifiable Herbert Simon—and an array of other luminaries, including the mathematical psychologist Amos Tversky. I was by far the least impressive member of the panel, a thirty-year-old political psychologist just promoted to associate professor at the University of California, Berkeley.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything
by Steven D. Levitt and Stephen J. Dubner
Published 11 Apr 2005

Becker, The Economics of Discrimination (Chicago: University of Chicago Press, 1957). / 72 The theory of information-based discrimination is derived from a number of papers, including Edmund Phelps, “A Statistical Theory of Racism and Sexism,” American Economic Review 62, no. 4 (1972), pp. 659–61; and Kenneth Arrow, “The Theory of Discrimination,” Discrimination in Labor Markets, ed. Orley Ashenfelter and Albert Rees (Princeton, N.J.: Princeton University Press, 1973). THE ONLINE DATING STORY: See Günter J. Hitsch, Ali Hortaçsu, and Dan Ariely, “What Makes You Click: An Empirical Analysis of Online Dating,” University of Chicago working paper, 2005.

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World
by Sandra Navidi
Published 24 Jan 2017

Ever restless and on the lookout for new challenges, pushing boundaries and climbing to new heights, Summers has had several exceedingly successful careers and held some of the most important positions in the U.S. government. His platinum resume was practically preordained in his DNA, as he is the son of two economists and the nephew of two Nobel laureates in economics, Paul Samuelson and Kenneth Arrow. His father taught at Yale University, and Samuelson had been an adviser to President Kennedy. Meteoric Rise Summers’s stellar professional rise occurred with lightning speed. He was accepted into the Massachusetts Institute of Technology at age sixteen and received tenure at Harvard University at only twenty-eight years old.

Prisoner's Dilemma: John Von Neumann, Game Theory, and the Puzzle of the Bomb
by William Poundstone
Published 2 Jan 1993

It was at RAND rather than in the groves of academia that game theory was nurtured in the years after von Neumann and Morgenstern’s book. In late 1940s and early 1950s, few of the biggest names of game theory and allied fields didn’t work for RAND, either full-time or as consultants. Besides von Neumann, RAND employed Kenneth Arrow, George Dantzig, Melvin Dresher, Merrill Flood, R. Duncan Luce, John Nash, Anatol Rapoport, Lloyd Shapley, and Martin Shubik—nearly all of whom were there at the same time. It is difficult to think of any other scientific field in which talent was concentrated so exclusively at one institution.

Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life
by Alan B. Krueger
Published 3 Jun 2019

The 1998 Copyright Term Extension Act—also known as the Sonny Bono Act, after the then-congressman and former member of Sonny and Cher—extended copyright protection for new works from the life of the author plus fifty years to the life of the author plus seventy years. A distinguished group of economists, including George Akerlof, Kenneth Arrow, and Milton Friedman, wrote an amicus brief to the Supreme Court arguing that this twenty-year extension, coming long after the death of an author or composer, would have virtually no impact on the economic incentive for creative output. “Because the additional compensation occurs many decades in the future, its present value is small, very likely an improvement of less than 1 percent,” the economists wrote.27 They further warned that extending protection raises costs for consumers and reduces “the set of building-block materials freely available for new works [and therefore] raises the cost of producing new works and reduces the number created.”

The Alternative: How to Build a Just Economy
by Nick Romeo
Published 15 Jan 2024

Yet the authors found that for a given statement, agreement dropped when the attribution shifted. For instance, when attributed to John Maynard Keynes, a statement that criticized the “symbolic pseudo-mathematical methods of formalizing a system of economic analysis” generated less agreement than when attributed to its fictitious source, the neoclassical economist Kenneth Arrow. If the economists were evaluating only the contents of the statement, changing its source would not alter agreement levels. They were failing to meet their own standards of rationality. Economists with a PhD degree from Asia, Canada, Scandinavia, and the United States showed higher levels of ideological bias than those with PhD degrees from South America, Africa, Italy, Spain, and Portugal.

Basic Economics
by Thomas Sowell
Published 1 Jan 2000

In other words, success did not automatically lead to expansions of successful enterprises nor failure to the contraction of unsuccessful ones, as it does in a market economy. Social Order Order includes more than laws and the government apparatus that administers laws. It also includes the honesty, reliability and cooperativeness of the people themselves. “Morality plays a functional role in the operation of the economic system,” as Nobel Prize winning economist Kenneth Arrow put it.{634} Honesty and reliability can vary greatly between one country and another. As a knowledgeable observer put it: “While it is unimaginable to do business in China without paying bribes, to offer one in Japan is the greatest of faux pas.”{635} Losses from shoplifting and employee theft, as a percentage of sales, have been more than twice as high in India as in Germany or Taiwan.{636} When wallets with money in them were deliberately left in public places as an experiment, the percentage of those wallets returned with the money untouched varied greatly from place to place: in Denmark, for example, nearly all of these wallets were returned with the money still in them.{637} Among United Nations representatives who have diplomatic immunity from local laws in New York City, diplomats from various Middle East countries let numerous parking tickets go unpaid—246 by Kuwaiti diplomats—while not one diplomat from Denmark, Japan, or Israel had any unpaid parking tickets.{638} Honesty and reliability can also vary widely among particular groups within a given country, and that also has economic repercussions.

