Kenneth J. Arrow

Nobel 1972 | What’s the future of democracy?

At the age of 51, Kenneth Arrow was the youngest economist ever to win a Nobel Prize. His outlook and recommendations have held strong in turbulent times, and serve as a beacon of hope in the struggle for political justice and preservation of democracy. Arrow had the firm belief that “if the world was composed of only selfish people, it wouldn’t survive for even a few minutes,” and so he tried to create a fair and socially desirable voting system. Even if the results prove that this is an impossible proposition, his studies mark the birth (not the end) of social choice theory. His wide scope of topics spanned from general equilibria and welfare to climate change and racial discrimination, calling upon everybody to fight and work hard for fairness and humanity.

Paul A. Samuelson

Kenneth J. Arrow

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (shared), 1972

At a glance

Born: 1921, New York City, New York

Died: 2017, Palo Alto, California

Field: Microeconomics

Prize-winning work: General economic equilibrium theory and welfare theory

A math rebel: Almost failed an arithmetic course in elementary school

Addictions: Would have had the whole house covered in Renaissance masterpieces if he’d been able to afford them

Attitude: Learning by doing

Attracted by impossibility

Rather than following the usual path, Arrow was attracted by the difficult challenges in life; addressing justice, fairness and equality. Perhaps this was due to growing up in the hardships of the Great Depression, or attending public school and later a public university; or perhaps Kenneth Arrow was simply destined to change the world.

Ironically, he found himself celebrating his worldwide success with a theory that confirmed the impossibility of having a fair voting structure. To illustrate the procedure, Arrow used the most obvious example: elections. As he said back in 1988, every layman would be able to understand the struggle using the example of democracy. When we met at his house in Palo Alto, he described the issue further. If we only choose between two candidates, we don’t convey any information about intensities. “Suppose instead we have three candidates and each individual submits a preference list. For each pair of candidates, we would look for the one that has the majority over the other.” This procedure becomes especially interesting if one candidate, for any reason, steps down. “Now we have left what is essentially just pairwise comparisons,” Arrow concluded. A paradox would arise, which has come to be called the impossibility theorem. Arrow took out paper to draw a diagram for us:

  • 43 votes A > B > C (43 people prefer A over B and prefer B over C)
  • 35 votes B > C > A (35 people prefer B over C and prefer C over A)
  • 25 votes C > A > B (25 people prefer C over A and prefer A over B)

Candidate A has the most votes, so he or she would win the elections. However, if candidate B withdrew his participation in the election, C would be the winner, as more people prefer C over A. (A would have 43 votes and C would have 60). A clear demonstration of the problems for such a voting system. “It may work,” Arrow mused, while sitting in his living room chair, “but we should always be aware that there are doubts.”

Dictatorship vs democracy: Which is more efficient?

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Is democracy the best form of government for the future?

The 2016 US elections brought an 'Arrow statement' back to life: a deeply divided democracy cannot function. In turbulent economic times, with political instability in Europe and the Arab world, Arrow’s outlook on democracy sheds new light on the current situation. 

Arrow already affirmed that democracy means a much more efficient allocation of resources than dictatorship. “Due to the openness of the system, it permits problems to be identified when they’re still small." By using examples of Stalin’s terror regime and Hitler’s inability to mobilize resources, Arrow demonstrated that the transparency found in a democractic regime, where information can flow freely, helps it to work more efficiently, enabling its superiority over totalitarian regimes.

Democracy has the advantage of permitting dissident viewpoints to be established, which gives governments the impulse to act.

When comparing India and China, two countries with large populations and harsh climate conditions, one can see clear patterns in the effects of policy. “There has essentially been no starvation in India since independence. China, due to their economic policies in the time period of the Great Leap Forward, had to accept responsibility for 10-20 million deaths due to starvation.” The two examples serve to illustrate the fact that in a totalitarian regime, where information can’t be published easily, the effects of policies aren’t revealed fast enough, and so suppress dissent.

Why do scientists fail to make everyone better off?

A discussion about how to design a system that makes everyone better off, led Arrow to consider what paradise would look like.

The traditional view of paradise is one where there is no economic problem. Therefore, no need for a stock exchange or money, or government policy. I mean, there’s no need for democracy because there’s no need for government.

