Kenneth Arrow

"There is no need to enlarge upon the importance of a realistic theory explaining how individuals choose among alternate courses of action when the consequences of their actions are incompletely known to them. It is no exaggeration to say that every choice made by human beings would meet this description if attention were paid to the ultimate implications."

"Among economic phenomena which have in some way been tied up with the existence of uncertainty, three classes may be distinguished: (1) those which by their very definition are concerned with uncertainty; (2) those which are not related to uncertainty by definition but nevertheless have no other conceivable explanation; (3) those whose relation to uncertainty is more remote and disputable."

"The businessman may be compared with two other types of individuals who are essentially concerned with behavior under uncertainty ― the scientist and the statistician. The scientist must choose, on the basis of limited information, among the innumerable logically conceivable laws of nature, a limited number. He cannot know whether his decisions are right or wrong, and, indeed, it is none too clear what is meant by those terms. There is a long history of attempts to reduce scientific method to system, including many which introduce probability theory, but it cannot be said that any great formal success has attended these efforts. If we were to compare the businessman to the scientist, we would be forced to the melancholy conclusion that little of a systematic nature can be said about the former’s decision-making processes. The statistician typically finds himself in situations more similar to that of the businessman. The problem of statistics can be formulated roughly as follows. It is known that one out of a number of hypotheses about a given situation is true. The statistician has the choice of one of a number of different experiments (a series of experiments can be regarded as a single experiment, so that drawing a sample of any size can be included in this schema), the outcome of any one of which is a random variable with a probability distribution depending on which of the unknown hypotheses is correct. On the basis of that outcome, the statistician must take some action (accept or reject a hypothesis, estimate the mean of a distribution to be some particular value, accept or reject a lot of goods, recommend a change in production methods, and so on), the consequences of which depend on the action taken and on the hypothesis that is actually true."

"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."

"Ever since I encountered Hicks’s Value and Capital while I was still a graduate student, I had the aim of completing and extending his vision of the economic system in its purest form. This was not because I believed that the economic world was perfectly competitive or that it was clearly self-equilibrating; after all, Chamberlin, Robinson, and Keynes were dominant intellectual influences, and I had the even more powerful influence of the facts of massive unemployment and large corporations. But the idea that the economic world was a general system, with all parts interdependent, seemed (and seems) to me to be an essential of good analysis. I regret what appears to be a revival of single-market thinking both among monetarists and among some of the younger empirical analysts. Then as now, the only game in town that offered a general system of economic interdependence was general competitive equilibrium, an idea to which the name of Leon Walras is imperishably linked. At least, such a system would provide a starting point for analysis of the market’s imperfections."

"L. Walras first formulated the state of the economic system at any point of time as the solution of a system of simultaneous equations representing the demand for goods by consumers, the supply of goods by producers and the equilibrium condition that supply equal demand on every market."

"Perhaps as important is the relation between the existence of solutions to a competitive equilibrium and the problems of normative or ."

"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."

"Government economic policy, like almost any realistic decision problem, has two fundamental characteristics: it is sequential and it is uncertain."

"In view of the magnitude of an economic system, it would take only a very small percentage of improvement in economic stability or growth to make almost any conceivable data collection worthwhile. The situation is analogous to reported results of the use of linear programming in industry; the gains are small in proportion to previous profit levels but still very much larger than the costs of the programming. No country is adequate in respect to its data. In particular the underdeveloped countries, with their ambitious programs, might well ponder whether or not the marginal productivity of investment in better economic statistics is perhaps not higher than almost any conceivable alternative; they have more need and fewer data."

"Decision theory, as it has grown up in recent years, is a formalization of the problems involved in making optimal choices. In a certain sense — a very abstract sense, to be sure — it incorporates among others operations research, theoretical economics, and wide areas of statistics, among others."

"The formal structure of a decision problem in any area can be put into four parts: (1) the choice of an objective function defining the relative desirability of different outcomes; (2) specification of the policy alternatives which are available to the agent, or decision-maker, (3) specification of the model, that is, empirical relations that link the objective function, or the variables that enter into it, with the policy alternatives and possibly other variables; and (4) computational methods for choosing among the policy alternatives that one which performs best as measured by the objective function."

"Strictly speaking, decision theory really is concerned only with the fourth part of the division given above, that is, the determination of the computational methods for optimization. Given the determination of the other three factors―the objective function, the range of policy alternatives, and the model―the ideal picture is that someone, presumable the firm that hires the operations researcher, hands him, on a silver platter, an objective function. By talking to the engineers, or by looking into a few scientific laws, he determines the policy alternatives available and also the model."

"Speaking very broadly, almost any human action involves choice; the external environment delimits a range of possible actions at any given moment but does not usually reduce that range to a single alternative. The formulation of a theory of human action in some sphere as a theory of choice means its presentation as a functional relation associating with each possible range of alternatives a chosen one among them."

"Learning, as studied by psychologists, closely resembles sequential analysis in some aspects. Learning experiments usually consist of a series of trials in which the subject’s choices are sometimes rewarded and sometimes not. The individual, after making many choices, eventually begins to discriminate between the proper response and the improper one. At some point, presumably, he could terminate the experiment, at least in the sense of disregarding the further observations and making the same choice each time."

"Index numbers are, of course, desired for purposes other than to measure the cost of living. One obvious possibility is to consider some subset of cost-of- living items, such as food. The logic of the preceding argument goes through precisely provided we assume that the distribution of food expenditures in any period among different foods depends only on the total volume of food expenditures and is independent of the prices of other goods, for any given total volume of food expenditures. This does not deny substitution between foods and other commodities, but we assume that the total effect of this substitution is already reflected in the choice of a volume of food expenditures. In a broad way, similar considerations apply to the pricing of producers’ goods, which should be interpreted as reflecting indirectly consumers’ preferences. However, there is undoubtedly a good deal more in the detailed working out of the theory that has never been developed."

"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 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."

"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."

"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."

"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."