…

{631} Land Use and Housing on the San Francisco Peninsula, edited by Thomas M. Hagler (Stanford, CA: Stanford Environmental Law Society, 1983), Volume IV. {632} Nikolai Shmelev and Vladimir Popov, The Turning Point, p. 261. {633} Ibid., p. 147. {634} “The Economy of Trust: An Interview with Kenneth Arrow,” Religion & Liberty, Summer 2006, p. 3. {635} Angelo Codevilla, The Character of Nations: How Politics Makes and Breaks Prosperity, Family, and Civility (New York: Basic Book, 2009), p. 42. {636} “Five-Fingered Discounts,” The Economist, October 23, 2010, p. 81. {637} William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York: The Penguin Press, 2006), p. 80

The Irrational Economist: Making Decisions in a Dangerous World
by Erwann Michel-Kerjan and Paul Slovic
Published 5 Jan 2010

Professor Akerlof’s research interests include sociology and economics, theory of unemployment, assymetric information, staggered contract theory, money demand, labor market flows, theory of business cycles, economics of social customs, measurement of unemployment, and economics of discrimination. Kenneth J. Arrow, Stanford University Kenneth Arrow is the Joan Kenney Professor of Operations Research (Emeritus) at Stanford University. His work has been primarily in economic theory and operations, focusing on such areas as social choice theory, risk bearing, medical economics, general equilibrium analysis, inventory theory, and the economics of information and innovation.

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
by William Poundstone
Published 18 Sep 2006

It has provoked sporadic interest ever since. A mention in John Maynard Keynes’s 1921 Treatise on Probability made it part of the mental furniture of nearly every twentieth-century economist. Bernoulli’s wager makes an appearance in von Neumann and Morgenstern’s Theory of Games and Economic Behavior and in papers by Kenneth Arrow, Milton Friedman, and Paul Samuelson. The paradox can be resolved easily by noting that Peter would have to possess infinite wealth to make good on the game’s potential payouts. No one has infinite wealth. Therefore most of the terms of the infinite series are irrelevant. A minuscule chance of winning a quadrillion dollars is not worth what you might compute.

Phishing for Phools: The Economics of Manipulation and Deception
by George A. Akerlof , Robert J. Shiller and Stanley B Resor Professor Of Economics Robert J Shiller
Published 21 Sep 2015

For a version of Pareto’s original writings, see Vilfredo Pareto, Manual of Political Economy: A Critical and Variorum Edition, ed. Aldo Montesano et al. (Oxford: Oxford University Press, 2014). This edition derives from Manuale di Economia, published in Italy in 1906, and also a later edition in French. 18. In 1954, Kenneth Arrow and Gerard Debreu published a joint article that proved the existence of such an equilibrium under rather general conditions. In due course both of them would receive the Nobel Prize: Arrow in 1972, and Debreu in 1982, both of them especially cited for this contribution. The existence of the general equilibrium, even with the generality of their assumptions, does not appear to us to be of tremendous interest (especially since it occurs for what to us is the obvious mathematical reason).

Postcapitalism: A Guide to Our Future
by Paul Mason
Published 29 Jul 2015

But in an information economy, the externalities become the major issue. In the old world, economists categorized information as a ‘public good’: the costs of science, for example, were borne by society – so everybody benefited. But in the 1960s economists began to understand information as a commodity. In 1962, Kenneth Arrow, the guru of mainstream economics, said that in a free-market economy, the purpose of inventing things is to create intellectual property rights. ‘Precisely to the extent that it is successful there is an under-utilisation of information.’37 If you think about it this way, the purpose of patenting the advanced HIV drug Darunavir can only be to keep its price at $1095 a year, which is, as Médecins sans Frontières put it, ‘prohibitively expensive’.

The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics
by William R. Easterly
Published 1 Aug 2002

World Bank, World Development Report, 1996, p. 210 (data for 1994).Just to confirm droughts and terrain, see p. 34 World Bank 198%. 19. World Bank, World Development Report, 1996, p. 88 (data for 1995). 20. This kind of self-fulfilling discrimination has long been postulated before by distinguished economists like Kenneth Arrow and Glen Loury, but Kremer was the first to apply it more generally to skill matching and economic growth. 21. Statistical Abstract ofthe United States, 1995, tables 52, 724. 22. Kosmin and Lachman 1993, p. 260. 23. Lipset 1997, pp. 151-152. 24. Psacharopoulos and Patrinos 1994, p. 6. 25. Psacharopoulos and Patrinos 1994, p. 37. 26.

Money: The Unauthorized Biography
by Felix Martin
Published 5 Jun 2013

Only a year after the publication of Lombard Street, the French economist Léon Walras had presented a mathematically rigorous formulation of the classical theory of price formation in his Elements of Pure Economics.14 In 1937, the British economist and future Nobel laureate John Hicks had alleged that the central ideas of Keynes’ General Theory could in fact be reconciled with classical orthodoxy.15 It was in 1954, however, that a paper appeared that was, to those who believed, the discovery of a fifth gospel. The American economist Kenneth Arrow and the French mathematician Gerard Debreu published a formal proof that, given certain assumptions, a market economy would indeed tend to gravitate towards a “general equilibrium” in which a unique set of prices would ensure that there could be no excess demand or supply across all markets taken together.16 It was, in other words, a knock-down argument in favour of the canonical classical doctrine—a formal proof of Say’s Law.

Priceless: The Myth of Fair Value (And How to Take Advantage of It)
by William Poundstone
Published 1 Jan 2010

Following Graham’s advice is easier said than done. During bull markets, less kindly known as bubbles, Mr. Market shows up every day quoting sky-high prices that only seem to go up. Most investors find it impossible to ignore the siren song. How could Mr. Market be so very wrong, day after day? As early as 1982, Stanford economist Kenneth Arrow identified Tversky and Kahneman’s work as a plausible explanation for stock market bubbles. Lawrence Summers took up this theme in a 1986 paper, “Does the Stock Market Rationally Reflect Fundamental Values?” Summers (now head of the National Economic Council for the Obama administration) was the first to make an extended case for what might now be called the coherent arbitrariness of stock prices.

