Master of the Age

Kenneth Arrow died last week, at 95, as modestly as he lived. He had survived his economist wife of seventy years, Selma Schweitzer Arrow, by eighteen months.   Of what I read in the obituaries, the most telling glimpse was one his son David afforded the Associated Press.

He was a very loving, caring father and a very, very humble man. He’d do the dishes every night and cared about people very much.  I think in his academic career, when people talk about it, it often sounds like numbers and probabilities. But a large focus of his work was how people matter.

Arrow’s nephew, former Treasury Secretary, Harvard University president, and himself an economist, Lawrence Summers, also provided an intimate view.

The next most germane observation could be ascribed to many persons over the years:  if Nobel Prizes were awarded solely to recognize dominant contributions to economic theory, the Stanford University economist would have won four or five.  As his friend Paul Samuelson once said, he was the foremost economic theorist of the second half of the twentieth century.

Arrow’s eminence is frequently ascribed, Tobin-fashion (“don’t put all your eggs in one basket”) to the short summary of social choice, a sub-discipline he and Duncan Black more or less founded in 1948 (“No voting system is perfect”). But he also fundamentally shaped the price theory applications, decision making under uncertainty, growth economics and the economics of information.

Indeed, with his appropriation of the terms “moral hazard” and “adverse selection” from the insurance industry (he trained one summer to be an actuary), Arrow introduced psychology and strategy into a fledgling science that to that point had understood itself as the study of prices and quantities.

He later sought, without success, to rename the problems he had identified as those of “hidden action” and “hidden information.”  But the deed was done.  After the appearance of “Uncertainty and the Welfare Economics of Medical Care,” in 1963, economics gradually came to concern itself with the information differences that are absolutely ubiquitous in life – and with the incentives they create.

Arrow’s centrality to the present age is not well understood. Economic Principals, among many others, has worked away on it for years.  Among his contributions, perhaps the least known, is what happened after he moved to Harvard University from Stanford, in 1968.

Since the late nineteenth century, Harvard had long been, with Columbia University and the University of Chicago, one of three main centers of economic learning in the United States. With the Russian Revolution and rise of Nazi Germany, Princeton became a late starter after 1933.

After the loss of two brilliant graduates to the Massachusetts Institute of Technology – Paul Samuelson, in 1940, Robert Solow, in 1950 – the Harvard economics department entered a long period of relative decline. Excellent faculty (Howard Raiffa, Thomas Schelling, Hendrik Houthakker, for example) continued to attract excellent students (Vernon Smith, Robert Wilson, Richard Zeckhauser, Samuel Bowles, Thomas Sargent, Christopher Sims, Robert Barro among them, and, by extension, Fischer Black) but not the critical mass of National Science Foundation grant recipients who flocked to MIT.  The latter would become the rising generation; familiar names today include Robert Merton, Joseph Stiglitz, Robert Hall, Eytan Sheshinski, George Akerlof, William Nordhaus, Martin Weitzman, Stanley Fischer, Robert Shiller, Paul Krugman, Ben Bernanke, and Jean Tirole. Relating the history of the Harvard department from its founding to the outbreak of World War II, professor Edward Mason pleaded with his editors, toward the end of the article, to permit him to delay the writing of the next chapter “until we are up again.”

By the early 1960s, Harvard economics had sloughed off the methodological conservatism and residual anti-Semitism that had cost it ITS leadership twenty years before. After losing a third brilliant graduate, Franklin Fischer, to MIT, the university resolved to reverse the course of events (about the same time they bet big on molecular biology). Successive chairmen John Dunlop and Richard Caves, hired three Clark Medal winners – Arrow (1957), Zvi Griliches (1965), and Dale Jorgenson (1971) – tenured Martin Feldstein, and brought John Meyer back from Yale (and, with him, from Manhattan, the National Bureau of Economic Research).

During the next eleven years, Arrow (and fellow theorist Jerry Green) taught many of the leaders of the generation that initiated the revolution in information economics.  They included Michael Spence, Elhanan Helpman, Eric Maskin, Roger Myerson, Jean-Jacques Laffont, and John Geanakoplos (not to mention scores of stellar undergraduates, including Jeffrey Sachs, James Poterba, and Robert Gibbons). Feldstein taught Summers and dozens of others. Harvard once again was among the top departments, this time in the world – especially after Maskin returned from MIT, followed by several others.  Someone will write up the story of those remarkable years someday.

All the while, Arrow returned to Stanford every summer, to preside over conferences at the Institute for Mathematical Studies in the Social Sciences, organized by Stanford professor Mordecai Kurz. It was at the IMSSS that many developments of the next generation took place.  By 1980, Arrow was ready to return to Stanford. But that’s a story for another day.

After he left, Harvard University Press published six volumes of his collected papers – Social Choice and Justice; General Equilibrium; Individual Choice under Certainty and Uncertainty; The Economics of Information; Production and Capital; and The Economics of Information.Earlier, he had published a volume of papers on planning written with his friend Leo Hurwicz, Studies in the Resource Allocation Process.

In 2005, Arrow attached an addendum to his autobiography on the Nobel Foundation site, to reflect a subtly changing reappraisal, his own and that of others, of the significance of his work. In 2009, he became founding editor, with Timothy Bresnahan, of The Annual Review of Economics. And in recent years, he began thinking of the next volumes of collected papers – perhaps as many as another six or even eight, including one on economics and ecology. Much more time will be required to see Kenneth Arrow in perspective