The following quote is taken from "Social Choice and Individual Values" by Kenneth Arrow, pp. 17-18. This represents Arrow's conception of an economic system rather than a political or voting system. Please notice that Arrow requires each individual to submit his preferences regarding not only his own work and consumption preferences but also his preferences regarding everyone else's work and consumption thus making this system totally impractical and unviable. He calls ordering everyone else's work and consumption "ordering according to values" while just ordering preferences regarding one's own work and consumption "ordering according to tastes." In this economic system one could submit preferences that one's enemies should work 80 hours a week for starvation wages and one's friends and cronies should get CEO salaries for doing practically nothing! One could submit preferences that one's self and friends should get $7 - $10 million a year for attending parties as Paris Hilton does!
Any viable economic system would only require that each individual submit preferences regarding one's own preferred patterns of work and consumption, but this would depart from the model Arrow uses for proving that social choice is impossible. The part about each individual specifying preferences regarding "collective activities" is completely viable. These are such things as public parks, public libraries, public education and, in most advanced countries other than the US, public health care. The individual would also submit preferences regarding how much he personally would be willing to pay as his part for such activities. This is commonly known as taxation. While Arrow goes on and on about tastes and values, he elaborates very little about "collective activites" which could be a valid part of an individual's preference specifications.
An economic system based on amalgamating data from each individual and treating each individual equally would be a form of economic democracy. Also it may escape Arrow's proof that social choice is impossible because it departs from his model by virtue of the fact that each individual does not submit preferences about social states but only about his own personal and social consumption and willingness to work to support such consumption. Thus an analysis of the viability of this model might show that it is not impossible given a set of "rational and ethical criteria" (not necessarily the same set as Arrow uses to prove social choice impossible).
The following is the quote from Arrow:
THE ORDERING OF SOCIAL STATES
In the present study the objects of choice are social states. The most precise definition of a social state would be a complete description of the amount of each type of commodity in the hands of each individual, the amount of labor to be supplied by each individual, the amount of each productive resource invested in each type of productive activity, and the amounts of various types of collective activity, such as municipal services, diplomacy and its continuation by other means, and the erection of statues to famous men. It is assumed that each individual in the community has a definite ordering of all conceivable social states, in terms of their desirability to him. It is not assumed here that an individual's attitude toward different social states is determined exclusively by the commodity bundles which accrue to his lot under each. It is simply assumed that the individual orders all social states by whatever standards he deems relevant. A member of Veblen's leisure class might order the states solely on the criterion of his relative income standing in each; a believer in the equality of man might order them in accordance with some measure of income equality. Indeed, since, as mentioned above, some of the components of the social state, considered as a vector, are collective activities, purely individualistic assumptions are useless in analyzing such problems as the division of the national income between public and private expenditure. The present notation permits perfect generality in this respect . Needless to say, this generality is not without its price. More information would be available for analysis if the generality were restricted by a prior knowledge of the nature of individual orderings of social states. This problem will be touched on again.
In general, there will, then, be a difference between the ordering of social states according to the direct consumption of the individual and the ordering when the individual adds his general standards of equity (or perhaps his standards of pecuniary emulation).14 We may refer to the former ordering as reflecting the tastes of the individual and the latter as reflecting his values. The distinction between the two is by no means clear-cut. An individual with esthetic feelings certainly derives pleasure from his neighbor's having a well-tended lawn. Under the system of a free market, such feelings play no direct part in social choice; yet psychologically they differ only slightly from the pleasure in one's own lawn. Intuitively, of course, we feel that not all the possible preferences which an individual might have ought to count; his preferences for matters which are "none of his business" should be irrelevant. Without challenging this view, I should like to emphasize that the decision as to which preferences are relevant and which are not is itself a value judgment and cannot be settled on an a priori basis. From a formal point of view, one cannot distinguish between an individual's dislike for having his grounds ruined by factory smoke and his extreme distaste for the existence of heathenism in Central Africa. There are probably not a few individuals in this country who would regard the former feeling as irrelevant for social policy and the latter as relevant, though the majority would probably reverse the judgment. I merely wish to emphasize here that we must look at the entire system of values, including values about values, in seeking for a truly general theory of social welfare.
It is the ordering according to values which takes into account all the desires of the individual, including the highly important socializing desires, and which is primarily relevant for the achievement of a social maximum. The market mechanism, however, takes into account only the ordering according to tastes. This distinction is the analogue, on the side of consumption, of the divergence between social and private costs in production developed by Professor Pigou.15
14. This distinction has been stressed to the author by M. Friedman, The University of Chicago. 15. A. C. Pigou, The Economics of Welfare, London: Macmillan and Co., 1920, Part II, Chapter VI. For the analogy, see Samuelson, op. cit., p. 224; Reder, op. cit., pp. 64-67; G. Tintner, "A Note on Welfare Economics," Econometrica, Vol. 14, January, 1946, pp. 69-78.