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
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.