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  • 10.20.15

How Nobel Prize Economist Angus Deaton Changed Our Thinking About World Progress

This year’s winner’s work has shown how the poor spend money–and how we can help them.

How Nobel Prize Economist Angus Deaton Changed Our Thinking About World Progress
[Top Photo: JEWEL SAMAD/AFP/Getty Images]

Only a few dozen people in history have ever won a Nobel Prize in Economics. All put in long work to achieve their world-changing results. Yet the day Princeton University economist Angus Deaton received his early morning phone call this week, he talked more about his luck than effort.

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He recounted how his father would have almost certainly died in World War II combat had he not “luckily” contracted TB. In the easy labor market after the war, Deaton’s father, a coal miner in Scotland, got a job at a civil engineering firm, and later, going against the advice rest of the family, encourage a young Deaton to read books. “One of the things it made me very conscious of is how much importance luck is in people’s lives,” Deaton said to an audience at Princeton after winning the award. “If you re-ran the world, it would be shuffled in a very different way.”

This outlook bled into Deaton’s Nobel-prize winning lifetime of work. “Those of us who were lucky enough to be born in the right countries have a moral obligation to reduce poverty and ill health in the world,” he’s written.

Deaton’s career has focused on understanding how people consume goods and services–a crucial step to achieving social goals like improved health and well-being and poverty and inequality reduction. His focus on the problems inherent in extreme income inequality came long before it was a political topic du jour. Unlike many economists, who focused on large-scale trends, he aims to understand why each person makes the choices they do. In other words, he realized that personal decisions matter. “It’s about people in the end,” he told the Nobel Prize organization this week. “You have to understand what makes people tick.”

Jessica Kourkounis/Getty Images

This work took him to tackle a wide variety of questions. In 1980, with a colleague John Muellbauer, he developed the Almost Ideal Demand System–a model that more accurately predicted how people change their consumption behavior in response to price and income fluctuations, compared to what existed before. The model–which is still widely used today–has helped experts study the effects of economic policies like a new tax or subsidy on the well-being on specific individuals, such as subsistence farmers or merchants. Later, he also debunked the idea it’s useful to think about a “representative consumer” and “average income” in an economy–and instead showed that economists must understand how individuals make and spend money before carefully aggregating any data.

He developed pioneering household survey methods that measured what goods and services poor people consumed and used the data to more accurately compare living standards and poverty levels across different countries and time periods, especially in the developing world where fewer such data sets exist. He has used his data-driven approach to tackle many practical questions in the field of development, poverty, health, and well-being. His work fanned out across the world, focusing often on India, South Africa, and the United States.

As the Nobel Prize Committee wrote: “In the 1980s, research into economic development was mostly theoretical and, where it was empirical, it was based on aggregate data from national accounts. This has now changed. Development economics is a flourishing empirical research field based upon the advanced analysis of detailed data from individual households. Deaton’s research has been an important driving force in this transformation.”

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Deaton has been particularly adept at disentangling the causes of poverty and inequality from the consequences. For example, in India, he showed that malnutrition was caused by a low income–rather than being a cause of low income, as some had believed. He showed that increasing people’s income did lead to a higher calorie intake among the poor. To learn this, he simply looked at the behaviors of individuals who are poor (with aggregated data, higher-income people were included and flattened out the effect).

In the United States, in one paper with co-author Darren Lubotsky, he showed that–contrary to deeply held views–income inequality in the U.S. was not linked to higher mortality rates. “Our work showed that that empirical basis for this claim was quite fragile and concluded that the evidence is pretty clear that there is not an association between income inequality in a city of state and mortality rates,” Lubotsky says. What it did show, however, was that higher mortality was strongly linked to racial inequality, so that both blacks and whites who lived in areas with large minority populations suffered worse health outcomes, suggesting that poor quality hospitals and health care facility are located in minority neighborhoods.

In a widely publicized paper with the psychologist Daniel Kahneman, he used a Gallup survey to attempt to answer the age-old question of whether more money buys more happiness. It turns out it does, up until you make an annual income of $75,000. After that, you’re on your own.

In 2013, he put together his ideas in the popular book The Great Escape: Health, Wealth and the Origins of Inequality, and it summarizes his positive outlook on world progress. Much like Bill Gates, Deaton traces the ways that the world has gotten better over the last 250 years, as billions of people have gotten healthier and happier as GDP has grown. But he notes that crises can interrupt progress, such as HIV/AIDS hitting hard in South Africa, and worries about the millions of people who are being left behind by this progress, especially in developed countries where inequality is growing and economic growth is slowing.

This week, he said that climate change and inequality are the two great challenges of our time, and they will exacerbate each other: “I do worry about a world in which the rich get to write the rules.”

There are current battles Deaton is fighting. The last decade has brought more criticisms of the unintended negative role of foreign aid can play in developing economies, and (unlike Bill Gates) Deaton says that aid is often ineffective and sometimes harmful. And despite his emphasis on data, he’s also a fierce critic of a new fad in development–the use of randomized control trials to test which poverty interventions are most effective (see his lecture on Angry Bird Economics.) Data removed from specific local contexts isn’t going to be helpful in seeing if an idea that works in one place will work in another, he says. Or, as University of Toronto professor Kevin Bryan puts it, his Nobel Prize is largely for “the idea that effective development requires theory.”

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Deaton’s prize is also a call for economists to focus on the poor in general. As Deaton said this week: “There’s still 700 million people who are poor and those are a constant reproach to all of us.”

About the author

Jessica Leber is a staff editor and writer for Fast Company's Co.Exist. Previously, she was a business reporter for MIT’s Technology Review and an environmental reporter at ClimateWire.

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