The Region

Interview with Kenneth Arrow

Published December 1, 1995  |  December 1995 issue

Kenneth Arrow's first paper was an influential piece on the use of winds for flight planning, and his first intellectual passion was for mathematical statistics. But after he discovered economics, it didn't take long for him to make his mark. Arrow's doctoral dissertation, and papers that followed, is still some of his best-known work. His influence grew quickly, and by age 51 he had received the Nobel Prize in Economic Science for 'pioneering contributions to general equilibrium theory and welfare theory.'

Arrow's interests are wide-ranging; he has worked on issues pertaining to medicine, statistics, rational choice, the economics of uncertainty, learning, information, technology, trade and many other topics.

In the following interview, Arrow discusses his prescription for a new health care plan, the efficacy of markets, the allocation of risk in security markets, rational expectations, the collaboration between economists and physical scientists, and how he made the leap from flight planning to economics.

Region: In 1978, you wrote an article for Dissent titled 'A Cautious Case for Socialism.' Given the recent changes in the Soviet Republic, would you now make a 'cautious case for capitalism'?

Arrow: I should start by saying that, as usual with magazines, the title is not written by the author. It was actually more of an autobiographical account of my early concerns with socialism. Let me say that the ideals that were sought for there, I still firmly accept. I think the idea that a society has to be responsible for all of its citizens, those who do well and those who do not, is really a precondition of a good society. Let me say that from the time I first understood economic principles, I was always concerned also that any system be operated on an efficient basis, which meant decentralization because knowledge is not concentrated anywhere. It's based on motivation, and so these are the advantages of, say, the cautious case for capitalism, that the market system is efficient.

On the other hand, markets are not, in my opinion, a full solution to any problem. The obvious problem they don't meet is the concerns of the welfare of individuals who may get lost in the operation of the system--the distributional question. We've seen this growing as we go further and further toward a market ideology in the United States and the United Kingdom. We've seen a decline in the welfare of the working poor, leaving aside any other pathologies, just the working poor, a very distinct increase at the very top levels.

This is not universally true by the way. It's not true of those European countries that have maintained social welfare institutions to a much greater extent than we have--Germany, France and, of course, the Scandinavian countries; and they are not doing worse than the United States on an overall basis. The fact is that the United States in the last 12 to 13 years has shown a remarkably modest rate of growth per capita. So it's not that we're unleashing tremendous productive forces.

The switch to the market in Eastern Europe, of course, has not exactly been one of the greatest advertisements for the market. There's no question the socialist system--and I hate to use the word 'socialist,' but I suppose some description of a system in which the state is in control--was breaking down, really collapsing. In these countries, most markedly in Russia itself and in a number of the others, it obviously was based on a tyranny, which is unacceptable even if it were producing good economic results, which it was not. But the fact is the conversion to a price system, which according to all our theories should have resulted in an immediate boost of productivity, has done nothing of the sort. Some people say Russia is running at 50 percent of its gross domestic product under that during the Communist period. In fact, none of the countries seems to have recovered the level that they had under communism, although the other countries in Eastern Europe are doing better than Russia and particularly the Czech Republic seems to be doing modestly well. East Germany I can't count because they have a rich uncle. You have economic benefits which have nothing to do with the workings of the system. While I do believe that these countries will sooner or later find an equilibrium and start a satisfactory rate of progress, they're going for quite a long period through a tremendous drop.

I think on the efficiency level, not only the distribution level, capitalism is a flawed system. It probably has the same virtues as Churchill attributed to democracy: It's the worst system except for any other. And I think that's right, but it cannot be thought that some unmitigated belief in free markets is a cure even from the efficiency point of view. As I say, the United States is not showing that now. The British probably could be getting better, but they're not remarkable either. The fact is the heyday of intervention, as in the 1960s, was our golden era, in retrospect, from the point of view of growth. Admittedly, the reasons for the growth may have nothing to do with the system at all, but with unexploited opportunities due to the war and the Great Depression.