"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."

"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."

"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."

"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."

"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 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."

"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."

"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."

"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."

"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."

"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."

"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, then, we must in a general theory take as our unit a social action, that is, an action involving a large proportion or the entire domain of society. At the most basic axiomatic level, individual actions play little role. The need for a system of public values then becomes evident; actions being collective or interpersonal in nature, so must the choice among them. A public or social value system is essentially a logical necessity."

"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 interpret moral obligation as the carrying out of agreements which may, however, be implicit. Thus, a society in which everyone immediately executed his aggressive impulses would be untenable. Therefore, there is an agreement that I will refrain from aggressive actions, which in themselves give me satisfaction, in return for your not taking aggressive action against me. However, conscious agreements to achieve these ends are much too costly in terms of information and bargaining. Therefore, as societies have evolved they have found it economical to make these agreements at an unconscious, implicit level. Internalized feelings of guilt and right are essentially unconscious equivalents of agreements that represent social decisions."

"In this case of unrestricted income distribution, the dimensionality of the issue space is the same as the number of individuals. Thus, as Tullock argues, political resolution of distributional issues is apt to be possible only if only a few parameters of the income distribution are under consideration, not the whole distribution. Why this restriction of the scope of choice should occur is not easy to explain on simple economic grounds. On the other hand, the restriction does conform to the long-standing view of writers on ethics, of whom Kant is perhaps most conspicuous, that decisions on distribution ought to be made as if by an impartial observer, who considers then only the mean, a measure of inequality, and perhaps one or two further parameters characterizing the income distribution, but not specifically who gets what. If voters acted like Kantian judges, they might still differ, but the chances of coming to an agreement by majority decision would be much greater than if voters consulted egoistic values only. Does this suggest that ethics may have survival value for political systems and therefore descriptive as well as prescriptive significance?"

"There are two approaches to a theory of general equilibrium in an imperfectly competitive environment; most writers who touch on public policy questions implicitly accept one or the other of these prototheories without always recognizing that they have made such a choice. One assumes that all transactions are made according to the price system, that is, the same price is charged for all units of the same commodity; this is the monopolistic competition approach. The alternative approach assumes unrestricted bargaining; this is the game theory approach. The first might be deemed appropriate if the costs of bargaining were high relative to the costs of ordinary pricing, while the second assumes costless bargaining."

"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."

"I want, however, to conclude by calling attention to a less visible form of social action: norms of social behavior, including ethical and moral codes. I suggest as one possible interpretation that they are reactions of society to compensate for market failures. It is useful for individuals to have some trust in each other's word. In the absence of trust it would become very costly to arrange for alternative sanctions and guarantees, and many opportunities for mutually beneficial cooperation would have to be, foregone."

"It is difficult to conceive of buying trust in any direct way (though it can happen indirectly, for example, a trusted employee will be paid more as being more valuable); indeed, there seems to be some inconsistency in the very concept. Nonmarket action might take the form of a mutual agreement. But the arrangement of these agreements and especially their continued extension to new individuals entering the social fabric can be costly. As an alternative, society may proceed by internalization of these norms to the achievement of the desired agreement on an unconscious level."

"Despite the favorable properties of the price system, I am no unrestrained admirer of it. Some of its limits in the urban context will be stressed below. It is not possible, however, to understand the city as an economic problem without first understanding the virtues of the free market system in performing its role of allocating resources."

"The case for equality may be made on other than utilitarian grounds; thus J. Rawls has, argued for maximizing the minimum utility, rather than the sum of utilities, as an ethical criterion, and this criterion would tend toward output equality and therefore strong input progressivity."

"Dynamic analysis may have deeper implications if we depart from the analysis of stationary states. The frim must now serve some additional roles. In the absence of futures markets, the firm must serve as a forecaster and as a bearer of uncertainty. Further, from a general equilibrium point of view, the forecasts of others become relevant to the evaluation of the firm's shares and therefore possibly of the firm's behavior."

"In any case the empirical evidence can only be made meaningful with at least a minimum of theoretical analysis."

"Property systems are in general not completely self-enforcing. They depend for their definition upon a constellation of legal procedures, both civil and criminal. The course of the law itself cannot be regarded as subject to the price system. The judges and the police may indeed be paid, but the system itself would disappear if on each occasion they were to sell their services and decisions. Thus the definition of property rights based on the price system depends precisely on the lack of universality of private property and of the price system. This ties in with the third hypothesis put forward in section I. The price system is not, and perhaps in some basic sense cannot be, universal. To the extent that it is incomplete, it must be supplemented by an implicit or explicit social contract. Thus one might loosely say that the categorical imperative and the price system are essential complements."

"While economic theory in general may be defined as the theory of how an economic condition or an economic development is determined within an institutional framework, the deals with how to judge whether one condition can be said to be better in some way than another and whether it is possible, by altering the institutional framework, to achieve a better condition than the present one."

"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."

"My own interest first centered on the relations between Pareto efficiency and competitive equilibrium. In particular, there was considerable discussion among economists in the late 1940’s about the inefficiencies resulting from rent control and different proposals for arriving at the efficiency benefits of a free market by one or another transition route. Part of the informal efficiency arguments hinged on the idea that under rent control people were buying the wrong kind of housing, say, excessively large apartments. It struck me that an individual bought only one kind of housing, not several. The individual optima were at corners, and therefore one could not equate marginal rates of substitution by going over to a free market. Yet diagrammatic analysis of simple cases suggested to me that the traditional identification of competitive equilibrium and Pareto efficiency was correct but could not be proved by the local techniques of the differential calculus."

"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."

"General competitive equilibrium above all teaches the extent to which a social allocation of resources can be achieved by independent private decisions coordinated through the market. We are assured indeed that not only can an allocation be achieved, but the result will be Pareto efficient. But, as has been stressed, there is nothing in the process which guarantees that the distribution be just. Indeed, the theory teaches us that the final allocation will depend on the distribution of initial supplies and of ownership of firms. If we want to rely on the virtues of the market but also to achieve a more just distribution, the theory suggests the strategy of changing the initial distribution rather than interfering with the allocation process at some later stage."

