Kenneth Arrow, who passed away on February 21, was, according to many knowledgeable observers, the foremost economist of the second half of the 20th century. Paul Samuelson, the first American to win the Nobel Prize in Economics, said Arrow was the most important economic theorist of the 20th century. Beginning with his Ph.D. thesis on social choice, Arrow pioneered research in general equilibrium theory, welfare theory, the economics of information, and many other fields. In a single article published by the American Economic Review in 1963, he launched modern health economics. With dazzling accuracy, he observed that “the special economic problems of medical care can be explained by adaptations to uncertainty (italics added) in the incidence of disease and in the efficacy of treatment.”
Prior to Arrow’s article, health economics was a small sub-field with research limited mostly to descriptive and institutional studies. In his foreword to a collection of papers celebrating and critiquing the 40th anniversary of “Uncertainty,” Mark Pauly wrote, “Arrow’s article made research in health economics respectable…It also made it interesting.” In Greek legend, Helen’s beauty launched a thousand ships; Arrow’s article has launched more than a thousand studies. It is the most frequently cited of all Arrows’s single-authored articles.
Rereading Arrow’s article is comparable, on a reduced scale, to rereading Smith’s Wealth of Nations or Marshall’s Principles of Economics. One is struck by the frequency with which a single sentence or paragraph opens up a concept, hypothesis, or relationship which will, years later, be expanded into a major subject of research — for example, “trust.”
What was Arrow’s impact on health economics? Tremendous. Research on asymmetrical information, health care insurance, and its two best known problems, moral hazard and adverse selection, is where “Uncertainty” has probably had its biggest impact. Most of these studies have had an empirical section; they were not just additional theoretical investigations. Another subject that Arrow introduced and has been vigorously discussed is the existence of social institutions such as professional ethics to improve efficiency and equity when market solutions appear inadequate or impossible.
What was the impact of Arrow’s article on health policy? That question is more difficult to answer. A count of citations to “Uncertainty” in journals other than economics shows political science and health policy journals in the lead. But that is evidence of an impact on discussions of policy, not necessarily on policy itself. The latter is shaped by so many factors other than the analysis supplied by the research community. One policy provision of the Affordable Care Act that might be traced back to “Uncertainty” is the prohibition of insurance policies that excluded care based on previous conditions. Another is mandates. Arrow was, however, first and foremost a brilliant analyst, not a policy advocate or a player in partisan politics. To understand Arrow’s priorities, we need only look at the dedication in his collected papers, where he praises his Columbia mentor Harold Hotelling for setting “the example of human concern combined with analytical rigor that I have always attempted to follow.”
Arrow’s “impact” was achieved primarily through his classic publications such as the 1963 American Economic Review article. But in a career that spanned over 70 years, many economists, and in particular, many leaders of economics, had personal contact with Arrow, and I believe that contact had some impact as well. Intellectually he was as broad as he was deep. He was a good example of Friedrich Hayek’s observation that “nobody can be a great economist who is only an economist.”
In seminars that we both attended Arrow was exemplary. He made a genuine effort to understand what the presenter was trying to do, and while he did not refrain from critiques, they were always delivered in a constructive way. He did not raise his voice. He did not hog the floor. He set a high standard for discussion of economics.
Personally, he was devoted to his family and was a warm and caring friend to many at Stanford and around the world. He was modest, thoughtful, attentive to others. He took on much more than his fair share of community and professional responsibilities. Compared with most who rise to the peak of a difficult field, he was less personally ambitious, less eager to proselytize, less driven by ego. Health economics was blessed to have Arrow and his article on “Uncertainty.”