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
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
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
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
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
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.
Arrow’s Autobiography on Nobelprize.org (offsite)