I think economics in general is not a field that communicates effectively with the public and, in some sense, a goal of this blog is to do better at that: to help communicate ideas and contributes that are interesting, useful, and shed some light on how the world works. Another way to understand the field is to look at the work of the Nobel laureates, to see who has been honoured, what work is considered important, and why. So today, I thought we’d have a quick look at the 2015 laureate, Angus Deaton.
Unlike some recent laureates, Deaton is not known for a single big idea but has made major contributions in several fields. In microeconomics, his ‘Almost Ideal Demand System’ helped to shore up a core part of micro theory that had been floundering: specifically, how prices for one product can influence our demand for other products. We all face a budget constraint, a limit of how much we can spend in any given period, so buying more of one product leaves less to spend on other products. This could be done easily for individuals, but theory at the time was quite limited in how it could be done in aggregate; Deaton’s system overcame many of these problems. This continues to be an important contribution for policy analysis, understanding how changes in taxes, regulations, or subsidies for one product will effect many other markets, and the economy as a whole.
He went on to study issues in macroeconomics, helping us to better understand the limitations of aggregate data. Previously, policy work (particularly in macroeconomics) focussed a lot on averages: for instance, average earnings or inflation. But Deaton looked at the numbers and demonstrated that policy on this basis could be flawed, even completely wrong, at the individual level. He then helped to build tools that enabled us to study things at the individual level, which has led to large improvements in policy.
But his biggest recent contributions have been in the field of development economics, the study of economic progress and how poorer countries can become wealthier. One of his biggest contributions was to shift our assessment of poverty away from income and towards consumption, giving a much more accurate picture of wellbeing. He has also studied the effectiveness of foreign aid programs and concluded that, on the whole, they have done more harm than good: the provision of aid undermines the ability of a country to develop its own capacities, and often entrenches bad governments and bad policies.
That is not to say he is negative about development as a whole. Indeed, he has demonstrated more than most that we have seen dramatic reductions in poverty across the developing world and improvements on a wide range of other metrics (particularly health and mortality). In his own words (from a superb column):
One thing that we can do is to agitate for our own governments to stop doing those things that make it harder for poor countries to stop being poor. Reducing aid is one, but so is limiting the arms trade, improving rich-country trade and subsidy policies, providing technical advice that is not tied to aid, and developing better drugs for diseases that do not affect rich people. We cannot help the poor by making their already-weak governments each weaker.
The bloggers at Marginal Revolution made an interesting point about the arc of Deaton’s career, noting that he has gone from theoretical work in micro, to empirical work in macro, to applying theory and testing it empirically in development. Few economic scholars are able to make large contributions in one of these fields using one approach, let alone using the three approaches across different fields.
If you want to learn more about Deaton, the Nobel folks have put together a popular (non-technical) summary of his contribution. Alternatively, you can read his (quite excellent) book, The Great Escape: Health, Wealth, and the Origins of Inequality, or listen to him in conversation on a past episode of Econtalk.