When Kenneth Arrow won the Nobel Prize for Economics in 1972, at 51, the youngest to do so, his peer Paul Samuelson wrote, “The economics of insurance, medical care, prescription drug testing — to say nothing of bingo and the stock market — will never be the same after Arrow.” To this list, he could well have added electoral processes, pay equity, even climate change and global negotiations for peace. Arrow, who passed away on Wednesday, was amongst those who brought the workings of human societies to bear on economic theories and numbers.
His work challenged that holy grail of then economic theory which depicted the marketplace as a secular arena where the rules of demand and supply determined how commodities were bought and sold. The reality was far more complex, Arrow showed. The marketplace was not a a theatre where buyers and sellers traded commodities with no links with each other. The menu at a restaurant, for example, involved not just food ingredients, it required oil, transport, cutlery, the chinaware. More significantly, the logic that governed the demand for a meal at an expensive restaurant could not apply to that for healthcare products. A gastronome would be very likely have been curious about the exotica at the restaurant, and known a fair bit about the ingredients that went into the fare and could make her choices accordingly. But in healthcare, physicians, hospitals and insurance companies would know much more than the family of the ailing. Such asymmetry of information made the marketplace a much more complicated entity than that was depicted in the simplistic theories of demand and supply.
Arrow brought his interests in human societies to his political choices. He goaded Standford University to rethink its links with apartheid South Africa and was among the rare American academics who thought Israel was wrong in its dealings with Palestine. He developed an interest in climate change and in his later years worried that time was running short to combat it. In times when much of the academia has become an insular ivory tower, Arrow ‘s life and work remains salutary.