"The forces of competition and the tendency to profit-maximization operate to mitigate these differences. However, the basic fact of a personnel investment prevents these counteracting tendencies from working with full force. In the end, we remain with wage differences coupled with tendencies to segregation."

"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."

"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)."

"The problem of interpersonal comparison of utilities seems to bother economists more than philosophers. As already indicated, utility or satisfaction or any other similar concept appears in economic theory as an explanation of individual behavior, for example, as a consumer. Specifically, it is hypothesized that the individual chooses his consumption so as to maximize his utility, subject to the constraints imposed by his budget. But, for this purpose, a quantitatively measurable utility is a superfluous concept. All that is needed is an ordering, that is, a statement for each pair of consumption patterns as to which is preferred."

"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."

"To the extent that individuals are really individual, each an autonomous end in himself, to that extent they must be somewhat mysterious and inaccessible to each other. There cannot be any rule that is completely acceptable to all. There must, or so it now seems tome, be the possibility of unadjudicable conflict, which may show itself logically as paradoxes in the process of social decision-making."

"Once the capital goods prices are known, it is clear that the consumption goods prices are uniquely determined; for each consumption good, the activity chosen will be the one which is cheapest in its use of capital goods, valued at the known capital goods prices. Thus, all balanced growth prices in an indecomposable pure capital model with no joint production are determined by the technology."

"The members of an economy—the firms, the consumers, the investors, and the government—make choices. To give a common name to them all, I will refer to them as agents, for indeed their most salient characteristic is that they act. That they make choices implies that they have alternatives, that what was chosen was not inevitable but was in fact only one in a range of opportunities. The opportunities available to a consumer are determined by the income he has and the prices he has to pay for commodities of different use-values."

"The economic value of information offers no great mysteries in itself. It is easy to prove that one can always do better, whether as a producer or as a consumer, by basing decisions on a signal, provided the signal and the economic variables are not independently distributed. But this remark has an implication for economic decisions; the economic agent is willing to pay for information, for signals."

"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."

"May I remark, especially for the benefit of economists, that consideration of the medical care market and of the insurance situation represents not only an application of economic principles but also a reconsideration of some of the principles that we take for granted."

"We have the possibility of diverting other resources to the medical field, but that means some subtraction somewhere else. We are sufficiently close to full employment that there is no great amount of unused resources to draw upon for this purpose. We do, of course, draw to some extent upon doctors trained in other countries, but quantitatively speaking, this is not very much of a help. The basic scarcity problem cannot be avoided."

"There is little warrant for the belief that we know the laws of history well enough to make projections of any great reliability. Most of the turning points of history, great and small, were surprises to both their participants and the analysts of the day, whatever their doctrine."

"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."

"From a theoretical viewpoint, one might say that the market is in a strange sort of equilibrium; there is some shadowy sort of price at which supply and demand are equated at zero. But this price is not performing much of a signaling function."

"The terms of trade with the outside world should not be regarded as freely given to the firm. In a world with a large number of commodities, even knowing the prices of relevant commodities involves the costly acquisition of certain kinds of information."

"An organization is typically composed of changing individuals. Now any individual generally has access to many communication channels, of which this particular organization is only one. In particular, education is such a channel. Thus, the organization is getting the benefit of a considerable amount of information which is free to it."

"I think we may safely agree that the notion of democracy has two components, both indispensable: 1) the securing of the freedom of the individual so that he may develop his individual potential; 2) a symmetric mutual respect of the individuals in the society for each other. These aims are, as has been frequently remarked, partly competitive; but, it must also be stressed, they are to a very considerable extent complementary. A hierarchical society marked by great inequalities in power and esteem will surely not tolerate the liberties of those most disadvantaged. Conversely a world in which individuals have their liberties tightly confined must be one in which there are large inequalities of power."

"Let us start with elementals. Income and property are certainly the instruments of an individual’s freedom. Clearly the domain of choice is enhanced by increases in those dimensions. It is true not merely in the sense of expanded consumer choice but also in broader contexts of career and opportunity to pursue one’s own aims and to develop one’s own potential. Unequal distribution of property and of income is inherently an unequal distribution of freedom. Thus a redistribution of income, to the extent that it reduces the freedom of the rich, equally increases that of the poor. Their control of their lives is increased."

"The aim of achieving an equal distribution of political power requires a restriction on the inequalities of wealth and income."

"The domain of the theory of social choice is not in principle the same as that of a theory of justice. In some directions, it is clearly wider, since it is supposed to cover all decision that must be made collectively. On the other hand, it is possible to hold that propositions about distributive justice are not necessarily propositions about collective decisions."

"As indicated, I retain the view that the outcome should be an ordering. Presumably, the weakest possible outcome of a constitution would be a choice function, a mapping of each feasible set of alternatives into a chosen subset. Again, one cannot avoid some consistency relations among the choices from different feasible sets. Various conditions weaker than a full ordering have been proposed, but, in my judgement, they do not lead to interesting conclusions. Unless they are implausibly weak, these conditions do not lead to noticeably greater freedom in the selection of social choice procedures."

"This is by no means a "formal" matter. Clearly, the intuition behind the continuity requirement is a small step in the direction of utilitarian ethics; even the worst-off member of the society might be made to suffer if there is enough benefit to others. The assumption of diminishing marginal utility implies with regard to usual policy alternatives that there are better ways of improving the lot of better-off members than by hurting the worst-off. But there is one striking case, of great practical importance, where our intuition is in favor of utilitarianism is some form as against any minimax rule. I refer to allocation over time. Typically, we expect future generations to be better off than we are. Should we save for them either directly or in the form of public investments? A maximin rule would surely say no. But if investment is productive, so that, in terms of goods, the next generation gains more than we lose, we usually feel that some investment is worthwhile even though the recipients will be better off than we are."