But even in paradise, as Arrow pointed out, some people will specialize in fishing fish, while others will prefer to be gardeners. “And perhaps the gardeners will want to trade some of their fruit for the extra fish, and sooner or later you have a market. The gardener will want to plant a tree and may need to borrow resources to do so, and then you have a stock market.”

He made his point clear. Even in paradise the system repeats itself. “The very idea of society must depend on the fact that people aren’t alike. People need each other to satisfy needs.”

Can we design a policy that makes everybody better off?

Arrow noted, economists have a big disadvantage in comparison to other natural scientists. “One reason why the natural sciences have succeeded is the possibility of laboratory experiments.You don’t look at the whole system when you’re trying to learn what’s going on.”

Arrow was aware that it’s very difficult to make economic predictions that are set-in-stone, as all observations are extracted from the uncontrolled world of markets . “Unfortunately, our understanding does not really translate into political control-modeling policies to achieve given ends.”

With this framework in mind, he tried to find out if there was a policy that would make every individual better off. His answer is as simple as it is frustrating: “no”. But even if we can’t reach what some might call utopia, Arrow claimed that we can fundamentally renew and modernize the pillars of our existing policies. To achieve this, humankind has to answer a wider set of questions.

What’s the solution to the federal budget deficit?

Focused on the economic outlook, Arrow voiced doubts about the development of current and future policies. “We had a great reduction in tax rates and I think it’s going somewhat too far,” he warned, explaining that the increasing budget deficit in the United States in the 1980s, and several times since then, has resulted in little to no improvement. Arrow claims: “Taxes should be raised to treat the problem, the taxes on gasoline especially should not be as low as they are.”

The advantages our society would gain from implementing Arrow’s suggestions would be an increased freedom for policy formulations across a wider spectrum. For Arrow, there’s a more personal example: “Because of a budget deficit, it’s very hard to discuss more generous treatment of the poor.”

How the budget deficit doesn’t help the poor

Is the US government misallocating resources?

Arrow had a strong stance regarding subsidies: they give preference to certain unprofitable activities. “Water resources in the United States are a peculiar American phenomenon. They have essentially been prepared and built on uneconomic grounds.” However, for Arrow, the greatest and most puzzling feature of advanced economies is the heavily subsidized farming industry.

Can we ever achieve a fair allocation of resources?

“An industry which is losing so much money should be reexamined and retracted.” In fact, the US isn’t the only advanced economy in the world that has heavily subsidized its farmers. Countries such as Germany, France and Japan follow this example. In Arrow’s opinion, this illustrates government interference in the market, creating both additional budget deficit problems and a severe case of resource misallocation.

Rather than nourishing unfertile and unprofitable current grounds, Arrow appealed to providing better educational conditions for the future.

How do you pave the road to development?

In Arrow’s opinion, a great obstacle to economic development has in many cases been the country’s own domestic policies. “I think one can identify the countries that have developed and those that haven’t, by looking at the extent to which they centralize their planning.” While Arrow stressed that central planning was probably the main cause of backwardness for many developing countries, he also pointed out that the road to progress isn’t immediate industrialization.

In his view, “this is a false statement. If you look at advanced countries, they are highly industrialized, that’s true. However, that doesn’t mean that the way to become an advanced country is through industrialization at all expenses.” Arrow stated that “agricultural productivity is the key to economic development,” and that in fact, “the US has developed to a considerable extent, by having a highly progressive agriculture.”

What can we invest in today to accomplish the progress of our children? And by invest I don’t mean bricks and mortar, I mean invest in people. We need economic justice coupled with an efficient public sector, and a productive allocation of resources.

What can we invest in today

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I think India is a very illuminating example. They shifted from an ‘industrialization is all’ program to an agrarian scheme, where they encouraged farming by letting the prices rise. The result was one of the most rapid increases in agricultural productivity ever seen in history.

The most thrilling aspect of life for Arrow, was how to look at the obvious and discover what isn’t very obvious, to see that there are connections among things that seem unrelated. “It’s an exciting game. And my hope is to stimulate students to think about questions that he or she had never thought about before.”

The fact that today many students describe Kenneth Arrow as the most interesting economist of all time, well, that would make Arrow smile.

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