Classic economic theories recognize public goods aspects of one kind or another--the need for economic intervention in, obviously, the supply of infrastructure and, particularly in this case, of education. We're not supplying that infrastructure at an appropriate rate today. I don't doubt it isn't just money; it's organization and goals and so forth. The intrinsic social structure, the family structure and so forth, is certainly in a very bad state. And I think that this is showing up in productivity. I think part of the reason, and I can't prove this, we're seeing a decline in some places is the breakup of the family, which is partly the result of an extreme form of individualism.

Region: Do you feel that intervention on the part of the state would improve these matters? Education? Family?

Arrow: Education certainly. Education is still, in spite of private education, a state matter. Family is a difficult matter. I must admit I do not know that the state can intervene successfully in a family. It's a fact that everything is connected with the individualist temperament, the kind of economic environment which stresses the individual, but this is not directly the result of a state policy, nor do I see any good way by which the state could intervene except in some marginal ways.

Region: You did some of the pioneering work on how security markets might allocate risk efficiently. Over the last 30 years we've seen a massive expansion in financial markets. Has this development significantly enhanced our ability to allocate risks efficiently?

Arrow: I would like to think so, but I'm not so sure it's true. The trouble is that the risks that are being hedged very well by new financial securities are financial risks. And it appears to me that the real things you want to hedge are real risks, for example, risks in innovation. The fact is that you'd like companies to be able to take bigger chances. Presumably one obstacle to successful R&D, particularly when the costs are large, are the risks involved.

To some extent new financial instruments have helped, and I'm not thinking of derivative securities, which only deal with risks on fully established companies. I think the development of the venture capital system has been an example of something which is a successful improvement in risk-bearing. It doesn't exactly remove the risks at the beginning, but at least creates greater rewards at a slightly later stage and therefore encourages, say, small companies to engage in technologically risky enterprises. If you like innovation, you expect 50 percent to 60 percent failure. In a sense if you don't get that, you're not trying hard enough. Venture capital has done much more, I think, to improve efficiency than anything. I like the way derivative securities started; in principle they're all right. But I'm struck by the fact that by and large equity capital doesn't play a big role in new financing; it's either bonds or internal financing but not really equity. And therefore, it's not clear that anything which improves the equity markets has really much to do with the productivity of the economy as a whole.

Region: Do you think that there is a role for regulation in policing such markets?

Arrow: You'd have to have the standard sort of rules--essentially revelation principles. I am not really inclined to think there is any very effective regulation of the derivative securities markets that would be useful. People who go into it essentially ought to know what risks they're taking and I don't see any useful regulation. There is a bit of a problem with the match between derivative securities markets and the primary markets. We have long ago instituted principles, essentially high margin requirements, to prevent certain instabilities in the stock market, and I think they're basically correct.

The trouble is that there's a linkage, let's say, between something like the stock market and the index futures markets, and the fact that the margin requirements are very different, for example, played some role in the October '87 crash. So in effect you can go around the margin requirements this way. But it's probably not a very big problem in creating instabilities. One doesn't like instabilities in markets; they may be damaging, but probably not fatal, as the October '87 crash showed. It turned out to be essentially inconsequential. So if that's true, I'm not very worried about the welfare of those who are investing any more than I am about the welfare of those who go into casinos.

Region: Recent macroeconomic research in Minnesota--both at the Federal Reserve Bank and at the University of Minnesota--has been greatly influenced by your work in the 1950s in the theory of general equilibrium. At the time, did you think that your work would contribute to a better understanding of the macroeconomy?

Arrow: I did, but not in the way it's turned out. The vision I had that wasn't articulated in my articles exactly was that the macroeconomy was the disequilibrium phenomenon. The idea that we could interpret economic fluctuations as an equilibrium phenomenon was something that did not cross my mind. And I'm still not sure that the disequilibrium interpretation isn't more appropriate, although much more has been gotten out of this equilibrium theory than I would have ever dreamt.

But I do think the interpretation of unemployment specifically is not well represented in the equilibrium models. I don't believe that unemployment is all voluntary, by anticipation of future wage movements or this sort of thing. I know you can modify the models by taking into account the indivisibilities, but I don't really think that people are voluntarily unemployed. When a job is offered, not so much today but say a few years ago, you would have had many applicants for it--people who do not seem to be conspicuously differently qualified than those who are now working.

Region: So you're not going to buy into the argument that these are just people in search?

