Kenneth Arrow Quotes

There is also one particularly needed elaboration of the model (which is not to say that it doesn't cry out for elaboration in many other directions). This is the relation between college filtering and on-the-job filtering. Once an employee has been hired, the employer can gradually draw on more directly obtained information to determine his productivity. However, this filtering may be costly. To the extent that the employer does filter and does so accurately, the Value of the college filter is reduced. The employer pays the average product of a group with given educational achievement only during the period before his own filter has become effective. Conversely, however, an increase in the college population will mean (and has meant) a depreciation in the quality of non-college students (this is not necessarily the same as a decrease in the quality of college students).

In a capitalist democracy there are essentially two methods by which social choices can be made: voting, typically used to make ‘political’ decisions, and the market mechanism, typically used to make ‘economic’ decisions. In the emerging democracies with mixed economic systems Great Britain, France, and Scandinavia, the same two modes of making social choices prevail, though more scope is given to the method of voting and to decisions based directly or indirectly on it and less to the rule of the price mechanism. Elsewhere in the world, and even in smaller social units within the democracies, the social decisions are sometimes made by single individuals or small groups and sometimes (more and more rarely in this modern world) by a widely encompassing set of traditional rules for making the social choice in any given situation, for example, a religious code.

In fact, is is not a mere empirical accident that not all the contingent markets needed for efficiency exist but a necessary fact with deep implications for the workings and structure of economic institutions. Roughly speaking, information about particular events, even after they have occurred, is not spread evenly throughout the population. Two people cannot enter into a contract contingent on the occurrence of a certain event or state if only one of them in fact will know that the event has occurred. A particular example of this is sometimes known as “moral hazard” in the insurance and economic literature. The very existence of insurance will change individual behavior in the direction of less care in avoiding risks.

The conventional view among economists is that education adds to an individual's productivity and therefore increases the market value of his labor. From the viewpoint of formal theory, it does not matter how the student's productivity is increased, but implicitly it is assumed that the student receives cognitive skills through his education. Educators, on the other hand, have long felt that the activity of education is a process of socialization, with the latent content of the process—the acquisition of skills such as the carrying out of assigned tasks, getting along with others, regularity, punctuality, and the like—being at least as important as the manifest objectives of conveying information. This last doctrine has been revived by radical economists, though with a negative rather than a positive valuation. But from the viewpoint of economic theory, the socialization hypothesis is just as much a human capital theory as the cognitive skill acquisition hypothesis. Both hypotheses imply that education supplies skills that lead to higher productivity. I would like to present a very different view. Higher education, in this model, contributes in no way to superior economic performance; it increases neither cognition nor socialization. Instead, higher education serves as a screening device in that it sorts out individuals of differing abilities, thereby conveying information to the purchasers of labor.

Democracy is a form of government in which political decisions are ultimately governed by the bulk of the adult population, though, of course, usually indirectly through election of representatives. It is fair to say that political liberties, freedom of speech and of the press, are so closely inherent in meaningful democracy as to constitute part of the definition. But one can perfectly well imagine democracy without freedom of religion or in a society where every move is reported and internal passports are needed. Whether or not these restrictions are incompatible with the persistence of democracy is a contingent question, not a tautologous consequence of a definition.

What can be concluded? We cannot be sure that the principles of democracy and socialism are compatible until we can observe a viable society following both principles. But there is no convincing evidence or reasoning which would argue that a democratic-socialist movement is inherently self-contradictory. Nor need we fear that gradual moves in the direction of increasing government intervention will lead to an irreversible move to “serfdom.”

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.

There are information asymmetries in this story. Health insurance is limping along. It's limited in scope, and then you other consequences. Insurance companies have high premiums to protect themselves. The ones who come to the insurance company are sicker and the people have to pay more. You have adverse selection. You have moral hazard. And the doctor does what's on the safe side -- defensive medicine -- without regard to cost. These are fundamental conditions that make health insurance difficult. You have some things that help. Some doctors understand that they shouldn't abuse the system. But you still see problems in the way doctors behave towards patients. They goof off. Sometimes it's too much work. Some things are difficult and risky to diagnose.

Certainly, there is no general principle that prevents the creation of an economic theory based on other hypotheses than that of rationality.

The only rational defense of what may be termed a liberal position, or perhaps more precisely a principle of limited social preference, is that it is itself a value judgment. In other words, an individual may have as part of his value structure precisely that he does not think it proper to influence consequences outside a limited realm. This is a perfectly coherent position, but I find it difficult to insist that this judgment is of such overriding importance that it outweighs all other considerations. Personally, my values are such that I am willing to go very far indeed in the direction of respect for the means by which others choose to derive their satisfactions.

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 purpose of organizations is to exploit the fact that many (virtually all) decisions require the participation of many individuals for their effectiveness.

If markets were sufficiently complete, with all futures periods and all uncertain contingencies already provided for in the contracts, the concept of property would cease to be problematic. All decisions would have been made in advance, and there would be no further questions of transfers to treat as just or unjust. Because in fact many of these markets do not exist, there are direct non-market relations which affect individuals' levels of satisfaction. Voluntary transfers become possible, but not all conceivable transfers can be made. Hence, voluntary transfers become biassed in direction, and the possible injustice of the whole system of transfers must be recognized.

Traditional welfare economics shows that there are certain of these combinations that will be preferred by all the voters, which permits us to eliminate the others without too much discussion. However, there will always remain an irreducible kernel of possibilities among which the choice rests on a combination or aggregation of individual ethical attitudes about distribution.

The competitive system can be viewed as an information and decision structure. Initially, each agent in the economy has a very limited perspective. The household knows only its initial holdings of goods (including labor power) and the satisfactions it could derive from different combinations of goods acquired and consumed. The firm knows only the technological alternatives for transforming inputs into outputs. The “communication” takes the form of prices. If the correct (equilibrium) prices are announced, then the individual agents can determine their purchases and sales so as to maximize profits or satisfactions. The prices are then, according to the pure theory, the only communication that needs to be made in addition to the information held initially by the agents. This makes the market system appear to be very efficient indeed; not only does it achieve as good an allocation as an omniscient planner could, but it clearly minimizes the amount of communication needed.