“For his analysis of consumption, poverty, and welfare,” Angus Deaton has been awarded this year’s Nobel Prize in Economics (or, more formally, “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”).
Every year, the Nobel Prize is awarded to someone whose ideas and research have increased our understanding of important issues in economics and related areas, and Dr. Deaton certainly meets and exceeds these criteria.
The Nobel Prize in Economics was created by the central bank of Sweden 1968, and the Royal Swedish Academy of Sciences decides on the recipients. Every year, the almost $1.5 million award is given for groundbreaking work in economics; areas of study include general equilibrium theory, traditional micro and macroeconomics, bargaining theory, and economic history. Sometimes, awards have gone to individuals who have explored the linkages between economics and other arenas (political science, psychology, sociology, law, mathematics, and others).
Selection criteria used by the Royal Swedish Academy of Sciences include the originality of the contribution, its scientific and practical importance, and its impact on scientific progress. The effects of the work on society and public policy may also factor into the process.
Dr. Angus Deaton is the Dwight D. Eisenhower Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs and the Economics Department at Princeton University. He holds American and British citizenship, and in Britain taught at Cambridge University and the University of Bristol.
The core of his work deals with poverty, and how it is crucial to understand individual consumption choices if we ever hope to make progress in reducing poverty. Dr. Deaton went beyond study of overall outcomes, looking instead at the detailed individual information. At the individual level, it is possible to see patterns that get lost in the summary form, and his work has transformed several areas of economics.
As explained by the Royal Swedish Academy of Sciences, the work for which Deaton is being honored revolves around three central questions. First, how do consumers distribute their spending among different goods? Second, how much of society’s income is spent and how much is saved? Finally, how do we best measure and analyze welfare and poverty?
The more accurately and completely we can answer the question of how consumers distribute their spending, the better we can explain and forecast actual consumption patterns. Armed with that understanding, it is possible to evaluate policy reforms (such as consumption taxes) and how they affect the welfare of different groups. Dr. Deaton’s “Almost Ideal Demand System” provides a way to estimate how demand for each good depends on the prices of all goods and on individual incomes. Developed some 35 years ago, the approach and subsequent refinements by Dr. Deaton and others are widely used both in academic settings and in public policy debate.
After noting some 25 years ago that the most widely used consumption theory at the time was flawed, Dr. Deaton set forth the idea that instead of looking at aggregate income and consumption, we should actually be looking at how individuals adapt their own consumption to their individual income. More recently, Dr. Deaton has been focusing on how individual household consumption patterns can be used to explain economic development. He not only furthered our understanding of problems in the way we often look at poverty (particularly comparing poverty rates over time or in different areas), but also pointed out how household data can help explain other variables ranging from food consumption to gender discrimination.
By taking a different stance and focusing on data at the individual (rather than aggregate) level, Dr. Deaton has helped shift economics toward a more empirical basis. When we look at the many different decisions driving overall changes, we can better understand the patterns which emerge.
Although others don’t necessarily share my view, I have always thought of his work as having parallels to theoretical physics. Those who study the universe see broad patterns that fit together elegantly; those who study the tiniest particles see different and far more detailed things. The current discussion of income inequality in the United States is a case in point. While overall consumption patterns at the national level are relatively smooth and predictably based on income, below the surface the buying habits and income patterns of individuals are changing as wealth distribution becomes more concentrated. It is only by looking below the aggregate numbers that you can see the true picture.
Dr. Deaton’s main current research areas are in health, wellbeing, and economic development. He’s looking at the determinants of health in rich and poor countries, as well as on the measurement of poverty in India and around the world. These are weighty problems indeed, and I’m glad that his work is focusing in these areas. Congratulations, Dr. Deaton, and keep up the good work.