Kenneth Arrow

Definition

Kenneth Arrow is a renowned economist known for his significant contributions to the fields of general equilibrium theory and social choice theory. His work laid the groundwork for understanding how markets achieve efficiency and how collective decision-making can be systematically analyzed, making him a pivotal figure in economic theory.

5 Must Know Facts For Your Next Test

1. Kenneth Arrow won the Nobel Prize in Economic Sciences in 1972 for his pioneering work on general equilibrium and social choice theory.
2. His work demonstrated how competitive markets can lead to efficient outcomes, which is foundational in welfare economics.
3. Arrow's Impossibility Theorem highlights the challenges in creating a fair voting system, influencing political science and economics.
4. He introduced the concept of 'Pareto efficiency,' where no individual can be made better off without making someone else worse off, to analyze market outcomes.
5. Arrow's research has had lasting implications, shaping discussions around economic policy, market design, and the intersection of economics and political science.

Review Questions

• How did Kenneth Arrow's work contribute to our understanding of general equilibrium and its relevance in economics?
  • Kenneth Arrow's contributions to general equilibrium theory helped clarify how markets operate together to achieve efficiency. He showed that under certain conditions, prices adjust so that supply equals demand across all markets, leading to optimal resource allocation. This insight is critical for understanding how economies function as interconnected systems rather than isolated parts.
• Discuss the implications of Arrow's Impossibility Theorem on democratic decision-making processes.
  • Arrow's Impossibility Theorem reveals the inherent difficulties in designing a perfect voting system that respects fairness criteria like unrestricted domain and independence of irrelevant alternatives. It demonstrates that no voting method can simultaneously satisfy all desired conditions when three or more options are present, which complicates how societies approach collective decision-making. This theorem has significant implications for political theory and electoral design.
• Evaluate the influence of Kenneth Arrow’s theories on modern economic policy and market regulation.
  • Kenneth Arrow's theories have profoundly influenced modern economic policy by providing a foundation for understanding market efficiencies and failures. His insights into general equilibrium allow policymakers to better grasp how different sectors interact within an economy. Additionally, his work on social choice has prompted discussions about fair representation and the limitations of democratic processes, leading to more informed approaches to market regulation and public policy design.

Related terms

General Equilibrium: A condition in which all markets in an economy are in balance simultaneously, with prices adjusting until supply equals demand across the board.

Social Choice Theory: A theoretical framework that examines how individual preferences can be aggregated to make collective decisions, often revealing the complexities of democratic decision-making.

Arrow's Impossibility Theorem:

A fundamental result in social choice theory that states no rank-order voting system can meet a specified set of fairness criteria when there are three or more options.