Getting tenure without terminal degrees … what a concept. Kenneth Arrow was one of the youngest economists to be awarded the Nobel Prize at 51. He died at the age of 95.
the Impossibility Theorem states that no rank-order voting system can be designed that always satisfies these three "fairness" criteria:
- If every voter prefers alternative X over alternative Y, then the group prefers X over Y.
- If every voter's preference between X and Y remains unchanged, then the group's preference between X and Y will also remain unchanged (even if voters' preferences between other pairs like X and Z, Y and Z, or Z and W change).
- There is no "dictator": no single voter possesses the power to always determine the group's preference.
Cardinal voting systems are not covered by the theorem, as they convey more information than rank orders.[2][3](See the subsection discussing the cardinal utility approach to overcoming the negative conclusion.)
Arrow originally rejected cardinal utility as a meaningful tool for expressing social welfare,[4] and so focused his theorem on preference rankings, but now states that a cardinal score system with three or four classes "is probably the best".[2]
His work even as magisterial as this has broader implications for amalgamating evidence of a broad range.
Professor Arrow anticipated the modern analysis of markets in which buyers and sellers do not share accurate information (now known as markets with asymmetric information). In a strikingly prescient article published in the early 1960s, he teased apart the complexities that asymmetric information creates in the market for health insurance. He pointed to incentives for patients and their physicians to agree to medical procedures of questionable value when a third party, the insurer, pays the bills.
Professor Arrow’s work spawned the modern treatment of “moral hazard,” whereby the fact of the purchase of insurance systematically affects the behavior of the parties to the contract.
The problems that Professor Arrow flagged a half-century ago figured prominently in the design of the Affordable Care Act, President Barack Obama’s 2010 health care legislation, including its controversial “individual mandate,” which required everyone to buy coverage whether they expected to need medical care or not.
Joseph Stiglitz, who won the Nobel in 2001 for formalizing the study of markets with incomplete information, traces his work to Professor Arrow’s initial forays.
The upshot? The theorist who in the 1950s proved that perfectly competitive markets could exist as a matter of mathematical logic spent much of the rest of his career showing how far short of perfection actual markets fall.