ARROW, Kenneth was born on August 23, 1921 in New York, United States. Son of Harry I. and Lillian Arrow. Arrow is considered, along with Paul Samuelson, one of the founders of modern neo-classical economics. His most significant works are his contributions to social choice theory, notably "Arrow's impossibility theorem," and his work on general equilibrium analysis. He has also provided foundational work in many other areas of economics, including endogenous growth theory and information economics. In 1972, Kenneth Arrow received the Nobel Prize for Economics.
Arrow's impossibility theorem was set out in his Ph.D. thesis, Social choice and individual values.
Arrow has generalized the well-known theorem about pareto-optimality of a competitive equilibrium, and he has demonstrated that there exist general tendencies towards inoptimality in the allocation of resources between research and investments in real capital. As perhaps the most important of Arrow's many contributions to welfare theory appears his "possibility theorem", according to which it is impossible to construct a social welfare function out of individual preference functions.
In its final form it states the following: given the conditions of Pareto Optimality (P), Unbounded social choice (S), Independence of choices (I) and non-Dictatorship (D), it is impossible to formulate a social choice function which satisfies all of them. This has tremendous implications for welfare economics and theories of justice. It was extended by Amartya Sen to the Liberal Paradox which argued that given a status of "Minimal Liberty" there was no way to obtain Pareto Optimality, nor to avoid the problem of social choice of neutral but unequal results.
Arrow applied mathematical methods in his studies of general equilibrium systems. In a series of papers, which preferentially treated the properties of solubility and stability of such systems, he provided the basis for a radical reformulation of the traditional equilibrium theory. Through this reformulation, which was based on the mathematical theory of convex sets, the general equilibrium theory gained both in generality and in simplicity. The pioneering work, a paper from 1954, was written together with Gerhard Debreu. The model presented in this paper became the starting point for the major part of further research in this field. Among Arrow's many important contributions should also be mentioned his development of the theory of uncertainty and its incorporation within the frame of general equilibrium theory and, furthermore, his analysis of the possibilities for decentralized decisions in a society where the price system is fixed by the central authority. This analysis was made in collaboration with Leonid Hurwicz.
Endogenous Growth theory
Arrow was instrumental in kick-starting research into endogenous growth theory (also known as new growth theory) which sought to explain the source of technical change, which is a key driver of economic growth. Until this theory came to prominence, technical change was assumed to occur exogenously - that is, it was assumed to occur with no explanation of why it occurred. Endogenous growth theory provided standard economic reasons for why firms innovate - so innovation and technical change are determined endogenously - that is, within the model (hence the name). A vast literature on this theory has developed subsequently to Arrow's pioneering work.
Arrow was also one of the first economists to note the existence of a learning curve. His basic idea was that as producers increase output of a product, they gain experience and become more efficient. “The role of experience in increasing productivity has not gone unobserved,” he wrote, “though the relation has yet to be absorbed into the main corpus of economic theory.” More than forty years after Arrow’s article, the learning curve insight has still not been fully integrated into mainstream economic analysis.
In yet more pioneering research, Arrow investigated the problems caused by asymmetric information in markets. In many transactions, one party (usually the seller) has more information about the product being sold than the other party. Asymmetric information creates incentives for the party with more information to cheat the party with less information; as a result, a number of market structures have developed, including warranties and third party authentication, which enable markets with asymmetric information to function. Arrow analysed this issue for medical care (a 1963 paper entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review); later researchers investigated many other markets, particularly second-hand assets, online auctions and insurance.