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever
by Robin Wigglesworth
Published 11 Oct 2021

Measurement was his lifelong passion, with his son later revealing that among his copious papers were facts and analyses on subjects as varied as admission rates to Yale, blindness in the United States, the most popular breeds of dogs, the weather in Palm Beach, and sharks.15 The Cowles Commission would go on to host and support an all-star cast of great economists and financial academics over the years, such as James Tobin, Joseph Stiglitz, Abba Lerner, Kenneth Arrow, Jacob Marschak, Tjalling Koopmans, Franco Modigliani, and Harry Markowitz, several of whom would go on to win Nobel Prizes for work at the commission. In fact, one could argue that in its heyday it was the most influential economic think tank in history. Not bad for the tuberculosis-ridden son of a newspaperman based in scenic but remote Colorado

Capital Ideas Evolving
by Peter L. Bernstein
Published 3 May 2007

“I have been around long enough to see empirical results that seem to be really solid until you try a different country or different statistical method or different time period. Maybe that’s why Fischer Black said you should put your trust only in logic and theory and forget about statistical empirical results.”  The alternative approach Sharpe now favors is state-preference theory, another unwieldy name, developed some thirty years ago by Kenneth Arrow of Stanford and Gérard Debreu of the University of California, who won the Nobel Prize in Economics together in 1972. The essence of Arrow’s theory is that the same asset can change in character as we look forward to the range of outcomes the future might hold. As Sharpe describes it: The basic premise is really quite straightforward.

Rage Inside the Machine: The Prejudice of Algorithms, and How to Stop the Internet Making Bigots of Us All
by Robert Elliott Smith
Published 26 Jun 2019

Since 1984, SFI has functioned as a not-for-profit think tank that gathers together economists, physicists, computer scientists, biologists and many others from the broadest possible spectrum, to study Complex Systems. Fellows include physics Nobel laureates Murray Gell-Man and Philip Anderson, economics Nobel laureate Kenneth Arrow and Dave’s PhD supervisor, the now deceased MacArthur Genius Award Fellow John Holland. The focus of the institute’s multidisciplinary research is to better understand the principles of complex adaptive systems (systems characterized by interconnected elements and the ability to perpetually change and learn), including physical, computational, biological, environmental and social systems.

Superminds: The Surprising Power of People and Computers Thinking Together
by Thomas W. Malone
Published 14 May 2018

COMPARING DISTRIBUTION OF BENEFITS In order to compare how effectively different types of superminds distribute the benefits of group decision making to their members, we need a way to judge whether one distribution is better than another. But this is a very complex problem that has occupied economists and others—from the Marquis de Condorcet in the 18th century to Kenneth Arrow and many others in the 20th century.12 Many economists have analyzed this problem by saying that we can’t sensibly compare one person’s preferences to another’s because there’s no way of really knowing how strongly I feel about something compared to how strongly you feel about it. For instance, imagine that there is only one piece of deer meat left and that we’re trying to decide whether Mary or John should get it.

A World Without Work: Technology, Automation, and How We Should Respond
by Daniel Susskind
Published 14 Jan 2020

In his words, on campus at that time, “the stupid people thought that automation was going to make all the jobs go away” but “the smart people understood that when there was more produced, there would be more income, and therefore there would be more demand.”33 David Autor, perhaps today’s most important labor market economist, makes a similar point, arguing that “people are unduly pessimistic … as people get wealthier, they tend to consume more, so that also creates demand.”34 And Kenneth Arrow, a Nobel Prize–winning economist, likewise argued that historically, “the replacement of men by machines” has not increased unemployment. “The economy does find other jobs for workers. When wealth is created, people spend their money on something.”35 The Changing-Pie Effect Finally, the last few hundred years also suggest a third way for the complementing force to work.

The Undoing Project: A Friendship That Changed Our Minds
by Michael Lewis
Published 6 Dec 2016

And so it was on a farm that a theory that would become among the most influential in the history of economics made its public debut. Decision theory was Amos’s field, and so Amos did all the talking. The audience contained at least three current and future Nobel Prize winners in economics: Peter Diamond, Daniel McFadden, and Kenneth Arrow. “When you listened to Amos, you knew you were talking to a first-rate mind,” said Arrow. “You raise a question. He’s thought of the question already, and he has an answer.” After he listened to Amos’s presentation, Arrow had one big question for Amos: What is a loss? The theory obviously turned on the stark difference in people’s feelings when they faced potential losses rather than potential gains.

Nerds on Wall Street: Math, Machines and Wired Markets
by David J. Leinweber
Published 31 Dec 2008

I meekly explained that I wasn’t the attendant, and gave the keys back. This remains one of my great regrets. Eventually, I navigated my Trans Am to UCLA and then on to RAND. I was blissfully unaware that I was passing through the same hallways used by some of the seminal thinkers of modern finance and economics: William Sharpe, Harry Markowitz, Kenneth Arrow, and George Dantzig. Markowitz and Sharpe, in particular, pioneered the ideas of balancing risk and reward in a systematic way, which when applied to finance, eventually led to their sharing the Nobel Prize in 1990. To digress just a bit, RAND’s interest in systematically approaching risk and reward, optimization, decision under uncertainty, and game theory was not initially conceived in the context of finance.

The Great Surge: The Ascent of the Developing World
by Steven Radelet
Published 10 Nov 2015

In Nigeria, per capita wealth fell because of rapid depletion of petroleum deposits and other resources. In the majority of countries, per capita wealth grew, after adjusting for changes in natural resources and other types of capital assets. More detailed studies on a smaller number of countries provide similar results. Nobel laureate Kenneth Arrow, Partha Dasgupta, and their coauthors provide an in-depth accounting of what they call “comprehensive” wealth and different forms of capital, including natural capital, in five countries: the United States, China, Brazil, India, and Venezuela. They explore the extent to which different types of capital are changing and comprehensive wealth is increasing.

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist
by Kate Raworth
Published 22 Mar 2017

And, he reasoned, if those markets were comprised of fully informed, small-scale competitive sellers and buyers, then the economy would reach a point of equilibrium that maximised total utility. In other words – in a neat echo of Smith’s invisible hand – it would, for any given income distribution, produce the best possible outcome for society as a whole. The mathematical techniques did not yet exist for Walras to prove his hunch but his agenda was later picked up by Kenneth Arrow and Gerard Debreu, who set out its equations in their 1954 model of general equilibrium. It appeared to be a landmark proof, giving microeconomic underpinning to macroeconomic analysis, launching a seemingly unified economic theory and laying the foundations of what has been known ever since as ‘modern macro’.4 The theory looks complete, sounds impressively like physics, and is set out in authoritative equations.