"The incompleteness of property rights in general creates well-known problems in welfare economics, being in fact the basic component of externalities. In particular, markets for future commitments are relatively under-developed compared with those for the present or immediate future. Individuals have to supply for themselves expectations as to future developments in order to make decisions with consequences extending into the future, e.g., investments. These expectations, for example of prices or of supply availabilities, are not "property," but they influence the use of property and are taken into account in the present legal system. For example, an obligation to sell a product for the next few years at a given price is understood in the law to hold only if conditions do not change in a strongly unexpected way; this understanding does not require explicit statement."

"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."

"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.”"

"Social theories are also social facts. Whatever explanatory value the “Marxist” or “conservative” models may have, they surely cannot be regarded as established with any degree of firmness. Yet excessive confidence in one or the other may have serious consequences. If “conservatives” believe too strongly that any move to socialism undermines democracy, then they may indeed act in accordance with the “Marxist” model, and vice versa. (Robert Merton long ago alerted us to “self-confirming” and “self-denying” social theories; here we have a pair of rival theories which are “other-confirming.”)"

"To sum up, the basic values that motivated my preference for socialism over capitalism were (1) efficiency in making sure that all resources were used, (2) the avoidance of war and other political corruptions of the pursuit of profits, (3) the achievement of freedom from control by a small elite, (4) equality of income and power, and (5) encouragement of cooperative as opposed to competitive motives in the operation of society."

"The comparative economic efficiency of capitalism and socialism remains one of the most controversial areas. The classical socialist argument is that the anarchy of production under capitalism leads to great wastage. An appeal to the virtues of the price system is, in fact, only a partial answer to this critique. The central argument, which implies the efficiency of a competitive economic system, presupposes that all relevant goods are available at prices that are the same for all participants and that supplies and demands of all goods balance. Now virtually all economic decisions have implications for supplies and demands on future markets. The concept of capital, the very root of the term “capitalism,” refers to the setting-aside of resources for use in future production and sale. Hence, goods to be produced in the future are effectively economic commodities today. For efficient resource allocation, the prices of future goods should be known today. But they are not. Markets for current goods exist and enable a certain coherence between supply and demand there. But very few such markets exist for delivery of goods in the future. Hence, plans made by different agents may be based on inconsistent assumptions about the future. Investment plans may be excessive or inadequate to meet future demands or to employ the future labor force."

"Ironically, the current conservative model explaining the supposed association of capitalism and democracy relates to the Marxist as a photographic negative to a positive. It too suggests that the political “superstructure” is determined by the “relations of production.” The conservative model contrasts the dispersion of power under capitalist democracy with its concentration under socialism. Political opposition requires resources. The multiplicity of capitalists implies that any dissenting voice can find some support. Under socialism, the argument goes, the controlling political faction can deny its opponents all resources and dismiss them from their employment. This theoretical argument presupposes a monolithic state. It is something of a chicken-and-egg proposition. If the democratic legal tradition is strong, there are many sources of power in a modern state. Adding economic control functions may only increase the diversity of interests within the state and therefore alternative sources of power. It is notoriously harder for the government to regulate its own agencies than private firms. Socialism may easily offer as much pluralism as capitalism. The overpowering force in all these arguments is the empirical evidence of the Soviet Union and the other Communist countries, and it is strong. But the contrary proposition, that capitalism is a positive safeguard for democracy, is hardly a reasonable inference from experience. The example of Nazi Germany shows that no amount of private enterprise prevents the rise of totalitarianism. Indeed, it is hard to see that capitalism formed a significant impediment. Nor is Nazi Germany unique; Fascist Italy, Franco’s Spain, and the recurrent Latin American dictatorships are illustrative counterexamples to the proposition that capitalism implies democracy."

"If the markets for durable goods are peculiarly sensitive to price anticipations, while those for perishable goods are more sensitive to current prices, then there is a little more scope for explaining economic fluctuations."

"I disagree with the widely accepted proposition that econometric models should have expectations consistent with them. To the extent, it is argued, that the economic theory underlying the model involves anticipations, the anticipations that appear in the model as determining individual behavior should be equal to the forecasts made from the model. More generally, in fact, I would disagree with the weaker proposition that anticipations made by individuals should be necessarily dependent on broadly available general data about the economy and in particular about government actions."

"I have argued that forecasts will be based on more information than is contained in econometric models and in general on information differing from agent to agent. I also want to argue that they will not necessarily use all the information contained in an econometric model. In fact, the two propositions are intimately linked though they seem to move in opposite directions. We have to assume that information-processing ability is scarce. As I have already said, this is one of the main justifications for and explanations of a decentralized economy. But then it follows that an individual concentrates on acquiring the information most useful to him and will have to crowd out the information which is less useful. In particular, information that is broadly pertinent to the economy as a whole may have very little predictive power for the future of an individual."

"The meaning of information is precisely a reduction in uncertainty. From the viewpoint of economics or decision theory, uncertainty is relevant because it concerns the consequences of decisions. An individual making a decision may be supposed to be choosing one among a set of feasible alternatives. In general, these alternatives are themselves plans extending in time, and he will want to choose the one that yields the most satisfying consequences. These may be profits in successive periods for a business firm, or they may be other satisfactions, such as consumption, power, bequests, or interesting challenges. It can be assumed that the individual compares the entire set of consequences deriving from each alternative in his decision set with those of the others and chooses the preferred one."

"If the state of information (the set of signals received) is given and constant, then optimal choice is a problem of decision making under a given uncertainty, a situation that has been the subject of considerable analysis in the last thirty years. The problems of the economics of information proper arise when the probability distribution of states of the world is a variable. In the language adopted here, the signals received can vary. The existence of signals creates two important possibilities for the improvement of decision making. The first is taking advantage of the existence of signals. If the individual knows that a signal will be received before the decision has to be made, his optimal choice should be a function of the signal. We can think, alternatively but equivalently, of making the decision after the receipt of the signal and basing it on the probability distributions of consequences conditional on the signal, or of making the decision in advance for all possible values of the signal."

