Kenneth Arrow Interview On The Market System

Kenneth Arrow was awarded a Nobel Prize in economics at the age of 51.  He is clearly regarded as one of the most influential US economists in recent history.  The University of Notre Dame posted an excerpt of an interview of Kenneth Arrow that is worth reading.

Arrow argues that any economic system should be evaluated in terms of two criteria.  Since any society should be concerned about the welfare of all of its citizens,  the distributional aspects of the system must be considered.  He argues that many European societies are better at meeting the distribution criterion than we are in the US.  They have social welfare programs that mitigate some of the distribution problems in the market system.

The purported advantage of the market system is its efficiency.  Most economics textbooks are heavily weighted towards the efficiency criterion.  The distributional aspects of the system are often excluded because they are not part of a "positive science".  Economic science is unable to evaluate the fairness of the system in terms of the distribution criterion.  The distribution criterion is considered to be part of a "normative science" in which values play an important role.

Arrow was critical of the communist system because it was a tyranny.  On the other hand, most of the Eastern European countries that adopted the market system did not make the case for efficiency of the market system.  He argues that the typical market economy is not very efficient.  He compares the efficiency of the market system to what Churchill said about democracy.  That is, it is the worst system except for every other system.

Arrow understands the importance of "human capital" in the economy.  Clearly, the state plays many important roles in any economy.  It provides the infrastructure and most of the formal education.  He believes, however, that the family plays a critical role in human capital formation.  He believed that the break up in the family has had a negative effect on the development of human capital.  He does not pretend that he can explain what has led to the break up in the family structure, but he suggests that it might have something to do with the extreme individualism that he observes in modern society.  There are probably better explanations for what Arrow observed about the family, but his point is well taken.  The family is a critical component in the development of human capital.  Moreover, he does not believe that government can do much about the problem.  Others might argue that the break down in the family structure may be related to the distributional problems that economists typically avoid. Its difficult for families, that struggle to satisfy subsistence needs, to invest in human capital formation.  Its also true that many European nations provide more assistance to families.  They provide day care services, which are very expensive in the US, they also provide greater access to healthcare and to higher education.