By William K. Black
February 22, 2017 Bloomington, MN
Kenneth Arrow, one of the giants of economics, has died at the age of 95. He became a Nobel Laureate in 1972. As a young lawyer in 1977, I saw him in action as an expert witness on the subject of risk. The context was setting the rates for shipping oil through the Trans-Alaska Pipeline System (TAPs). Arrow testified about the risks of oil prices falling. The FERC administrative law judge thought such a scenario was ridiculous. Within four years, oil prices fell sharply. Arrow’s experience was a common one for economists dealing with lawyers – the ALJ ignored him.
The New York Times obituary for Arrow is revealing about how the conventional wisdom distorts economic theory in a predictably skewed fashion. It begins by discussing Arrow’s “impossibility theorem,” which states that where there are more than two choices it is impossible to construct perfect majority choice systems.