"The need for coordination has two basic causes: the various members (e.g., production units) are competing for a common pool of resources, financial and material; and different decisions complement or substitute for each other. For both reasons, the effectiveness of decisions made by one participant is influenced by the decisions of another. With limitations on the flow of information, the decisions themselves cannot be coordinated. That would require transferring all the information available, precisely what is to be avoided. It has been emphasized earlier that when information will be available, the individual should choose a decision function, a policy or strategy that determines what his actual decision should be for each possible signal he receives. Hence, ideally, in an organization there should be prior agreement on decision functions or strategies for all participants."

"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."

"Finding out the prices of a large range of commodities is itself a costly enterprise, and knowledge of this fact by price setters is itself enough to create incentives for inefficient market behavior. If one individual has more information about the quality of a good than the second, the first may exploit the situation, and the second, distrusting him, may not take advantage of what is in fact a desirable trade."

"Collective action is a means of power, a means by which individuals can more fully realize their individual values."

"Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people's word. Unfortunately this is not a commodity which can be bought very easily. If you have to buy it, you already have some doubts about what you have bought."

"As is by now well known, attempts to form social judgments by aggregating individual expressed preferences always lead to the possibility of paradox."

"There are many other organizations beside the government and the firm. But all of them, whether political party or revolutionary movement, university or church, share the common characteristics of the need for collective action and the allocation of resources through nonmarket methods."

"It is this thinking which I think gives rise to the greatest tragedies of history, this sense of commitment to a past purpose which reinforces the original agreement precisely at a time when experience has shown that it must be reversed."

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

"Uncertainty means that we do not have a complete description of the world which we fully believe to be true."

"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."

"Any argument seeking to establish the presence of irrational economic behavior always meets a standard counterargument: if most agents are irrational, then a rational individual can make a lot of money; eventually, therefore, the rational individuals will take over all the wealth. Hence, rational behavior will be the effective norm. There are two rebuttals to the counterargument. (1) Not all arbitrage possibilities exist. For example, corporate profits, even though they may be down, are very distinctly positive in real terms after all necessary adjustments, including taxes. Yet there seems no way by which the average investor in corporate securities can get a positive real rate of return. (2) More important, if everyone else is “irrational,” it by no means follows that one can make money by being rational, at least in the short run. With discounting, even eventual success may not be worthwhile. Consider, for example, a firm that engages in research and development which depresses the current profit and loss statement. Irrational investors look only at this information, and therefore the price of the stock is below the expected value of future dividends based on the profitable outcomes of the research and development. In a perfectly working market with rational individuals, stock prices would gradually rise as the realization date approached, but prices in the actual market would be constant. A rational investor would understand the future value of the stocks, but he or she could not realize any part of this gain during the gestation period. Although the rational investor may get rewarded eventually if the stock is held long enough, he or she is losing liquidity during an intervening period which may be long. Hence, the demand for the stock even by the rational buyers will be depressed. As Keynes argued long ago, the value of a security depends in good measure on other people’s opinions."

"The Soviet Union and its satellite Socialist countries in Eastern Europe have typically avoided unemployment and business cycles, except as they are induced through their trade with the Western World. But on the other hand they are clearly inefficient and wasteful, at least relative to the West. As repeated statements by the socialist economists themselves make clear, the excessive concentration of economic decision-making is a prime cause of the inefficiency. There are recurring demands for "liberalization," even by the highest authorities (Yuri Andropov, the effective head of the Soviet Union, being the latest example), but they are responded to only mildly or not at all. Clearly, a really major step toward decentralization of economic power, to the plant managers or the workers themselves, is perceived as a threat to the system."

"I was early regarded as having unusual intellectual capacity. I was an omnivorous reader, and I added to that a desire to systematize my understanding. As a result, history, for example, was not merely a set of dates and colorful stories; I could understand it as a sequence in which one event flowed out of another. This sense of order crystallized during my high-school and college years into a predominant interest in mathematics and mathematical logic."

"Multiple discoveries are in fact very common in science and for much the same reason. Developments in related fields with different motivation help one to understand a difficult problem better. Since these developments are public knowledge, many scholars can take advantage of them. It is pleasant to the ego to be first or among the first with a new discovery. However, in this case at least, the evidence is clear that the development of general equilibrium theory would have gone on quite as it did without me."

"Studying oneself is not the most comfortable of enterprises. One is caught between the desire to show oneself in the best possible light and the fear of claiming more than one’s due."

"I want to stress that rationality is not a property of the individual alone, although it is usually presented that way. Rather, it gathers not only its force but also its very meaning from the social context in which it is embedded."

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

"Not only is it possible to devise complete models of the economy on hypotheses other than rationality, but in fact virtually every practical theory of macroeconomics is partly so based. The price- and wage- rigidity elements of Keynesian theory are hard to fit into a rational framework, though some valiant efforts have been made. … But if the Keynesian model is a natural target of criticism by the upholders of universal rationality, it must be added that monetarism is no better. I know of no serious derivation of the demand for money from a rational optimization. … The use of rationality in these arguments is ritualistic, not essential."

"Gibbard's work was a bombshell. That was very exciting. I didn't know about Satterthwaite's work for a couple of years, but it was very much the same thing. I had taken the liberty of abstracting from manipulability in my thesis and I never went back to that issue. What's surprising is not really that there is an impossibility of non-manipulability, but that the issues should be essentially the same. That strikes one as a remarkable coincidence."

"The problem I have with utilitarianism is not that it is excessively rational, but that the epistemological foundations are weak. My problem is: What are those objects we are adding up? I have no objection to adding them up if there's something to add. But the one thing I retain from utilitarianism is that, basically, judgements are based on consequences. Certainly that's the sort of thing we do in the theory of the single individual under uncertainty; you make sure utility is defined only over the consequences. I view rights as arrangements which may help you in achieving a higher utility level."

