Angus Deaton, Nobel Prize in Economic Sciences 2015

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This year, the Nobel Prize in Economics was awarded to the Scottish economist Angus Deaton for his academic work on consumption, poverty, welfare and income distribution inequality. Angus Deaton is considered by many as one of the world’s leading microeconomists and microeconometricians, specialized in consumption, mechanisms of poverty, living standards, well-being and development economics.

As we know, consumption is one of the most important economic aggregates of the gross domestic product (GDP). It is therefore highly important to assess the factors that influence the variations in individual consumption and savings as well as the whole mechanism behind it in order to construct efficient economic policies and welfare programs, not only in developing countries but also in developed economies, especially in the aftermath of the global economic crisis. In this context, numerous economic researches on how to assess consumption have been produced during the last decade. Angus Deaton has been among the leading economists in this field.

Numerous researches contributed to the recognition of Angus Deaton’s contribution in the field of economics worldwide. His highest achievement probably lies in the fact that he highlighted a sounder measurement procedure to assess numerous macroeconomic phenomena. For instance, he has been among the first in his discipline to focus on microeconomic data in order to study macroeconomic countrywide concepts. Instead of only focusing on theoretical concepts, Angus Deaton also gathered multiple empirical data, aggregated them and came up with much more accurate economic models than those that were widely used so far.

But What Exactly Was He Awarded For?

More precisely, the Committee for Nobel Prize in Economic Sciences highlighted three major achievements of Angus Deaton’s career. Firstly, in 1980, thirty-five years ago, Mr Deaton has been able to estimate the demand function much more accurately than many of his peers, across time and across different commodities. Mr Deaton thus came up with the “Almost Ideal Demand System”, in collaboration with John Muellbauer, a model that helped economists to better understand consumer behaviour with the help of a much simpler and still more accurate linear demand function. Secondly, Angus Deaton revolutionized the assessment of individual dynamic consumption and saving functions through an exhaustive econometric research on an individual basis. Unlike other economists before him, Deaton studied individual consumption behaviour across time and aggregated his empirical findings in order to obtain a much more accurate result. Finally, Angus Deaton helped to contribute to a much better understanding of households’ consumption in developing countries by conducting precise individual surveys. His studies allowed a better understanding of income distribution, living standards and poverty measures and mechanisms. Mr Deaton’s studies also helped create more accurate and efficient public policies and welfare systems.

Angus Deaton studied the correlation between income and consumption, based on factual household surveys in developing countries. For example, Mr Deaton analysed the consequences on households’ calories intakes as a function of households’ revenues, while these “infinitesimal” issues were often considered as unimportant and disregarded by many for the sake of a global, but less accurate, vision. Mr Deaton’s findings helped to develop the so-called “Deaton Paradox” according to which sudden shocks on individual incomes do not have significant effects on individual consumptions.

Fame Before The Nobel Prize: Wealth and Happiness

Interestingly, Angus Deaton already became very famous in 2010 in the United States for one of his minor but surprisingly popular and mainstream researches about the correlation between wealth and happiness. He conducted this study based on surveys of American households, with the help of the psychologist Daniel Kahneman, winner of the 2002’s Nobel Prize in economics.  Together, they arrived to the fascinating conclusion that emotional wellbeing does not raise significantly once a yearly income of USD 75,000 has been reached, a figure that seemed surprisingly dismal to the public opinion and that was argued to simply correspond to the fulfilment of all the basic yearly needs of a household in the United States. This figure might of course change from country to country and it does not correspond to a level of personal satisfaction but rather to the fulfilment of uncertainties related to the lack of money. This study highlighted the diminishing marginal returns of money but failed to demonstrate the existence of a negative relation between income and happiness once a very high threshold of income has been reached. It was indeed argued that, beyond a certain point, a higher income would just provide a constant utility.

A couple of years later, in 2013, a controversy regarding some of Deaton’s statements in his latest book brought him back to the spotlight. In his book titled “The Great Escape“ (2013), Mr Deaton studied the relationship between material living conditions and health in developing countries in order to assess whether a higher income would come with a higher level of health. Mr Deaton then came to the conclusion that healthcare only depended on the level of technology, without any relation to the level of wealth. He provided examples when improved medical techniques allowed for an increased life expectancy without any increase in population’s income.

In one of the chapters of this book, Angus Deaton argued that foreign aids do more harm than good to the developing world and that the funds seldom reach the population in need, falling instead in the hands of corrupt and undemocratic governments. According to angus Deaton, “the idea that global poverty could be eliminated if only rich people or rich countries were to give more money to poor people or to poor countries, however appealing, is wrong”. He believes that this trivial economic misconception is actually the main reason why people stay in poverty.  However, these statements have been largely criticised by NGOs, politicians and other economists, who argued that he did not provide any serious data in order to support these claims.

A Dedication Related To His Personal Story?

The work of Mr Deaton largely contributed to understand the ways in which poverty should be measured, at an individual level rather than at a societal level as it used to be often the case in economic science. When economists focus on individuals instead of focusing on society in general, the empirical results seem to be entirely different from what theoretical models would predict. This approach is also much more time consuming and work demanding but, as Angus Deaton demonstrated to us, it also provides us with much more accurate and realistic results. It also brings Economics back to where it is supposed to evolve – closer to the humans that it is supposed to study.

Highly personal aspects of Angus Deaton’s life could also have explained the choice of the Nobel prize committee. Mr Deaton indeed comes from a low-income family of Scottish minors. His father used to work as a minor before undertaking studies and becoming a civil engineer. His father always wanted to provide his son with an outstanding education, believing that it was the only path for a successful and satisfying life. The fact that Angus Deaton has been awarded with the Nobel Prize should not only represent the milestone achievement of his career but also of his personal life.

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