David R. Henderson  

Arrow: Why Shouldn't I Go to the Highest Bidder?

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Harold Hotelling, an economist, taught some of the statistics courses and "gave a course in mathematical economics" that Arrow said he took "out of curiosity." But because it began to hook him on economics, when his cash ran down Arrow approached Hotelling. The economist told Arrow that he had no influence over the math department's financial awards, but he could help him if he switched to economics. "So I switched to economics. People get very shocked by this. I said, 'You're all economists--why shouldn't I go to the highest bidder?'" he recalled in a recent interview in his office at Stanford University, where he spent most of his professional life.
This is from Janet Stotsky, "Path Breaker," Finance & Development, September 2014, Vol. 51, No. 3. It's her lengthy profile of Kenneth J. Arrow. Quite fun.

There's an interesting tension, though, between parts of the article. Early in the piece, she writes:

In nearly all his endeavors Arrow introduced mathematical rigor and was a major influence in making economic theory as mathematically oriented as it is today.

Later she writes:
Arrow's 1963 paper on uncertainty and the welfare economics of medical care explained the difficulties in designing a well-functioning market for medical care both because some participants know more than others--for example, the gap in medical knowledge between doctors and their patients--and because there is an absence of price competition in this market. He demonstrated the central importance of moral hazard in the medical marketplace--for example, greater demand for medical care by patients with insurance. A committee of leading economists said the article was one of the 20 most influential in the first century of the American Economic Review, the flagship publication of the American Economic Association.

Where's the tension? This 1963 article became a classic. A committee of leading economists counts it as one of the 20 most influential in 100 years of publication of one of the two top U.S. economics journals. (The other is the Journal of Political Economy.) Here's the thing. There's not an ounce of math in that article. It's all words. And if I recall correctly, there isn't even a graph. That doesn't contradict her statement that Arrow helped mathematize economics. But it does mean that a huge part of his influence had nothing to do with math.

By the way, Arrow's 1963 classic is very nicely done. In fact, it was the subject of one of my earliest blog posts.

Interestingly, his first paper was published in the Journal of Meteorology.


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COMMENTS (7 to date)
Tom West writes:

People get very shocked by this. I said, 'You're all economists--why shouldn't I go to the highest bidder?'

Because almost any economist will tell you that there are certain situations for which economics is the *wrong* approach.

One of those situations is the selection of an area of academic interest, where love of the subject matter is supposed to be the guiding principle.

Of course they were shocked (and likely somewhat appalled). Professor Arrow was applying the field of economics where it didn't belong.

Of course there's a lesson there for those economists about how *other* people feel when they see economics being applied in an area to which they feel it doesn't belong. It might make them feel less surprised at the negative reaction that economists sometimes garner.

Daniel Kuehn writes:

Tom West - monetary payoffs have a big impact on field of study. And why shouldn't they? Why doesn't it belong in a major human capital investment of all places? And for that matter how are non-monetary preference not an economics "approach"?

Certainly other factors belong too, but that doesn't mean that on the margin money shouldn't matter.

David R. Henderson writes:

@Tom West,
What Daniel Kuehn said.
Moreover, read the whole interview and you’ll see that Ken Arrow, like many of his generation, was “changed” by the Great Depression. He worried about whether he could get a job, let alone what kind of job. This reminds me of a similar story that Milton Friedman tells about how, if he had continued with his strength, math, he probably would have become an actuary. But he discovered economics early. Always in his mind, though, was whether he could make a living.
Or take my own story. I was making these big decisions in the early 1970s. I didn’t have nearly the same worry that Arrow and Friedman had, but I did think about money and jobs. I was choosing between a Ph.D. in economics and a Ph.D. in philosophy. I certainly did ask about job prospects in both.

Tom West writes:

I should make myself clearer. It seems quite rational (and proper, not always the same thing) to me to consider economic factors in deciding one's field of study.

I'm old enough to understand that people's joy and interest are usually pretty flexible, and aren't (usually) divine inspiration. But that image is strongly a part of academic culture.

Culture beats economics much of the time, and the admitting that you are driven by economic concerns in a culture that clearly values non-economic concerns means (1) you shock those who truly believe that love of the field is the only correct way to choose and (2) you shock those who understand that while many (most) do factor in economic concerns, that to say so is to directly assault that culture.

Of course, this is all just a comment he made, so it's important not to put much weight on people's shock. But it probably did raise a few eyebrows.

Bosker Leuken writes:

I agree with Tom. David you were choosing between two Ph.D's. The story as it's presented suggest Arrow switched merely because of monetary reasons. That is a strange thing to do when it comes to academia.

You go to the highest bidder all things equal. But the story suggest that all things were not equal. People are shocked by the ease of which he gave up other things for money. Again based on how the story is presented. Could be different with more details.

David R. Henderson writes:

@Bosker Leuken,
The story as it's presented suggest Arrow switched merely because of monetary reasons.
So when the story said that the econ course he took "began to hook him on economics,” that wasn’t enough for you?

Bosker Leuken writes:

in my reading that's more than undone by the next sentences

"The economist told Arrow that he had no influence over the math department's financial awards, but he could help him if he switched to economics."

And

"So I switched to economics. People get very shocked by this. I said, 'You're all economists--why shouldn't I go to the highest bidder?'"

I suppose one could read it either way.

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