"The tension between chaotic behavior and perfect foresight was observed. Start with an equilibrium dynamics of a standard type derived from the hypothesis that future prices are predicted perfectly. Suppose that the solution to the difference equations characterizing the solution exhibits chaotic behavior. Is it realistic to assume that the future, even though deterministic, is in fact predictable? Clearly, part of the lessons drawn by natural scientists, especially meteorologists, from nonlinear dynamics is precisely the opposite; chaotic behavior implies that small errors of observation in the starting position may lead to virtually total unpredictability after some period of time. This creates no difficulties of consistency when the predictor is not part of the system being predicted. But when the predictors are the economic agents being examined, there is a fundamental inconsistency. This epistemological antinomy is reinforced by the empirical observation that actual behavior of prices of assets such as securities could never reasonably have been predicted; if it had, there would have been much more buying or selling at earlier stages."

"The implications for planning are ambiguous. On the one hand, the optimal allocation under increasing returns will not be obtained under free markets. In fact, as I have already remarked, the competitive equilibrium is not even viable, and the outcome will be some kind of imperfect competition. But optimal allocation under increasing returns is difficult. For one thing, the optimisation requires the use of integer programming, a procedure intrinsically more complex than linear programming, and impossible to carry out for large systems even with the most powerful computers. Even more serious are the data demands. The information needed is widely dispersed among the industries and cannot be effectively communicated. It is for these reasons that decentralised decision-making with some element of monopoly is likely to be more efficient."

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

"The uncertainty of the future is inescapable, one must think about it and arrive at plans for action. A statement attributed to a number of thinkers is, "Prediction is very difficult, especially of the future." Postdiction, knowing what went on in the past, is also difficult. The past, however, is our basis for understanding the future."

"As a general rule, the greater the uncertainty, the better to avoid large and irreversible commitments, to the extent that it is possible. When the famous 1930s gangster, Dutch Schultz, was dying, his incoherent last remarks were taken down by a stenographer. One of them was. "Don't make no bull moves." His words are a lesson for the kind of future that one might choose. Maintaining flexibility or keeping ones options open, is key in these matters."

"I am old-fashioned enough to retain David Hume’s view that one can never derive “ought” propositions from “is” propositions. The two issues, method and value, are distinct."

"Information, one of the fundamental determinants of production, laps over from one firm to another, yet the firm has so far seemed reasonably sharply defined in terms of legal ownership. It seems to me there must be increasing tensions between legal relations and fundamental economic determinants. Small symptoms are already appearing in the legal and economic spheres. There is continual difficulty in defining intellectual property. The United States courts, at least, have come up with some strange definitions of property."

"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."

"I think one of the things we learned from the physicists and also the theoretical biologists is the idea that when you're dealing with very complex systems you're going to get a large variety of behavior which can be interpreted as hill climbing, but hill climbing with a lot of modifications, hill climbing with big jumps occasionally. This is an elaboration of the idea of the learning model. The learning model story takes off from psychology, but the adaptive processes take off from biology and physics. They have the same story. One thing it does suggest in some sense is that we have to be more modest in what we claim."

"The slippery role of information as an economic good is of deep significance to economic behavior, especially in the relatively information-rich modern economy. It is an economic good in the traditional sense; it is valuable, and it is costly. But it has a peculiar algebra. Adding one ton of steel to another permits more to be done; repeating the same item of information does not add anything useful. On the other hand, supplying a ton of steel to another reduces the steel available to the supplier; supplying information to another does not reduce the information available to the supplier."

"The conflict of incentives and information is increasingly leading to a diffusion of responsibility for medical decisions. The simple picture of the physician making decisions for the patient has certainly become more complicated. Patients always had a role in choosing to seek medical advice and from whom. Their choices are becoming increasingly restricted as medical practice becomes more organized. The problems of cost control in an insured world are partly met by the increasing use of control of medical services through review by health maintenance organizations and insurance carriers."

"For the voucher system to work, it would be necessary to have informed parents. One cannot be dogmatic without empirical evidence, but I would be surprised if the average parent has the time or patience or competence to digest the relevant information. Indeed, one wonders where the information is to come from and in what form it should exist. Do we use test scores, themselves affected by the selection processes of the students? Impressions of individual teachers or of the physical appearance of the school will tend to dominate."

"Child care has grown up under different circumstances than education and probably for a mixture of reasons, good and bad. There are many systems of child care, some private, some public. As compared with primary and secondary education, there is clearly less need for coordination. The sequencing of classes is much less important. It would appear that the ability of parents to monitor the conduct of the child care activity is much greater because the activity is much closer to everyday experience and knowledge. Most of the informational and structural arguments for the public supply of education are absent in the case of child care. Reputation and experience may suffice for adequate monitoring."

"Krugman's whole attack is directed at a statement made neither by Arthur nor by Cassidy. Krugman has not read Cassidy's piece with any care nor has he bothered to review what Arthur has in fact said."

"There are many unknowns in the creation and use of knowledge as a factor of production. Still, two main lessons stand out: * Every country or firm must have education and training in technology and science, even if the research is not on par with that being conducted elsewhere. Knowledge cannot be absorbed unless some knowledge is already possessed. * Countries and firms must be open to new ideas, have multiple sources of new ideas, and see that ideas are diffused. This point strongly argues for freedom of entry, even when it seems to forgo economies of scale."

"Various medical groups are continually putting out advice as to health-inducing behavior (diet, exercise, and so forth). Individuals who follow this advice will reduce their demand for medical services. An extreme version is the campaign of the American Dental Association for fluoridation of water, a measure designed to reduce cavities and so the demand for dental services. There is also a logical problem. How does the relatively small group of physicians acquire power? In a democratic system, political power derives from numbers or from wealth. While physicians are certainly relatively well off, they do not have the concentration of wealth of many industries. Their power, it seems to me, is derived from moral authority. It is derived from the same professional respect that we are trying to explain. Indeed, when the American Medical Association came into conflict with either the retired or with the business interests that bought medical plans, the weakness of its power base quickly became apparent."

