25 October 1972

The
Royal Swedish Academy of Sciences has decided to award the
Bank of Sweden Prize in Economic Sciences in Memory of Alfred
Nobel, 1972 , to

**John R Hicks**, Oxford University, U K

and

**Kenneth Arrow**, Harvard University, USA

**for their pioneering contributions to general economic
equilibrium theory and welfare theory.**

The progress of the economic sciences has
led to a profound transformation of the general equilibrium
theory. To a high degree, this development is marked by the
pioneering works of Sir John Hicks and of Professor Kenneth
Arrow. Both have opened up new productive paths for research in
this area and thereby made fundamental contributions to the
renewal of the theory. Hicks initiated this recreative process in
the 1930s and Arrow provided it with fresh nourishment in the
1950s and 60s. As the distance in time between these
contributions indicates, Hicks and Arrow belong to two different
generations of scientists, a fact which can be traced in their
choice of problems and methods of analysis.

General equilibrium theory had, earlier, essentially the
character of formal analysis. In his most well-known work, the
monography, *Value and Capital*, published in 1939, Hicks
abandoned this tradition and gave the theory an increased
economic relevance. He presented a complete economic equilibrium
model with aggregated markets for commodities, factors of
production, credit and money. The construction of this model
included a number of innovations, *i.e.*, a further
development of older theories of consumption and of production,
the formulation of conditions for multimarket stability, an
extension of the applicability of the static method of analysis
to include multiperiod analysis, and the introduction of a
capital theory based on profit maximization assumptions. By being
deeply anchored in theories of the behaviour of consumers and of
entrepreneurs, Hicks's model offered far better possibilities to
study the consequences of changes in externally given variables
than earlier models in this field, and Hicks succeeded in
formulating a number of economically interesting theorems. His
model became of great importance also as a connecting link
between general equilibrium theory and current theories of
business cycles.

As his mathematical tool, Hicks used traditional differential
analysis. When, later on, more modern mathematical methods were
introduced in economic sciences, Arrow applied these methods in
his studies of general equilibrium systems. In a series of
papers, which preferentially treated the properties of solubility
and stability of such systems, he provided the basis for a
radical reformulation of the traditional equilibrium theory.
Through this reformulation, which was based on the mathematical
theory of convex sets, the general equilibrium theory gained both
in generality and in simplicity. The pioneering work, a paper
from 1954, was written together with Gerhard Debreu. The model presented in
this paper became the starting point for the major part of
further research in this field. Among Arrow's many important
contributions should also be mentioned his development of the
theory of uncertainty and its incorporation within the frame of
general equilibrium theory and, furthermore, his analysis of the
possibilities for decentralized decisions in a society where the
price system is fixed by the central authority. This analysis was
made in collaboration with Leonid Hurwicz.

From general equilibrium theory to welfare theory is but a short
step, and both Hicks and Arrow have, on several points, developed
the welfare economic consequences of their achievements indicated
above. The most well-known contributions by Hicks to welfare
theory are his analysis of criteria for comparisons between
different economic situations, and his revision of the concept of
consumer surplus. In its new form this concept has had a great
impact, *i.e.*, within the cost-benefit analysis. Arrow has
generalized the well-known theorem about pareto-optimality of a
competitive equilibrium, and he has demonstrated that there exist
general tendencies towards inoptimality in the allocation of
resources between research and investments in real capital. As
perhaps the most important of Arrow's many contributions to
welfare theory appears his "possibility theorem", according to
which it is impossible to construct a social welfare function out
of individual preference functions.

Both Hicks and Arrow have made important contributions also to
other fields than those mentioned above - Hicks to monetary
theory and to the theory of business cycles, and Arrow to growth
theory and decision theory.

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MLA style: "The Prize in Economics 1972 - Press Release".