Arrow: No, because I can't see why search should vary that much. I think all of these are partial truths. But the idea of search is certainly true, and I think it's quite true that you have a lot of shifting. For some reason the demand structure is shifting rapidly as, for example, with foreign competition, or with the technological progress. Then in those periods I would expect more unemployment because of search. And I think that's a very valuable thing. However, when you get to 10 percent or 11 percent unemployment, search does not explain much of that. It may explain why it's hard to go below 4 percent or 5 percent unemployment.

Region: The Nobel Prize in Economics has recently been given to Robert E. Lucas Jr. for the influence that he has had in macroeconomics and, in particular, for his contributions to the theory of Rational Expectations. Much of the current literature in microeconomics seems to be moving away from the assumption that agents are rational. Instead, it is assumed that the rationality of individuals is limited. We're looking at bounded rationality. Do you think that the current theories of learning will prove more successful than the theory of Rational Expectations for certain questions? And if so, which questions?

Arrow: I think the answer is yes, that learning models will turn out to be more accurate. More useful is another question, because usefulness depends on tractability. For example, look at one body of evidence--experimental work. Admittedly, it's a controversial question as to whether experiments are useful. The first experimental work tended to show that static markets come to equilibrium very quickly. This was, therefore, widely accepted because it would support the idea of equilibrium. The same experiments tend to show that asset markets show all sorts of anomalies and do not come into the long-run equilibrium within the length of the experiment. I'm thinking of Vernon Smith's and Charles Plott's work.

October '87 is a wonderful example. Rational expectations would suggest that prices would change when news changes. In October '87 there was no news that anybody could identify even in retrospect as relevant. There was a 20 percent drop in the day. Now that's a kind of internal dynamics of the market. And part of it undoubtedly is that investors have a model of the future which says that if prices start falling they're going to continue to fall for a while, and therefore one ought to get out of it now and then buy at a lower price later. So one rushes to get out. That's oversimplifying it, but it's built into the computer programs. Now that's not based on a rational expectation.

It struck me when this thing started that it's perfectly obvious that prices were to get back up again. I held on. It seemed to be quite obvious that they were going to come back because there was no reason why they shouldn't. But the fact is that people didn't behave that way. The fact is you have these periods of alternating volatility and lack of volatility. So it seems to me that at least as far as the financial markets are concerned, there is increasing evidence against rational expectations, even at the macro level. When you look at any experimental work not directly related to economics, but trying to test rational behavior in other ways, experiments have conspicuously failed to show rational behavior. Macro evidence certainly suggests deviations from rationality, but I don't want to say the rationality hypothesis is completely wrong. If you have any introspective idea or experimental idea about people's behavior, it seems to be incompatible with the really full scale rational expectations. People can only learn much simpler things than are implied in this. Finally, there aren't enough repetitions to justify rational expectations. The world is changing. We're not really proceeding on a stationary basis.

Region: Wouldn't that be a problem with the theories of learning as well; if your target is moving, you'll never be able to learn about it?

Arrow: You certainly will never be able to learn it. That means the equilibrium of learning theory is not relevant. 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.

Region: For the past decade you have been involved with the Santa Fe Institute, where there have been collaborative efforts between economists and physical scientists. Do you feel that these interactions have proven to be fruitful? If so, what have we learned from the physicists?

Arrow: 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.

Evolutionary theory, for example, tends to explain quite well in retrospect how various species emerged. It's not very good on prediction. Nevertheless, one cannot say that there isn't a lot of knowledge that's been obtained in this field. In the same way, with these complex physical phenomena between solid state physics, you can say a lot of things without necessarily knowing the next step. So I'm first impressed with the approach--with what it is or what questions we can ask--and we've been asking the wrong questions. Secondly, these methods actually turn out to be very effective in their own fields which are more rigorous with their experiment, mainly because experimentation is more possible in the physical sciences than in economics.

Region: In 1963, a very influential paper of yours appeared in the American Economic Review. The subject of this paper was medical care. In it you described the many difficult issues that arise in this market due to moral hazard, adverse selection, and so on. [Editor: Very briefly, moral hazard is when insured people undertake actions that they would otherwise avoid, and adverse selection occurs when insured people hide information that would be pertinent to the insurer.] There is a current debate in Washington on the role that the government should play in managing health care. What is your view on the plans that have been proposed?