The Evolution of Everything: How New Ideas Emerge
by Matt Ridley

This received wisdom has been handed down for more than half a century. It was the economist Robert Solow who demonstrated in 1957 that innovation in technology was the source of most economic growth – at least in societies that were not expanding their territory or growing their populations. It was his economist colleagues Richard Nelson and Kenneth Arrow who explained in 1959 and 1962 respectively that government funding of science was necessary, because it is cheaper to copy others than to do original research. This makes science a public good, a service, like the light from a lighthouse, that must be provided at public expense, because nobody will supply it for free.

Human Frontiers: The Future of Big Ideas in an Age of Small Thinking
by Michael Bhaskar
Published 2 Nov 2021

While the latter in particular has force, surely the most telling thing is that the debate is needed; it would have been much harder to claim that the fruits of the 2IR were not revolutionising all of society. 34 Warsh (2007) 35 Ibid., p. xxii 36 Yueh (2018), p. 266 37 Solow (1956) 38 The great economist Kenneth Arrow, among others in a long intellectual lineage, can also claim credit for establishing the link between knowledge and increasing returns. 39 Romer (1990) 40 Greenspan and Wooldridge (2018), p. 361 41 Jones (2019) 42 Jones (1995) 43 Ibid. 44 See also Laincz and Peretto (2006) for a similar analysis. 45 Jones (2002); Cowan (2011), p. 18.

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

A term that Lerner actually picked up from Vilfredo Pareto, who first set the proposition in 1894. V. Pareto, ‘Il massimo di utilita data dalla libera concorrenza', Giornale degli Economisti 9(2) (1894), pp. 48-66. This proposition was further refined by other economists, among whom we find Lerner, whilst nowadays the accepted proof is the one elaborated by Kenneth Arrow in 1951: ‘An extension of the basic theorem of classical welfare economics', in Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability (Berkeley and Los Angeles: University of California Press, 1951), pp. 507-32. 14. E. N. Wolff, Growth, Accumulation, and Unproductive Activity: An Analysis of the Postwar U.S.

Luxury Fever: Why Money Fails to Satisfy in an Era of Excess
by Robert H. Frank
Published 15 Jan 1999

The proponents of consumption taxation form an impressive list: David Hume, Adam Smith, John Stuart Mill, Alfred Pigou, and Alfred Marshall were among the early luminaries who extolled the virtues of progressive consumption taxation.7 Contemporary economists of every political stripe have also voiced similar views. Thus conservatives like Nobel laureate Milton Friedman and Martin Feldstein, chairman of the Council of Economic Advisors under Ronald Reagan, are vocal advocates of consumption taxation;8 so are liberals Kenneth Arrow, also a Nobel laureate; Laurence Summers, a Treasury Department official in the Clinton administration and winner of the economics profession’s prestigious Clark Medal; and Lester Thurow, the best-selling author and former dean of MIT’s Sloan School of Management. Liberals and conservatives disagree on many details concerning the consumption tax, including the extent to which it should be progressive (although virtually all forms of the tax that have been proposed are at least mildly progressive).

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

To be sure, actuarial science gives insurance companies an in-built advantage over policy-holders. Before the dawn of modern probability theory, insurers were the gamblers; now they are the casino. The case can be made, as it was by Dickie Scruggs before his fall from grace, that the odds are now stacked unjustly against the punters/policy-holders. But as the economist Kenneth Arrow long ago pointed out, most of us prefer a gamble that has a 100 per cent chance of a small loss (our annual premium) and a small chance of a large gain (the insurance payout after disaster) to a gamble that has a 100 per cent chance of a small gain (no premiums) but an uncertain chance of a huge loss (no payout after a disaster).

The Man From the Future: The Visionary Life of John Von Neumann
by Ananyo Bhattacharya
Published 6 Oct 2021

Mathematicians, inspired by von Neumann’s achievement, poured into economics and began applying fresh methods to the dismal science. By the 1950s, the subject was transformed. Fixed-point theorems were used to prove key results in economics – including in von Neumann’s own game theory by a young upstart called John Nash. A half-dozen Nobel laureates are reckoned to have been influenced by the work.26 Among them were Kenneth Arrow and Gérard Debreu, who were awarded the prize (in 1972 and 1983 respectively) for their work on the theory of general equilibrium, which models the workings of a free-market economy. A half-century after von Neumann’s Princeton seminar, the historian Roy Weintraub described his paper as ‘the single most important article in mathematical economics’.27 But as was his way, von Neumann had moved on long before anyone really recognized its significance.

Samuelson Friedman: The Battle Over the Free Market
by Nicholas Wapshott
Published 2 Aug 2021

His myriad technical papers, which flowed from him with such facility, would have been a towering achievement for any academic economist. His application of mathematics to economics transformed the discipline from something akin to a branch of philosophy to a true social science. Samuelson left a personal dynasty of sorts, with a brother, Robert Summers,56 a sister-in-law, Anita Summers,57 a brother-in-law, Kenneth Arrow,58 and a nephew, Larry Summers, all distinguished economists. His most lasting accomplishment, however, is found in the generations of young economists around the world who have learned economics from his textbook, which has made him Keynes’s most effective proselytizer. Samuelson’s neoclassical synthesis remains the most widely acknowledged guide to how macroeconomics can be made to avoid catastrophe.

