Kenneth Arrow Quotes

In addition to ignoring game aspects of the problem of social choice, we will also assume in the present study that individual values are taken as data and are not capable of being altered by the nature of the decision process itself. This, of course, is the standard view in economic theory (though the unreality of this assumption has been asserted by such writers as Veblen, Professor J. M. Clark, and Knight) and also in the classical liberal creed. If individual values can themselves be affected by the method of social choice, it becomes much more difficult to learn what is meant by one method’s being preferable to another.

I then follow up with four major aspects of economic research in the last 60 years, the period of my scholarly activity. One, econometric methodology and practice, is of such fundamental importance that it cannotgo unnoticed, although I played no role in it. With the other three, general equilibrium, dynamic processes, and uncertainty and information, I was more intimately involved.

The creation of knowledge that constitutes an innovation is in turn dependent on the acquisition and application of existing knowledge; information is an input into the production of information. This background knowledge and the ability to use it are the most important elements of the social context of individually motivated innovation.

Because the costs of transmission are nonnegligible, even situations which are basically certain become uncertain for the individual; the typical economic agent simply cannot acquire in a meaningful sense the knowledge of all possible prices, even where they are each somewhere available. Markets are thus costly to use, and therefore the multiplication of markets, as for contingent claims as suggested above, becomes inhibited.

The idealist doctrine then may be summed up by saying that each individual has two orderings, one which governs him in his everyday actions, and one which would be relevant under some ideal conditions and which is in some sense truer than the first ordering. It is the latter which is considered relevant to social choice, and it is assumed that there is complete unanimity with regard to the truer individual ordering.

I was a very polite person, though. Paul Samuelson tells these stories how he used to correct his professors. I assume that’s true. But I wasn’t that type.

The government may be regarded as a decision-making entity. Among the decisions it makes are the formation of economic policy and the collection of economic-statistical information. In all modern nations the economic policies of the government are significant activities, if for no other reason than the high proportion of national income which passes through the Treasury; but of course in many countries much more ambitious economic planning is aimed at, though not necessarily achieved. Economic statistics, on the other hand, if one is to judge by expenditures, form only an insignificant proportion of a government's activities and are the least developed precisely in those underdeveloped countries which have the greatest felt needs for economic plans.

Even Ricardo's most famous accomplishment, the law of comparative advantage in foreign trade, is incomplete, though not wrong.

Nevertheless, when all due allowances are made, the coherence of individual economic decisions is remarkable. As incomes rise and demands shift, for example, from food to clothing and housing, the labor force and productive facilities follow suit. Similarly, and even more surprising to the layman, there is a mutual interaction between shifts in technology and the allocation of the labor force. As technology improves exogenously, through innovations, the labor made redundant does not become permanently unemployed but finds its place in the economy. It is truly amazing that the lessons of both theory and more than a century of history are still so misunderstood. On the other hand, a growing accumulation of instruments of production raises real wages and in turn induces a rise in the prices of labor-intensive commodities relative to those which use little labor. All these phenomena show that by and large and in the long view of history, the economic system adjusts with a considerable degree of smoothness and indeed of rationality to changes in the fundamental facts within which it operates.

To sum up, we expect a free enterprise economy to underinvest in invention and research (as compared with an ideal) because it is risky, because the product can be appropriated only to a limited extent, and because of increasing returns in use. This underinvestment will be greater for more basic research. Further, to the extent that a firm succeeds in engrossing the economic value of its inventive activity, there will be an underutilization of that information as compared with an ideal allocation.

Unfortunately, the word 'learning' is a very general word. It isn't a very specific theory and we can have a lot of learning models, and it's unlikely that any one is going to track. When you talk about learning, you talk about the human mind adapting to conditions, and we haven't nailed that down very well. This is always an objection to the whole idea of bounded rationality. Not that it's wrong, but if it's right, it doesn't actually tell you what to do. Rationality is unique. That isn't really quite true, but at least under many circumstances it is. To say that we're not at the top of a hill gives you a lot of variety as to where you might be. So the problem with bounded rationality is not that it's wrong. On the contrary, I think it's very apt to be correct. It's just that its predictions are a lot more vague than those implied by rationality. At the moment, I don't know what to do about that.

In eras when authority or at least specific authorities have been questioned, there is more tendency to examine the roots of and the need for authority. The owl of Minerva flies not in the dusk but in the storm.

I expect that ethical codes and informal nonprice organizations will continue to evolve where needed, for example in the control of product quality, to permit transactions which would be impossible because of differential information in markets where all individuals behaved in a purely selfish manner. The evolution of ethical codes is facilitated by the fact that productive units are organizations, not individuals, and individuals are mobile among these organizations.

We find that capitalism, like any very complex system, contains within itself contradictory tendencies, but there is no reason to suppose they are fatal, at least in the foreseeable future. We do find implied in these contradictions some social tasks: the completion of the tasks involved in the achievement of macroeconomic stability, the redistribution of income and power to improve the sense of justice in the arrangements of society, by which I mean the inseparable elements of the liberty and equality of individuals, and, perhaps hardest, the increase in the sense of individual and local control over one's destiny in the workplace and the small society. These aims are mutually reinforcing, not competitive.

Let us turn from the epistemological problems of the current decision-maker for society to those in the original position. Individuals are supposed to know the laws of the physical and the social worlds, but not to know who they are or will be. But empirical knowledge is after all uncertain, and even in the original position individuals may disagree about the facts and laws of the universe.