Arrow: The plans are very complex and in many ways they're what I might call second-best plans. They deal with parts of the issue. It's rather hard to come to a firm opinion without a great deal more attention than I've paid to the details. However, I am struck by the difference between the debate last year and this year.

The proposals have run in terms of many objections to the Clinton plan of last year, namely, that it amounted to price control. Of course, the present plan gets most of its proposed gains by reducing the pay of the doctors, in other words, by price control. The present plan deals with only Medicare; I presume there's a Medicaid proposal on the way.

To my mind, none of the plans has really asked fundamental questions about the nature of the medical care system and the interaction between medical care and financing provisions. For one thing, the entire debate on both sides assumes an employer-based system. There's really no logical relation whatever between employment and health care and the insurance that goes with that. The health care provisions are presumably for individuals. And whoever pays for them, whether it's paid by the individual, state, whatever, the value is an individually based value. It has nothing to do with employment. And therefore the whole logic of the system is at stake. It means people, and you get all sorts of anomalies, who are for various reasons not connected with employment, are on a special status, you have provisions providing for, let's say, families of employees. Logically, there is no real relationship here. So I think that all of these systems are flawed by trying to relate the system to the job. That's less relevant to the current debate, which deals with Medicare, but it's relevant to last year's proposals and to any other plans that will deal with this. So I think that systems that are based on employment are illogical and attempts to meet them create all sorts of unnecessary complexities.

On Medicare, which is the part that is disconnected from employment, you have essentially a single-payer system. We're now discussing some details as to whether it should all be paid on a fee for service or if HMOs should be the providers. Essentially what you have today, which is in itself not so illogical, is to use the monopsonist power of the government, that is to say that the government is, in effect, an exclusive buyer, to regulate prices. So long as Medicare is only part of the entire system, and not the whole system, of course, the government is not such a strong monopsony. And what I would expect to happen if you reduce the compensation when there is also a sector in which there is no restriction of compensation, is for a drift of medical resources out of Medicare, out of the care of the elderly, into the other sectors, the below-65 part of the economy which is not regulated. This may take many forms, by the way. It may take the form of people literally refusing to take the assignments for Medicare. It may, however, take the form of deteriorating the quality of the care.

Region: What would be the key features of a plan that you would propose, if given the opportunity?

Arrow: I think we need basically a single-payer system, that is a single-payer system for basic benefits. I think there's no way, and nor is it desirable, to prevent people from buying additional coverage. The financing, as is known already from Medicare and certainly from Social Security payments from a centralized system, can be done much more cheaply than when you have many competitive insurance plans. The reimbursement schedules become very costly. The cost of administering the present plans is large and there are big economies of scale.

Also, but more basic, issues of adverse selection disappear with a single-payer plan. If everybody's covered, there's no way of cherry picking, having plans that appeal to only particular groups, with all the distortions that accompany them. There is a possibility, and I think it's compatible to that plan to try to administer it through a competitive arrangement of one kind or another, that people can have choices of plans and compete where the reimbursement schedules are prearranged, and they can eventually get reductions in their premiums by choosing HMOs that are competitive. I think the principle of competitive supply as opposed to competitive financing is going to be a valuable one.

Region: Inspired by your work, economists have been working for 25 years on the economics of information studying moral hazard, adverse selection, signaling and so on. What has been the impact of this work?

Arrow: I think there's been a very large impact. In fact, I'm really impressed with how wide it has gone. There are all sorts of institutions in the economic world which depart from the simple price/market model which I worked on in an earlier incarnation and which has been sort of the mainstream of economic theories since Adam Smith and David Ricardo. There are all sorts of contractual relations between firms and individuals which do not conform to the simple price theory--profit-sharing schemes and so forth--and the explanation for these suddenly became clear. We now understand why these emerged and that they are based on differences in information in the economy. This has been explored over and over again in many contexts, for example, customer/firm relationships; there seems to be no end of applications. There are papers applying it to specific applications all the time, in discussions of international economics relations, problems with sovereign debt, and so forth, studied from this point of view.

