Limited Knowledge and Economic Analysis

Posted: 17 Nov 2009

See all articles by Kenneth J. Arrow

Kenneth J. Arrow

Stanford University - Department of Economics

Date Written: 1974

Abstract

Considers the idea that the uncertainties about economics stem from the need to understand the economics of uncertainty. Also argues that the lack of economic knowledge is largely due to the difficulty in modeling the economic agent's ignorance. The neoclassical model, founded on concepts regarding the individual economic agent and the market, is the starting point for the discussion. It is suggested that a market system is informationally economical and that the individual agent need not know very much about the economic system as a whole because there is far more in it than any one individual can learn. What the individual must know is the motivation and production conditions that define him or her. In addition, the simplification of an individual's decision making processes is possible because the markets have supplied the needed economic information in the form of prices. Also examined is the nonexistence of markets for future goods. This is done by considering the implications for the rest of the system and the reasons for the market's nonexistence. Finally, it is proposed that when uncertainty exists, risk aversion implies that steps will be taken to reduce risks. (SFL)

Keywords: Neoclassical economics, Resource allocation, Risks, Decision making, Economic decisions, Knowledge base, Prices, Contracts & agreements, Uncertainty, Markets, Risk management, Information transfer, Information seeking, Economic theory, Agent model

Suggested Citation

Arrow, Kenneth J., Limited Knowledge and Economic Analysis (1974). American Economic Review, Vol. 64, Issue 1, p. 1-10 1974. Available at SSRN: https://ssrn.com/abstract=1506319

Kenneth J. Arrow (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

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