"My own view is that both endogenous and exogenous elements are important in explaining innovation. Incentives certainly play a role, but so does the general state of scientific knowledge, which is not directly produced by profit-making entities."

"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."

"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 Austrian a priori dogmatism (von Mises, especially; Hayek, to a lesser degree)."

"I don't know which way human psychology will go wrong. We have a world in which there is uncertainty. There are new technologies. And one of the problems is that we do things today with a thought to the future. Any purchase is one for the future. If you buy a refrigerator you are making a commitment to the future, so that you have food to eat for the next ten years. That's a simple theory, one of many simple theories -- theories that people agree on and that don't, in a fundamental way, change. But every once in a while there is unemployment, and wages will drop, and there will be several different interpretations."

"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."

"We don't have much time left. We are moving towards temperature increases of around two degrees Celsius, which is going to have consequences in the tropics, and we will lose things like glaciers. That's not a theory; it's happening right now. It's not a prediction; it's happening right now. But you just sightsee near those glaciers. But the glaciers are a big source of water. And on the questions of water, in California we store our water in a snowpack. When that's gone, the rain will be the same but it won't accumulate. With warming temperatures the snowpack will not work. It might be possible to substitute with dams, but that's complicated. This is conjoined with a big energy problem and I think that we really have to encourage development in this area. Just waiting for technological improvement won't work. We need to encourage it."

"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."

"Clearly, information is of the utmost importance in making economic decisions, especially when it comes to securities or other assets whose value depends on events not yet known. Now the distribution of information cannot simply be taken as given. On the contrary, information can be acquired at some cost."

"As we see it, a choice is not something you do today in isolation; it is part of a plan that includes some choices to be made in the future."

"Once individuals are acting to carry out a norm and cannot be fully checked, their natural norm of self-interest will come into play. The rules actually acted upon will therefore move away from any norm that might be acceptable on the basis of general principles."

"We don’t have a laissez-faire system. The intervention of the federal government, as measured by expenditures, is growing. It is not a private system at all. Roughly 50 percent of health costs are paid for by the government, and state governments are spending more and more on health. It’s crowding out education. State budget-support for education, especially higher education, is crowded out by two things: health and prisons. Nobody is prepared for the idea of a laissez-faire system, and we never really had one."

"There’s a famous Churchill quote: “democracy is the worst form of government, except for all the others.” That applies to regulation as well. In the late 1800s, we had a natural monopoly: railroads. The government created a regulatory enterprise – the Interstate Commerce Commission – and of course it was captured. But it still made a difference. I think we just have to accept that capture does occur, but it’s limited. The Federal Trade Commission, for example, is a pretty active body. Monopolies have been broken up. The AT&T telephone monopoly was broken up in 1982 – Stigler was still writing about regulatory capture then. AT&T was a classic monopoly, but a pretty benevolent one. It delivered good service – rates were too high, but not by that much. It didn’t necessarily pass on value to the consumers, but Bell Labs were a source of great innovative function. Nevertheless, it was broken up by antitrust measures, brought on by government. So there is regulatory capture, but it is by no means complete. Regulations do play a role. One example of non-regulatory capture fighting against effective regulation was during the run-up to the 2008 crash, when several officials argued for CDOs to be regulated, which means they would have had to meet certain requirements of transparency. This was not accepted. I’m not saying the crash could have been avoided if that happened, but that would have made a big difference."

"In 1972 American economist Kenneth Arrow, jointly with Sir John Hicks, was awarded the Nobel Prize in economics for “pioneering contributions to general equilibrium theory and welfare theory.” Arrow is probably best known for his Ph.D. dissertation (on which his book Social Choice and Individual Values is based), in which he proved his famous “impossibility theorem.” He showed that under certain assumptions about people’s preferences between options, it is always impossible to find a voting rule under which one option emerges as the most preferred."

"Alchian: Perhaps it might have been more appropriate for the Nobel Prize to have gone to you and Hicks together, and [Kenneth] Arrow and [[Gunnar Myrdal|[Gunnar] Myrdal]] together. Hayek: Oh, surely. [laughter]"

"Then during the early '50s Kenneth Arrow published his book Social Choice and Individual Values (1951). That stirred up a great deal of interest, both in political science and economics. My general reaction was that the people who criticized Arrow, and Arrow himself, really didn't quite get the message in the sense that the concentration was on the fact that majority rule would not give you a political equilibrium, that you get this political cycle and so forth. My criticism basically was, if that's the way the preferences are, that's what you want to have. A democracy should not mean one majority simply ruling. It ought to be a rotation, if that's the way the preferences are. I was kind of an anti-majoritarian then and now. So my critique of Arrow, which not many people paid much attention to, got me further into thinking about these things."

"In technical economics, I see a peak with Paul Samuelson and Kenneth Arrow and some of the core developments in game theory. Since then there are fewer iconic figures being generated in this area of research, even though there are plenty of accomplished papers being published."

"During this period I also came-across Kenneth Arrow's now famous Social Choice and Individual Values. Although I hardly did full justice to that pioneering work, it emboldened me to take a stab at a much more formal presentation than I had encountered in political theory. The form of my two chapters certainly owes something to my having ploughed my way through that book. For better or worse, Arrow's book must also have influenced my decision to present parts of the argument in a formal notational system (though only in footnotes and appendices)."

