2015 Nobel Prize in Economics: Consumption, great and small

Angus Deaton of Princeton University has been awarded this year’s Nobel Prize in Economic Sciences ‘for his analysis of consumption, poverty, and welfare’.

‘Deaton’s work has bridged theory and data; it has also bridged individual behaviour and aggregate outcomes; and it has helped to transform the fields of microeconomics, macroeconomics & development economics’, said Jacob Svensson, a member of the Prize Committee, in his announcement of this year’s laureate.

 

 

And George Mason University economics professor and blogger Tyler Cowen wrote, ‘“Understanding what economic progress really means” I would describe as his core contribution… Think of Deaton as an economist who looks more closely at what poor households consume to get a better sense of their living standards and possible paths for economic development. He truly, deeply understands the implications of economic growth, the benefits of modernity, and political economy.’

Deaton himself has summarised his research as follows: ‘Much of my work has been concerned with household behaviour, with demand systems, with consumption and saving, and with intra-household allocation. I have tried to work on these topics broadly, at both microeconomic and macroeconomic levels, and using data from developing as well as industrialised countries. I have been concerned with using theory to interpret data, and with methods for organising data that will cast light on issues of theory or policy.’

 

 

The Nobel citation focuses on three areas of achievement in Deaton’s research.

How do consumers distribute their spending among different goods?

When governments plan changes to their tax systems – proposing, for example, to raise VAT on food – they need to be able to forecast which social groups will gain and lose and how large the gains and losses will be. To do this, they need to understand how individual choices depend on prices and incomes and how consumption might change in response to the reform – they need to understand what is known as the ‘demand system’. Deaton’s early work sought to capture these real world demand patterns, to compare them across countries and to assess their implications for policy.

 

How much of society’s income is spent and how much is saved?

Stabilisation policy – government efforts to manage the ups and downs of the business cycle – depends on understanding the links between income, consumption and saving – how much is spent and how much is saved. Aggregate measures of these variables are of course determined at the individual level, but Deaton found that analysing aggregate data often yields the wrong results, suggesting that consumption varies more than income when in fact the opposite is the case. His work showed that it is essential to study consumption and income at the individual level and then to aggregate.

 

 

How do we best measure and analyse welfare and poverty?

In his recent work, Deaton has been concerned with measuring living standards and poverty in developing countries. In particular, he has demonstrated the difficulties of setting a poverty line as a way of assessing the extent of global poverty – for one thing, it is vital to know the prices and quality of the goods and services that are available to people. His use of household surveys has helped transform development economics from a theoretical field based on aggregate data to an empirical field based on detailed individual data.

His most recent book is The Great Escape: Health, Wealth and the Origins of Inequality. Stanford historian Ian Morris says it ‘tells the two biggest stories in history: how humanity got healthy and wealthy, and why some people got so much healthier and wealthier than others… he tells us how the billion still trapped in extreme poverty can join us in this great escape.’

 

Angus Deaton

Born in Edinburgh in 1945, Deaton was awarded his doctorate in economics by Cambridge University in 1974 before spending seven years as a professor of econometrics at the University of Bristol. Since 1983, he has been at Princeton University.

Speaking by telephone to the press conference in Sweden shortly after the announcement, Deaton said, ‘as someone concerned with the poor of the world, how they behave and what gives them a good life, I am delighted that this kind of research has been recognised’. As one of the great proponents of the importance of measurement in economics, he added, ‘the work done by me and my colleagues relies on data collected by statistical offices around the world. The people working in these roles, especially in poor countries, are the great unsung heroes of economic analysis’.

 

 

The Lindau Nobel Laureate Meetings offers sincere congratulations to the new laureate and hopes to hear from him in person about his research at the next Lindau economics meeting in 2017.

Romesh Vaitilingam

About Romesh Vaitilingam

Romesh Vaitilingam is a writer and media consultant, and a member of the editorial board of Vox. He is the author of numerous articles and several successful books in economics, finance, business and public policy, including The Financial Times Guide to Using the Financial Pages (FT-Prentice Hall), now in its sixth edition (2011). As a specialist in translating economic and financial concepts into everyday language, Romesh has advised a number of government agencies and international institutions, including the European Central Bank, the European Bank for Reconstruction and Development and the UK's Department for International Development. His work also involves consultancy for the economic research community, notably advising the Royal Economic Society, the Centre for Economic Performance at LSE and the Centre for Economic Policy Research on the management and development of their public profile; and training economists in communication skills. In 2003, he was awarded an MBE for services to economic and social science.

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