The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics
by Rod Hill and Anthony Myatt
Published 15 Mar 2010

In the left-hand diagram we assumed a fall in the price of fertilizer shifted the supply curve of wheat to the right. This caused a surplus of wheat at the original equilibrium price. As a result, we are told prices fall. But since no one sets prices, how do they fall? The lack of an explanation for price movements in the demand and supply model is known as Arrow’s Paradox, after the issue raised by Kenneth Arrow (1959): all individuals and firms are assumed to be ‘price-takers’ and to have no influence over the market price, yet somehow the market price adjusts and reaches the equilibrium value. One ‘solution’ to this conundrum is to invent an auctioneer, who is ‘the visible, if imaginary, embodiment of the invisible hand.

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis
by Anatole Kaletsky
Published 22 Jun 2010

Economist Arthur Laffer was apparently similarly confused: “If you like the Post Office and the Department of Motor Vehicles and you think they’re run well, just wait till you see Medicare, Medicaid, and health care done by the government.” Arthur Laffer on CNN Newsroom, August 4, 2009. Clip available from Media Matters at http://mediamatters.org/mmtv/200908040014. 3 James Buchanan, Public Choice: The Origins and Development of a Research Program. 4 See, for example Kenneth Arrow, Social Choice and Individual Values, and Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups. 5 Buchanan, Public Choice, 8-9. 6 Rent seeking is the economic term used to describe behavior that extracts unearned value from other participants in the economy, without making any contribution to productivity, for example by gaining control of land and natural resources or by taking advantage of regulations that may affect consumers or businesses. 7 Such questions are prevalent throughout both Plato’s Republic and Aristotle’s Politics. 8 A sunset clause creates an expiration date, at which point a law will go off the books unless it is renewed.

The Future of Ideas: The Fate of the Commons in a Connected World
by Lawrence Lessig
Published 14 Jul 2001

This has tempted the World Intellectual Property Association to build control for trademark interests into the very architecture of the network. See ¶¶23-28, “Executive Summary of the Interim Report of the Second WIPO Internet Domain Name Process,” available at http://wipo2.wipo.int. 61 The origin of modern economic work here is Kenneth Arrow's “Economic Welfare and the Allocation of Resources for Invention,” in National Bureau Committee for Economic Research, The Rate and Direction of Inventive Activity, Economic and Social Factors, Richard Nelson, ed. (Princeton, N.J.: Princeton University Press, 1962), 609. Harold Demsetz responded to this by arguing in favor of a stronger property-based regime.

The Euro: How a Common Currency Threatens the Future of Europe
by Joseph E. Stiglitz and Alex Hyde-White
Published 24 Oct 2016

They are nothing more than an IOU, a promise to pay, with interest, which can be bought and sold. 32 My earlier book Freefall explained how the neoliberal ideology that underpinned the eurozone led to the financial crisis, and in Globalization and Its Discontents, I explained how the same ideology has resulted in globalization not living up to its promise. Later in this book, I describe some of the basic economic research that overturned the premises of market fundamentalism/neoliberalism. 33 The pathbreaking work was that of Kenneth Arrow and Gerard Debreu (for which both received the Nobel Prize). (Kenneth J. Arrow, “An Extension of the Basic Theorems of Classical Welfare Economics,” in Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability, ed. J. Neyman [Berkeley: University of California Press, 1951], pp. 507–32; and Gerard Debreu, “Valuation Equilibrium and Pareto Optimum,” Proceedings of the National Academy of Sciences 40, no. 7 [1954]: 588–92; and Debreu, The Theory of Value [New Haven, CT: Yale University Press, 1959.])

Making Globalization Work
by Joseph E. Stiglitz
Published 16 Sep 2006

See Ha-Joon Chang, “Kicking Away the Ladder: Infant Industry Promotion in Historical Perspective,” Oxford Development Studies, vol. 31, no. 1 (2003), pp. 21–32; and Partha Dasgupta and Joseph E. Stiglitz, “Learning by Doing, Market Structure, and Industrial and Trade Policies,” Oxford Economic Papers, vol. 40, no. 2 (1988), pp. 246–68. The general theory of “learning”—and why government action may be required—was developed by Nobel Prize–winning economist Kenneth Arrow in “The Economic Implications of Learning by Doing,” Review of Economic Studies, vol. 29, no. 3 (June 1962), pp 155–73. 20.A dramatic illustration was provided by America’s illegal imposition of steel tariffs on March 20, 2002, in response to political pressure from steel producers. (They were ended on December 4, 2003, after an adverse WTO ruling.)

A Man for All Markets
by Edward O. Thorp
Published 15 Nov 2016

Another nontransitive example with great practical impact is voting preferences. Often a majority of voters prefer candidate A over candidate B, candidate B over candidate C, and candidate C over candidate A. In these elections, where voting preference is nontransitive, who gets elected? It depends on the structure of the election process. Mathematical economist Kenneth Arrow received the Nobel Prize in Economics for showing that no voting procedure exists that satisfies an entire list of intuitively natural desirable properties. A Discover magazine article on this subject argued that, with a more “reasonable” election procedure, based on voter comparisons of all the major Democratic and Republican candidates, in 2000 John McCain would have received the Republican nomination and then been elected president instead of George W.

Virtual Competition
by Ariel Ezrachi and Maurice E. Stucke
Published 30 Nov 2016

Kulick, “Price Discrimination, Two-Sided Markets, and Net Neutrality Regulation,” Tulane Journal of Technology and Intellectual Property 13 (2010): 81, https://www.researchgate.net/profile/Dennis_Weisman /publication/228307995_Price _Discrimination _Two-Sided _ Markets _ and _Net _Neutrality_Regulation/links/0deec5187eadf2a5c8000000.pdf. 7. Josh Wright, “Price Discrimination Is Good, Part I,” Truth on the Market (November 30, 2008), http://truthonthemarket.com/2008/11/30/price -discrimination-is-good-part-i/. This approach, generally associated with Nobel laureate economist Kenneth Arrow, suggests “the increased business generated by an innovation will come mostly from sales that formerly would have gone to competitors, while monopolists may largely cannibalize their own business”; Weisman and Kulick, “Price Discrimination, Two-Sided Markets, and Net Neutrality Regulation.” 8.

