Thursday, February 23, 2017

Kenneth Arrow RIP

not many tributes are coming from main stream ecomists, perhaps due to the dubious status of general equilibrium theory, of which he is one of the contributors and won Nobel Prize for it.
Here is one in a series of four The greatest living economist has passed away:Notes on Kenneth Arrow Part1This part is about 'Srroe's Impossibilty Theorem' and the author says "The conditions I gave above for Arrow’s Theorem are actually different from the 5 conditions in the original 1950 paper. The reason is that Arrow’s original proof is actually incorrect, as shown by Julian Blau in a 1957 Econometrica. The basic insight of the proof is of course salvageable."
Another by Bill Black in Naked Capitalism Kenneth Arrow's ( Ignored) Impossibilty Theorem is about General equilibrium theory, and elaborates on a quote of an obituary in NYTimes:
"[Arrow] made clear, his powerful conclusions about the workings of competitive markets held true only under ideal — that is to say, unrealistic — assumptions.
His assumptions, for example, ruled out the existence of third-party effects: The sale of a product by Harry to Joe was assumed not to affect the well-being of Sally — an assumption routinely violated in the real world by, for example, the sale of products that harm the environment."  And goes on to say 
"Arrow was brilliant and well meaning. We celebrate his life and mourn his passing. The opportunity cost to our field is how much he could have accomplished had his research not been so distorted by neoclassical dogma."
From an interview last year "Arrow himself has embraced many of the criticisms made against the general equilibrium theory, calling it “empirically falsified.” Over the years he has made further contributions to the theory, incorporating into it such elements as uncertainty and allocation of risk for the first time."
P.S. More on general equilibrium theory
"But it does mean that individual rationality as the sole paradigm of economic analysis is dead: it is mathematically proven that postulates of individual rationality will not allow us to say anything of consequence about economic aggregates or game theoretic outcomes in the frequent scenarios where we do not have a unique equilibria with a well-defined way to get there (via learning in games, or a tatonnament process in GE, or something of a similar nature).  Arrow himself(1986, J. Business) accepts this: “In the aggregate, the hypothesis of rational behavior has in general no implications.” This is an opportunity for economists, not a burden, and we still await the next Arrow who can guide us on how to proceed."

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