Kenneth Arrow Quotes

The fundamental fact which causes the need for discussing public values at all is that all significant actions involve joint participation of many individuals. Even the apparently simplest act of individual decision involves the participation of a whole society.
It is important to note that this observation tells us all non-trivial actions are essentially the property of society as a whole, not of individuals. It is quite customary to think of each individual as being able to undertake actions on his own (e.g., decisions of consumption, produc- tion, and exchange, moving from place to place, forming and dissolving families). Formally, a social action is then taken to be the resultant of all individual actions. In other words, any social action is thought of as being factored into a sequence of individual actions.

To conclude, I argue that the government should not display risk aversion in its behavior. Hence, the proper procedure is to compute the expected values of benefits and costs, and discount them at a riskless rate, contrary to the view of Hirshleifer (1964, p. 85).
Suppose the future to be unknown; it is known that one of a set of states will prevail, and their probabilities are known (or believed in). A given state means a complete description of all production possibilities, so that all uncertainties are resolved when the state is known. To summarize some earlier discussions (Arrow, 1964b; Deberu, 1959, chap 7; Hrishleifer, 1964, pp. 80-85), we can achieve an optimal allocation if we imagine markets in all possible commodity-options, a commodity-option being an obligation to deliver a fixed amount of a given commodity if, and only if, a given state prevails.

According to this point of view, knowledge is, so to speak, a by-product of production or of investment. In research, on the contrary, it can be said that knowledge is the primary product. The distinction between products and by-products is not important for ordinary goods, because in a competitive regime the marginal costs of the two must be equal. But since knowledge does not have the normal properties of an economic good, it is necessary to study each mode of its production.

The choice among these alternatives in any given case depends on the degree of difficulty consumers have in making the choice unaided, and on the consequences of errors of judgment. It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable. The certification proposal never seems to have been discussed seriously.

If the government and other nonprofit institutions are to compensate for the underallocation of resources to invention by private enterprise, two problems arise: how shall the amount of resources devoted to invention be determined, and how shall efficiency in their use be encouraged? These problems arise whenever the government finds it necessary to engage in economic activities because indivisibilities prevent the private economy from performing adequately (highways, bridges, reclamation projects, for example), but the determination of the relative magnitudes is even more difficult here.

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.

In an ideal socialist economy, the reward for invention would be completely separated from any charge to the users of information. In a free enterprise economy, inventive activity is supported by using the invention to create property rights; precisely to the extent that it is successful, there is an underutilization of the information.

Invention is here interpreted broadly as the production of knowledge. From the viewpoint of welfare economics, the determination of optimal resource allocation for invention will depend on the technological characteristics of the invention process and the nature of the market for knowledge.

In this aspect, the case for democracy rests on the argument that free discussion and expression of opinion are the most suitable techniques of arriving at the moral imperative implicitly common to all. Voting, from this point of view, is not a device whereby each individual expresses his personal interests, but rather where each individual gives his opinion of the general will.

From the point of view of seeking a consensus of the moral imperative of individuals, such consensus being assumed to exist, the problem of choosing an electoral or other choice mechanism, or, more broadly, of choosing a social structure, assumes an entirely different form from that discussed in the greater part of this study.

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.

If there are at least three alternatives which the members of the society are free to order in any way, then every social welfare function satisfying Conditions 2 and 8 and yielding a social ordering satisfying Axioms I and II must be either imposed or dictatorial.

If the total number of alternatives is two, the method of majority decision is a social welfare function which satisfies Conditions 2–5 and yields a social ordering of the two alternatives for every set of individual orderings.

The concept of rationality used throughout this study is at the heart of modern economic analysis, and it cannot be denied that it has great intuitive appeal; but closer analysis reveals difficulties.

The problem of measuring utility has frequently been compared with the problem of measuring temperature. This comparison is very apt. Operationally, the temperature of a body is the volume of a unit mass of a perfect gas placed in contact with it (provided the mass of the gas is small compared with the mass of the body). Why, it might be asked, was not the logarithm of the volume or perhaps the cube root of the volume of the gas used instead? The reason is simply that the general gas equation assumes a particularly simple form when temperature is defined in the way indicated. But there is no deeper significance.