When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm
by Walt Bogdanich and Michael Forsythe
Published 3 Oct 2022

His government introduced competition, allowing patients to choose their medical providers. Poorly performing hospitals would, in theory, lose out. In reality, competition didn’t work well in a hospital setting. That wasn’t a secret: one of the most praised economists of the twentieth century, Kenneth Arrow, had concluded decades earlier that the magic of markets didn’t function for health care in the way it would for selling bread, cars, or plane tickets. Patients just didn’t have the information to intelligently price health-care services, and more often than not their priority was getting the best care as soon as possible, not finding the cheapest oncologist.

Seven Crashes: The Economic Crises That Shaped Globalization
by Harold James
Published 15 Jan 2023

Larry Summers was a late-twentieth-century equivalent to Keynes at the beginning of the century: indeed his background might well be described by the words that Keynes’s biographer Robert Skidelsky applied to Cambridge, “the arrogance of a place.” Like Keynes, he came from an academic dynasty: his parents were both economists, Robert Summers (originally Samuelson) and Anita Summers. Two of Summers’s uncles, Paul Samuelson and Kenneth Arrow, also economists, won Nobel Prizes. Summers himself won the John Bates Clark Medal given to the best economist under forty. Like Keynes, he moved easily between academic life and the world of policy, and, also like Keynes, he was constantly enveloped by controversy. He worked in numerous areas of economics, notably public finance, labor economics, and macroeconomics, and also thought consistently about the discipline, its methodology and orientation.

How Asia Works
by Joe Studwell
Published 1 Jul 2013

Quoted in Tessa Morris Suzuki, A History of Japanese Economic Thought (London: Routledge, 1989), p. 60. 14. ‘My Six-year-old Son Should Get a Job’, chapter 3, Ha-Joon Chang, Bad Samaritans (London: Random House, 2007). 15. In modern economics the term ‘learning by doing’ was popularised by the Nobel Laureate Kenneth Arrow’s 1962 paper ‘The Economic Implications of Learning by Doing’. To my mind, however, Arrow hijacked a concept that makes much more sense in its everyday usage. Arrow’s paper asserts that the fact that everyone learns by doing means that the learning of new technologies is an automatically generated part of the economic process.

More: The 10,000-Year Rise of the World Economy
by Philip Coggan
Published 6 Feb 2020

In an article published in 1957, Robert Solow examined the history of the US economy between 1909 and 1949 and found that just one-eighth of the increase in output per worker was down to the availability of more capital, with the rest being the result of increased productivity.2 A crucial insight, attributed to both Kenneth Arrow and Paul Romer, is that knowledge can be subject to increasing returns. As the latter wrote, an innovation by one company “cannot be perfectly patented or kept secret”.3 Eli Whitney failed to make a fortune out of his cotton gin because other people grasped his idea and found it easy to replicate.

Money: 5,000 Years of Debt and Power
by Michel Aglietta
Published 23 Oct 2018

The importance of this debate is in the radical challenge it presents to the ultra-neoliberal drift in economic theory over the last forty years, which has made possible the hegemony of finance over politics. For fundamental reasons, neoliberal economic theory cannot accommodate the perspective of sustainable development. A Principle of Social Justice Is the Foundation of a New Principle of Sovereignty Social wellbeing is not the aggregation of individual preferences. Indeed, Kenneth Arrow’s impossibility theorem shows that it is impossible for any social choice process in a democratic society to aggregate heterogeneous individual preferences according to an incontestable idea of social wellbeing. It follows from this that any attempt to eradicate poverty and reduce inequalities must proceed the other way around, taking a criterion of social justice as its starting point.

The Beginning of Infinity: Explanations That Transform the World
by David Deutsch
Published 30 Jun 2011

Also, it is not only about people’s top preferences: once we are considering the details of decision-making in large groups – how legislatures and parties and factions within parties organize themselves to contribute their wishes to ‘society’s wishes’ – we have to take into account their second and third choices, because people still have the right to contribute to decision-making if they cannot persuade a majority to agree to their first choice. Yet electoral systems designed to take such factors into account invariably introduce more paradoxes and no-go theorems. One of the first of the no-go theorems was proved in 1951 by the economist Kenneth Arrow, and it contributed to his winning the Nobel prize for economics in 1972. Arrow’s theorem appears to deny the very existence of social choice – and to strike at the principle of representative government, and apportionment, and democracy itself, and a lot more besides. This is what Arrow did.

Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies
by Geoffrey West
Published 15 May 2017

Among its founding fathers were two other major figures of twentieth-century academia, both Nobel laureates: Philip Anderson, a condensed matter physicist from Princeton University who had worked on superconductivity and was an inventor, among many other things, of the mechanism of symmetry breaking that underlies the prediction of the Higgs particle; and Kenneth Arrow from Stanford University, whose many contributions to the fundamental underpinnings of economics, from social choice to endogenous growth theory, have been hugely influential. He was the youngest person ever to have been awarded the Nobel Memorial Prize for economics, which five of his students have also received.

Traffic: Why We Drive the Way We Do (And What It Says About Us)
by Tom Vanderbilt
Published 28 Jul 2008

It is because roads are free that we have run out of spare road space.” From Harford, The Undercover Economist (Oxford: Oxford University Press, 2004), p. 88. more people want to use them?: William Vickrey, “Pricing in Urban and Suburban Transport,” American Economic Review, vol. 53 (1963). Reprinted in Richard Arnott, Kenneth Arrow, Anthony B. Atkinson, and Jacques H. Drèze., eds., Public Economics: William Vickrey (Cambridge: Cambridge University Press, 1994). the results to friends: The Vickrey story is taken from a working paper by Ron Harstad at the University of Missouri, available at www.economics.missouri.edu/working-papers/2005/wp0519_harstad.pdf.