I think there are some things that still elude us by doing this. One problem is that the compensation schemes called for by theories are much more complex than those we encountered in reality. They vary less. According to the theory they should vary very much with circumstances, the exact distributions of uncertainty and things like that. I think this is partly related to bounded rationality, as I have said before.

The other problem with the theory is that it deals with individual markets. It's very hard to discuss the sort of thing that general equilibrium theorists want to discuss--the linkages across markets, how one affects the other. It also tends to be involved in monopolistic rather than competitive situations. But, what happens when you have lots of principals and lots of agents? There are just a few papers on that subject. I think on the whole the understanding of the ideas is the credibility of repeated relations where they're based on the concept of asymmetric information. These ideas have really changed the picture of the economy as much as any other single thing. I can't think of a single step in economic theory that is as big a jump in perspective as this. I don't want to claim the credit, but I think my paper of '63 initiated the theory, but it's one of these things that is identified with a large number of people. It's been a remarkable collectively developing enterprise.

Region: On that same theme, I'll focus on one of your students, Michael Spence, who worked on signaling in the labor market. His work suggested that much of education is wasteful in that skilled people spend valuable resources in education solely to sort themselves out from the less-skilled people. The applied literature on human capital seems to take the view that education increases skill levels. Why has Spence's work has so little impact on the applied literature?

Arrow: It's a very interesting question. I'm not sure I can tell you the answer. I think the lesson in Spence's work is very important and may be neglected. By the way, I think one should be a little careful of saying that the education is wasted in Spence's work. It permits the sorting. That in itself may be socially gainful. And Spence's model in its form doesn't fully convey all its implications. It implies that an individual will be productive no matter what.

If you extend the model, people go to different jobs, so a person may be productive in job A, maybe in job B he's no more productive than the next. His comparative advantage is only in some jobs, not in others. The education per se may have nothing to do with that advantage, but it enables it to be recognized. And you will actually get an increase in productivity in the economy as a whole as a result of it. In Spence's original work there is no social gain actually. But in a somewhat extended version of it, you would get a real gain from the sorting, from the signaling. So education can actually be worthwhile even if it does nothing but select. I think that point hasn't been clearly made. The trouble, of course, is that our data are really not sufficient to distinguish the idea that education identifies you as more productive from the idea that education directly adds to productivity.

Region: How did you get interested in pursuing economics as a career?

Arrow: I had some interest when I was an undergraduate but I didn't pursue it seriously. Economics in college was very poor; I was not very impressed with it. I actually wanted to study statistics. I discovered mathematical statistics as an undergraduate and was fascinated with it. It was then a very rapidly changing field. There was no Statistics department anywhere in the United States at that time, but there were some places where you could study it. I went to Columbia, partly because it was home and partly because it had a great statistical center. Actually, it had one man who was very good--Harold Hotelling. So not knowing any better, I entered the Mathematics department with the idea of taking statistics. Hotelling was giving a course in mathematical economics that really fascinated and impressed me. Statistics was still sort of a main goal, then Hotelling informed me that mathematics departments were very hostile to statistics; however, if I were to change my enrollment to the Economics department, which was his department, and he had done some very important work in economics, he thought he could get some financial support for me. So I switched to economics--it was an economic motivation if you like. So I switched to economics and really found I was more interested in economics than I was in statistics.

Region: Your first paper was in aerodynamics. How did you get interested in that?

Arrow: Not aerodynamics exactly, but the use of winds for flight planning. You must remember there was a little event called World War II, and I volunteered to go into something that would at least use my technical skills. They were looking for weather officers and a background in mathematics was sufficient. So I enrolled in that, was admitted into the program and spent more than four years of my life there, studying and then as a weather officer. Because I got very high grades, I was sent to research. I always said that they really knew I couldn't forecast; they just got me out of harm's way.

The work on flight planning came about when a group associated with some aircraft company had an idea for navigation using the wind. The idea was that when you're flying, of course, you're drifting, you point your plane in one direction but the wind modifies it. And the object was to get from one place to another as fast as possible. An applied mathematician directed me to European literature on that subject. Some of it was in German, and my German was mediocre, but I could struggle through it. All the literature assumed that the world was flat, that everything was on a plane, which may be germane if you're flying a hundred miles. But we were already flying planes across the Atlantic, from Newfoundland to Scotland. It turned out to be an interesting mathematical problem to change these results to be applicable to the sphere--and that was my contribution. The results are used routinely by firms that supply the airline companies with the optimal routes and they must be based ultimately on my work--there is only one solution. There were articles in the practical literature a few years later which picked up on it, but I've never traced my influence on the actual practice.

