Distributed Information and the Role of the State in the Economy

  • Kenneth J. Arrow
Part of the International Economic Association Series book series (IEA)


I intend to make here some reflections on the role of the state in the government of the economy. More specifically, I want to draw the implications of the fact that knowledge in the economy is very widely dispersed. Neither the state nor any other entity has ready access to any more than a small portion of the myriad of facts, generalizations, and judgements, explicit and implicit, which are known somewhere in the economic system and affect its outcome. This perception is classic among economists, as seen in Adam Smith, if not before. In recent times, there is a prevailing consensus that the government is in a poor position to make economic decisions since its knowledge is such a small part of that scattered through the economy, a position especially associated with the name of Friedrich von Hayek (1945). This view is manifested in practice in the strong current trend towards privatization and towards deregulation even of natural monopolies. I want to re-examine the argument and show that the inference from dispersed information to absence of government intervention is valid only for some cases but not for others. The generalizations common in current rhetoric are too sweeping.


Transaction Cost Asymmetric Information Market Failure Contingent Valuation Imperfect Competition 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Arrow, K. J. (1951) ‘A Reconsideration of the Basic Theorems of Classical Welfare Economics’, in J. Neyman (ed.). Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability (Berkeley and Los Angeles: University of California Press), pp. 507–32.Google Scholar
  2. Arrow, K. J. (1953) ‘Le rôle des valeurs boursières dans la répartition la meilleure des Risques’, in Econometrie, Colloques Internationaux, vol. 11 (Paris: Centre National de la Recherche Scientifique), pp. 41–7.Google Scholar
  3. Arrow, K. J. (1963) Social Choice and Individual Values, 2nd edition (New Haven and London: Yale University Press).Google Scholar
  4. Arrow, K. J. (1969) ‘The Organization of Economic Activity: Issues Pertinent to the Choice of Market vs. Nonmarket Allocation’, in Joint Economic CommitteeGoogle Scholar
  5. United States Congress, The Analysis and Evaluation of Public Expenditures: The PPB System (Washington, DC: Government Printing Office), vol. 1, pp. 47–64.Google Scholar
  6. Bator, F. (1958) ‘The Anatomy of Market Failure’, Quarterly Journal of Economics, vol. 72, pp. 351–79.CrossRefGoogle Scholar
  7. Baumol, W. J. (1952) Welfare Economics and the Theory of the State (Cambridge, MA: Harvard University Press).Google Scholar
  8. Bergson, A. (Burk) (1938) ‘A Reformulation of Certain Aspects of Welfare Economics’, Quarterly Journal of Economics, vol. 52, pp. 310–34.CrossRefGoogle Scholar
  9. Bertrand, J. (1883) ‘Théorie des Richesses’, Journal des Savants (September), pp. 499–508.Google Scholar
  10. Calabresi, G. (1970) The Costs of Accidents: A Legal and Economic Analysis (New Haven and London: Yale University Press).Google Scholar
  11. Ciriacy-Wantrup, S. (1945) ‘International Cooperation in Conservation Policy’, World Economics (March-June), pp. 83–102.Google Scholar
  12. Coase, R. (1960) ‘The Problem of Social Cost’, Journal of Law and Economics, vol. 3, pp. 1–44.CrossRefGoogle Scholar
  13. Cournot, A.-A. (1838) Recherches sur les Principes Mathématiques de la Théorie des Richesses (Paris: Rivière).Google Scholar
  14. Debreu, G. (1951) ‘The Coefficient of Resource Utilization’, Econometrica, vol. 19, pp. 273–92.CrossRefGoogle Scholar
  15. Dupuit, Jules (1844) ‘De la mesure de l’utilité des travaux publics’, Annales des Ponts et Chaussées, 2ième Série, vol. 8, pp. 332–75.Google Scholar
  16. Edgeworth, F. Y. (1881) Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences (London: C. Kegan Paul).Google Scholar
  17. Hayek, F. von (1945) ‘The Use of Knowledge in Society’, American Economic Review, vol. 35, pp. 519–30.Google Scholar
  18. Hicks, J. R. (1939) Value and Capital (Oxford: Clarendon Press).Google Scholar
  19. Hotelling, Harold (1938) ‘The General Welfare in Relation to Problems of Taxation and Railway and Utility Rates’, Econometrica, vol. 6, pp. 242–69.CrossRefGoogle Scholar
  20. Knight, Frank H. (1924) ‘Some Fallacies in the Interpretation of Social Cost’, Quarterly Journal of Economics, vol. 38, pp. 582–606.CrossRefGoogle Scholar
  21. Lardner, D. (1850) Railway Economy (London: Taylor, Walker & Maberly).Google Scholar
  22. Lindahl, E. (1929) ‘Prisbildungsproblemets Uppläggning frân Kapitalteorisk syn-punkt’, Ekonomisk Tidskrift, vol. 31, no. 2, pp. 31–81.CrossRefGoogle Scholar
  23. Lindahl, E. (1939) Studies in the Theory of Money and Capital (London: George Allen & Unwin).Google Scholar
  24. Marshall, A. (1890) Principles of Economics, 1st edition (London: Macmillan), 8th edition (London: Macmillan, 1948).Google Scholar
  25. Marshall, A. (1907) ‘The Social Possibilities of Economic Chivalry’, Economic Journal, vol. 17, pp. 7–29; reprinted in A. C. Pigou (ed.) Memorials of Alfred Marshall (London: Macmillan, 1925), pp. 323–46.Google Scholar
  26. Meade, J. E. (1972) The Controlled Economy (Albany, NY: State University of New York Press).Google Scholar
  27. Musgrave, R. (1959) The Theory of Public Finance: A Study in Public Economics (New York: McGraw-Hill).Google Scholar
  28. National Oceanic and Atmospheric Administration (1993) Report of Panel on Contingent Valuation, Federal Register, vol. 58, no. 10 (15 January), pp. 4602–14.Google Scholar
  29. Neumann, J. von and O. Morgenstern (1944) Theory of Games and Economic behavior (Princeton: Princeton University Press).Google Scholar
  30. Pigou, A. C. (1912) Wealth and Welfare (London: Macmillan).Google Scholar
  31. Pigou, A. C. (1929) The Economics of Welfare (London: Macmillan).Google Scholar
  32. Radner, R. (1968) ‘Existence of Equilibrium of Plan, Prices and Price Expectations’, Econometrica, vol. 36, pp. 31–58.CrossRefGoogle Scholar
  33. Robinson, J. (1933) Economics of Imperfect Competition (London: Macmillan).Google Scholar
  34. Scitovsky, T. (1941) ‘A Note on Welfare Propositions in Economics’, Review of Economic Studies, vol. 9, pp. 77–88.CrossRefGoogle Scholar
  35. Scitovsky, T. (1954) ‘Two Concepts of External Economies’, Journal of Political Economy, vol. 17, pp. 143–51.CrossRefGoogle Scholar
  36. Stiglitz, J. (1994) Whither Socialism? (Cambridge, MA: MIT Press).Google Scholar
  37. Viner, J. (1931) ‘Cost Curves and Supply Curves’, Zeitschrift für Nationalökonomie, vol. 3, pp. 23–46.CrossRefGoogle Scholar
  38. Young, A. (1913) ‘Pigou’s Wealth and Welfare’, Quarterly Journal of Economics, vol. 27, pp. 672–86.CrossRefGoogle Scholar

Copyright information

© International Economic Association 2002

Authors and Affiliations

  • Kenneth J. Arrow
    • 1
  1. 1.Stanford UniversityUSA

Personalised recommendations