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society
by Binyamin Appelbaum
Published 4 Sep 2019

Porter, Trust in Numbers: The Pursuit of Objectivity in Science and Public Life (Princeton, N.J.: Princeton University Press, 1995), 162–65. 13. Ibid. 14. Nicholas Kaldor, “Welfare Propositions of Economics and Interpersonal Comparisons of Utility,” Economic Journal 49, no. 195 (1939). 15. Kenneth Arrow already had proved the new version of welfare economics was theoretically flawed. In his 1950 doctoral thesis, “Social Choice and Individual Values” — which was completed at Rand, where Arrow was working on Cold War game theory — Arrow showed that individual expressions of preference, in the form of rank ordering, could not be reliably translated into an accurate statement of collective preferences.

The Alignment Problem: Machine Learning and Human Values
by Brian Christian
Published 5 Oct 2020

I marvel that this manuscript was written using typesetting software more than 40 years old, and for which none other than Arthur Samuel himself wrote the documentation. We really do stand on the shoulders of giants. Humbly, I want to acknowledge those who passed away during the writing of this book whose voices I would have loved to include, and whose ideas are nevertheless present: Derek Parfit, Kenneth Arrow, Hubert Dreyfus, Stanislav Petrov, and Ursula K. Le Guin. I want to express a particular gratitude to the University of California, Berkeley. To CITRIS, where I was honored to be a visiting scholar during the writing of this book, with very special thanks to Brandie Nonnecke and Camille Crittenden; to the Simons Institute for the Theory of Computing, in particular Kristin Kane and Richard Karp; to the Center for Human-Compatible AI, in particular Stuart Russell and Mark Nitzberg; and to the many brilliant and spirited members and visitors of the CHAI Workshop.

The Upswing: How America Came Together a Century Ago and How We Can Do It Again
by Robert D. Putnam
Published 12 Oct 2020

Murnane (New York: Russell Sage Foundation, 2011), 165–85 find a similar pattern for absolute educational mobility—rising until roughly 1975 and then falling. Robert M. Hauser et al., “Occupational Status, Education, and Social Mobility in the Meritocracy,” in Meritocracy and Economic Inequality, eds. Kenneth Arrow, Samuel Bowles, and Steven Durlauf (Princeton: Princeton University Press, 2000), 179–229 find a similar pattern for absolute mobility in occupational status. Research is mixed about whether there was a similar turning point in relative intergenerational mobility. Hilger and Hout and Janus find that relative educational mobility (which is closely related to income mobility) increased between roughly 1940 and roughly 1970 and then stabilized or even slightly reversed.

Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed
by James C. Scott
Published 8 Feb 1999

For the case of jet engines, the performance of which "remains notoriously uncertain in the development process" and which have to be adjusted by engineers with long experience after pilots conduct in-flight testing, see Nathan Rosenberg, Inside the Black Box: Technology and Economics (New York: Cambridge University Press, 1982), especially pp. 120-41. Rosenberg makes it clear that the limits of scientific methodology in this case have to do with the impossibility of anticipating the interactive consequences of the enormous number of independent variables (including different technologies) at work in a jet engine. See also Kenneth Arrow, "The Economics of Learning by Doing," Review of Economic Studies, June 1962, pp. 45-73. 53. Charles E. Lindblom, "The Science of Muddling Through," Public Administration Review 19 (Spring 1959): 79-88. Twenty years after this article appeared, Lindblom extended the argument in another article with a catchy title: "Still Muddling, Not Yet Through."

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

Much of the literature reflected the Gordon-Liebhafsky theorem that: “provided that it achieves a certain threshold of intelligibility, the greater the obscurity of a piece written by an economist, the greater is the likelihood that it will be recognized as a classic or seminal work.”35 For financiers, theory and models were secondary to profit. Merton’s dynamic hedging or replication approach allowed the creation of derivatives and their risk management, helping banks to trade a bewildering variety of instruments. In the 1950s, two economists, Kenneth Arrow and Gerard Debreu, showed that attaining the nirvana of economic equilibrium required state securities, contracts to buy or sell everything at any time period in every place until infinity or the end of the world, whichever was first. This theoretically perfect world now justified any and every type of derivative and financial product.

Antifragile: Things That Gain From Disorder
by Nassim Nicholas Taleb
Published 27 Nov 2012

Kirkpatrick, 2005, “The Evolution of Infidelity in Socially Monogamous Passerines: The Strength of Direct and Indirect Selection on Extrapair Copulation Behavior in Females.” American Naturalist 165 (s5). Aron, Raymond, 1964, Dimensions de la conscience historique. Agora/Librairie Plon. Arrow, Kenneth, 1971, “Aspects of the Theory of Risk-Bearing,” Yrj¨o Jahnsson Lectures (1965), reprinted in Essays in the Theory of Risk Bearing, edited by Kenneth Arrow. Chicago: Markum. Atamas, S. P., and J. Bell, 2009, “Degeneracy-Driven Self-Structuring Dynamics in Selective Repertoires.” Bulletin of Mathematical Biology 71(6): 1349–1365. Athavale, Y., P. Hosseinizadeh, et al., 2009, “Identifying the Potential for Failure of Businesses in the Technology, Pharmaceutical, and Banking Sectors Using Kernel-Based Machine Learning Methods.”

Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity
by Daron Acemoglu and Simon Johnson
Published 15 May 2023

Building on Smith’s ideas, many free-market advocates have remained skeptical of large corporations, and some of them raise alarms when mergers and acquisitions increase the power of big players. Thwarting the workings of the market is not the only reason for being suspicious of big businesses. A well-known proposition in economics is the Arrow replacement effect, named after the Nobel Prize–winning economist Kenneth Arrow and later popularized by the business scholar Clayton Christensen as the “innovator’s dilemma.” It states that large corporations are timid innovators because they are afraid of eroding their own profits from existing offerings. If a new product will eat into the revenues a corporation enjoys from what it is already doing, why go there?