"I was influenced very early on, my first time at the—I spent a year at the Center at Palo Alto, the Center for Advanced Study there, and I became a good friend of Kenneth Arrow. I think he was not at the Center that year but he lived in Palo Alto. [...] Marvelous man. Both as a person and as a scholar. And I became as I say greatly influenced by the way in which he dealt with phenomena. [...] So I was influenced by that as a model, a way of thinking more abstractly, perhaps, than customary, about democratic theory. Making clear the premises, the epistomological assumptions and matters of that kind, and I think that sort of set the stage. And then once you get in of course, into that field, which was not highly— I don’t know how to put this properly—as a formal field of political science was not highly developed at the time, once you get into it you quickly become aware of how rich the potential subject matter is. One of the enormous changes, perhaps anticipating your question, one of the changes in the world is the extraordinary increase in the number of countries that, by the standards that we use today, can be called democratic—always, I repeat this and repeat this, but, always keeping in mind the difference between the ideal and the threshold at which we now accept a country as democratic, or a polyarchy as I would say. And the enormous increase in the number of those available for study—when I was a graduate student, there were maybe half a dozen countries that you could study: France and Britain and, I’m not quite sure of Canada at that time . . . and then the expansion created out there a field . . . that was both a challenge and an opportunity."

"Ken Arrow was involved with the Santa Fe Institute from its beginning. He is one of my heroes, because he’s a guy who does something, and then moves on. He’s moved on from general equilibrium to complexity."

"The interesting thing is that Ken Arrow was a dove and Bob Solow was then a hawk, in 1963-4. We used to have huge debates. Hahn was very hawkish, Meade was hawkish, only Arrow and what's now the Cambridge left were doves, particularly the Asians, for obvious reasons. After all, it was the Asians who were being napalmed. There were terrible fights going on, and the beginning of huge rifts in the faculty over the Vietnam war. Solow switched, later on, and to his everlasting credit came out and said he'd switched. Arrow was always a dove. That's why, fond as I am of Bob Solow, and much thought I admire him, I've always admired Arrow more, because Arrow, I think, has always had the right instincts. He's a self-declared socialist, he was a dove, he was always active on civil rights, he fought for Sam Bowles at Harvard, and so on. He's always gone out on a limb for the right issues - on the left issues, actually. By that time (1967-8), I was in the thick of moratoria and death threats and bombs and all the rest of it. I wrote the survey in about four months. It was refereed by Arrow, Stiglitz, Samuelson and one other - I've never found out who it was. Samuelson recommended publication 'as is'. Arrow wrote to me and said, 'May I use you brilliant survey for my graduate class at Harvard?', which is the letter I prize most of any I've received in all the world. Stiglitz didn't say anything at the time, but he saved it all up for when he wrote that very critical review article of my book (which he kept calling my article!) in the Journal of Political Economy."

"But the old dilemma between efficiency and fairness was about to be shattered by a young New Yorker called Kenneth Arrow, who knew all about unfairness after watching helplessly as a teenager while his father lost his successful business and all his savings in the Great Depression. The desire for social justice stayed with Arrow, but intellectually he couldn’t just ignore the question of efficiency. The young economist set his logical mind to wrestling with the tension between the unerring efficiency of the free market and the imperative that some kind of fairness should prevail. His solution was brilliant, twisting the traditional thinking about competitive markets and efficiency on its head. He proved that not only are all perfect markets efficient, all efficient outcomes can be achieved using a competitive market, by adjusting the starting position."

"It is not easy to see him. Not because he’s short. Rather because the piles of books and papers scattered around his admittedly relatively narrow office in the Landau Building are so high. ‘They’ve moved us here and now I’m trying to look through all my stuff and see what I can possibly throw out’, says Kenneth J. Arrow, rising swiftly from behind one of the book piles, with an apologetic gesture. In spite of his 86 years, he seems physically quite fit and, no wonder, he prides himself in cycling to the office every day. The room is nice, bright, modern and new, but there is no way Arrow could possibly fit everything into the book shelves along the walls. ‘Never mind’, he says, laughing. He has a great warm open smile, and is eager to talk – which he then does at an amazing speed. Politely, he liberates a chair for me, opens a drawer next to himself for me to place the microphone in since there is no more space on the desk, of course – and off we go."

"And I am glad that you talked to Ken Arrow. But Nobel laureates, who have wide responsibilities and much on their mind, are not necessarily on top of what has been going on in research outside their usual field. I happen to know of one laureate who, circa 1991, was quite unaware that anyone had thought about increasing returns in either growth or trade."

"I’m an optimist, so I am hopeful. I don’t think Samuelsonian economics can be the long-run equilibrium of such an important field such as economics. I think that because of the two secret sins of Samuelsonian economics, the qualitative theorems and significance testing in the absence of the loss function, we can’t make scientific progress. We can do a lot of other stuff. We can take a look at tables and see how large schooling is in the national economy; that kind of thing is science. So I’m sure we can make some progress, off the center of the scientific stage of so-called mainstream Samuelsonian economics. An interesting concrete example of this was a presentation Ken Arrow made when he came to Iowa, where he was trying to make the obvious point that we shouldn’t spend all of our time in undergraduate economics preparing people for graduate school. This is a point that I have made over and over again, that we should be preparing students for life, for business and law school. Arrow said, “Look, the main argument for this is not very complicated: as we all know, half of 1 percent of our students, if that, go on to graduate school in economics, end of argument.” The argument is not special to Arrow, but the fact that it came from Arrow was very interesting. He didn’t come and say there is an existence theorem proof that there doesn’t exist some social welfare function such that blah blah blah. He didn’t do that. He said, “Look, here’s the number that shows obviously that the policy of making undergraduate programs into junior graduate programs is a mistake.”"

"Arrow’s Impossibility Theorem is quite surprising. It shows that three very plausible and desirable features of a social decision mechanism are inconsistent with democracy: there is no “perfect” way to make social decisions. There is no perfect way to “aggregate” individual preferences to make one social preference. If we want to find a way to aggregate individual preferences to form social preferences, we will have to give up one of the properties of a social decision mechanism described in Arrow’s theorem."

"[Arrow's] experience as an Air Force weather forecaster during the Second World War "added the news that the natural world was also unpredictable." ... One incident that occurred while Arrow was forecasting the weather illustrates both uncertainty and the human unwillingness to accept it. Some officers had been assigned the task of forecasting the weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: "The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.""