Region: My husband, who's an aeronautical engineer, asked me: "Why in the world did he switch from aerodynamics to the dismal science of economics?"

Arrow: You can tell him one thing I learned from meteorology is that being an actual science was no guarantee of exactness.

Region: Has the profession of economics changed much since you first started?

Arrow: The first thing is that there's a lot more of it. When I started in the field, there were eight journals that counted. Now there are good articles in at least 30 journals, and I think the number is still growing. At the level of sophistication, knowledge of the field is just transformed. Actually, if you pick up any journal, for example, Quarterly Journal of Economics in 1945, I think you'd be very unimpressed. There was a certain amount of interesting data, but it was just a bunch of tables and you could really tell very little from them. As a budding mathematical statistician, I was already very critical of any empirical work that was done. Econometric work today is on an entirely different level of analysis. The theoretical sophistication, of course, is entirely different. That's as far as the content of economics is concerned.

I think you're also asking about economics as a profession. I think the students are far better qualified than they were. There's no comparison. On the other hand, I do sense, as compared with let's say the early '50s, there's somewhat more of a careerism. I don't think it's anything special to economics; it's equally true with physics or biology. A graduate education has become a more career-oriented thing, and part of that is because of the need for funding. In fact, that's a much worse problem in the natural sciences than it is in economics. So you can't even do your work in the natural sciences, particularly, and even to some extent in economics, without funding. The rate of growth of the relevant population is much greater than the rate of growth in funds, though funds have gone up very nicely. But we have been producing students at a rapid rate; they're competing for funds and therefore they're more frustrated. I think there's a certain sense of weariness in the intellectual realm, as I say, it's not in any way peculiar to economics, it's a general proposition. I do see more backbiting and more concern about priorities and things like that than we in the '50s and '60s felt. I'm comparing now with the immediate postwar period. Before that everything was kind of sleepy. The '50s was a very exciting period, probably because there were fewer of us and communication was a lot easier. I corresponded with Leo Hurwicz here at Minneapolis, for example. Part of it was we had all gone through the Cowles Commission in Chicago together and felt persecuted. [Editor: The Cowles Commission was formed to study econometrics.]

Region: Persecuted? Why?

Arrow: Some people at the University of Chicago thought this was all wild stuff. Milton Friedman was very much against it.

Region: Was very much against the Cowles Commission?

Arrow: We felt sort of bunched together. But we were kind of feared, too. It was a funny kind of being persecuted. We were persecuted, but we were taken seriously, even when we were just this little group, five or six people at Chicago.

Region: Who were the five or six?

Arrow: Well, of course, they rotated. There was Jacob Marschak, who was probably the most leading, Tjalling Koopmans, Lawrence Klein, Leo Hurwicz, and the statisticians-- Theodore Anderson, Herman Rubin and Don Patinkin. I'm sure I'm forgetting somebody.

Region: Sounds like quite a group.

Arrow: Franco Modigliani spent a year there. He was more of a visitor. It was quite a group. And Gerard Debreu was later. I had left before he came. It was a very exciting period. We were bubbling over with new ideas and shouting at each other. We were very aggressive, except for Koopmans; he was very unhappy with this style. He was very much the reserved scholar and didn't like a quick give and take. He was a wonderful person, and we all loved him.

I think I've given my ideas of the general change in atmosphere. But there is no question, the standards of what we do is so incredibly higher than anything it was. I'd say it's gone up in even the last 20 years, not just as compared with the very early situation. I think we've been steadily improving, technically. The fact is new ideas do bubble up: the Rational Expectations school, endogenous growth theory and the Santa Fe sort of ideas. Path dependence is catching hold, and other new concepts are coming out. I think intellectually the field is in quite a good state. Unsolved problems, that's one of the great signs of progress in my opinion.

Region: Thank you, Professor Arrow.

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