Human Diversity: The Biology of Gender, Race, and Class
by Charles Murray
Published 28 Jan 2020

Korenman, Sanders, and David Neumark. 1991. “Does Marriage Really Make Men More Productive?” Journal of Human Resources 26 (2): 282–307. Korenman, Sanders, and Christopher Winship. 2000. “A Reanalysis of the Bell Curve: Intelligence, Family Background, and Schooling.” In Meritocracy and Economic Inequality, edited by Kenneth Arrow, Samuel Bowles, and Steven Durlauf. Princeton, NJ: Princeton University Press. Koscik, Tim, Dan O’Leary, David J. Moser et al. 2009. “Sex Differences in Parietal Lobe Morphology: Relationship to Mental Rotation Performance.” Brain and Cognition 69 (3): 451–59. Krapohl, Eva, Kaili Rimfeld, Nicholas G.

The Irrational Bundle
by Dan Ariely
Published 3 Apr 2013

—George Akerlof, Nobel Laureate in Economics, Koshland Professor of Economics, University of California, Berkeley “Dan Ariely’s ingenious experiments explore deeply how our economic behavior is influenced by irrational forces and social norms. In a charmingly informal style that makes it accessible to a wide audience, Predictably Irrational provides a standing criticism to the explanatory power of rational egotistic choice.” —Kenneth Arrow, Nobel Laureate in Economics, Joan Kenney Professor of Economics, Stanford University “A delightfully brilliant guide to our irrationality—and how to overcome it—in the marketplace and everyplace.” —Geoffrey Moore, author of Crossing the Chasm and Dealing with Darwin “Dan Ariely is one of the most original and consistently interesting social scientists I know.

Capital in the Twenty-First Century
by Thomas Piketty
Published 10 Mar 2014

There is good reason to believe, however, that the price signal has less of an impact on emissions than public investment and changes to building codes (requiring thermal insulation, for example). 56. The idea that private property and the market allow (under certain conditions) for the coordination and efficient use of the talents and information possessed by millions of individuals is a classic that one finds in the work of Adam Smith, Friedrich Hayek, and Kenneth Arrow and Claude Debreu. The idea that voting is another efficient way of aggregating information (and more generally ideas, reflections, etc.) is also very old: it goes back to Condorcet. For recent research on this constructivist approach to political institutions and electoral systems, see the online technical appendix. 57.

Money and Power: How Goldman Sachs Came to Rule the World
by William D. Cohan
Published 11 Apr 2011

But Corzine stood up for Steck. “Shut the fuck up,” Corzine said. “He just saved the firm.” Steck became a partner. CHAPTER 13 POWER One of the people Goldman hired as a consultant during its consultant-hiring spree was Lawrence Summers, a Philadelphia-born Harvard economist whose two uncles—Paul Samuelson and Kenneth Arrow—had both won Nobel Prizes in economics. Summers’s parents, Robert and Anita, were also economics professors. During the summer of 1986, when Rubin and Friedman were still the co-heads of Goldman’s fixed-income group, Jacob Goldfield, a precocious and gifted young Goldman trader, suggested to Rubin that he and Summers should meet.

Bourgeois Dignity: Why Economics Can't Explain the Modern World
by Deirdre N. McCloskey
Published 15 Nov 2011

During the 1960s I myself was trained at Harvard in Samuelsonian economics, and during the 1970s I taught at the University of Chicago, which was at the time turning away from Marshall and Knight and toward Samuelson and Arrow. Samuelsonian economics was invented in the 1940s and 1950s by the brilliant and amiable Paul Anthony Samuelson (1915–2009)—long my mother’s mixed-doubles tennis partner—together with his equally brilliant and equally amiable brother in law, Kenneth Arrow (1921– )—long a distantly friendly colleague of mine. Startlingly, they are joint uncles of the crown prince of Samuelsonian economics, Lawrence Summers. 10. Haidt 2006; Epley 2014. 11. For example, Wilson 2010, which is the only substantive use in economics of Wittgenstein’s Philosophical Investigations.

Strategy: A History
by Lawrence Freedman
Published 31 Oct 2013

Assuming that all players followed strategies to maximize their utilities, this point would be one from which individual actors had no incentive to deviate. In principle, it would represent the most logical outcome to the strategic game and would set the terms for future empirical work. A key figure in the development of rational choice theory at RAND was Kenneth Arrow, who developed the “impossibility theorem” that explained why democratic systems do not always produce outcomes that conform to the wishes of the majority. His student Anthony Downs, in his Economic Theory of Democracy used the idea of individuals maximizing their self-interest to challenge notions of public interest.

Networks, Crowds, and Markets: Reasoning About a Highly Connected World
by David Easley and Jon Kleinberg
Published 15 Nov 2010

We can easily check that each of these k dictatorship systems satisfies Unanimity and IIA. First, if everyone prefers to X to Y , then the dictator does, and hence the group ranking does. Second, the group ranking of X and Y depends only how the dictator ranks X and Y , and does not depend on how any other alternative Z is ranked. Arrow’s Theorem. In the 1950s, Kenneth Arrow proved the following remarkable result [22, 23], which clarifies why it’s so hard to find voting systems that are free of pathological behavior. Arrow’s Theorem: If there are at least three alternatives, then any voting system that satisfies both Unanimity and IIA must correspond to dictatorship by one individual.

Artificial Intelligence: A Modern Approach
by Stuart Russell and Peter Norvig
Published 14 Jul 2019

The IIA condition says that, ωi ≻* ωj should not change. •No Dictatorships: It should not be the case that the social welfare function simply outputs one voter’s preferences and ignores all other voters. These four conditions seem reasonable, but a fundamental theorem of social choice theory called Arrow’s theorem (due to Kenneth Arrow) tells us that it is impossible to satisfy all four conditions (for cases where there are at least three outcomes). That means that for any social choice mechanism we might care to pick, there will be some situations (perhaps unusual or pathological) that lead to controversial outcomes. However, it does not mean that democratic decision making is hopeless in most cases.