Angus Deaton: Who is he and Why Does he Matter?

On 12 October, the Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (colloquially just the Nobel Prize) for 2015 to Angus Deaton. Broadly, committee awarded Deaton the prize for his work revolving around three central questions: how do consumers distribute their spending among different goods, how much of society’s income is spent and how much is saved, and how do we best measure welfare and poverty?

Image courtesy of Jonathunder © 2008, some rights reserved.
Image courtesy of Jonathunder © 2008, some rights reserved.

These are incredibly important questions in economics, and his impact on the discipline is enormous. But the impact of his work goes beyond disciplinary boundaries—his influence is also keenly felt in international affairs. Chris Blattman, associate professor of public affairs and political science at Columbia, noted that ‘his idle afterthoughts helped start huge literatures.’ So what follows is a brief (and non-comprehensive) survey of his work in the field.

Measuring Poverty

Arguably Deaton’s biggest influence was on how poverty is measured in developing countries. One of Deaton’s main points was that macro-economic measures, like GNP per capita, average expenditures, and average consumption, are bad measures. Blattman argues ‘Annual income works fine in a country like the United States where most people earn a regular salary from one source, but it’s meaningless when a household has dozens of small activities, varying day to day, most of which produce things the family consumes themselves;’ Deaton was instrumental in replacing these data with other measures.

Instead, he pioneered massive household surveys. Disaggregating data from the macro- to the micro-level, he helped economists gain a better idea of what really works in development. He played a vital role in the beginning of the Living Standards Measurement Study, one of the first international household surveys, administered by the World Bank. He was also key in ensuring that consumption, not income, remained the primary metric of poverty. For example, Deaton and Subramanian estimate the elasticity of calorie consumption with regards to total expenditure to examine the relationship between poverty and hunger. The result was clear: ‘policies to foster income growth among the poor will reduce malnutrition.’

This work also extends beyond micro-economics in developing countries. Household surveys are administered around the world, such as the Three Cities Study in the United States and the HILDA survey in Australia. And in recent years Deaton has also turned his attention to other methods for gathering data. Most notable was his criticism of those who place too much emphasis on randomised control trials.  While informative, Deaton argues that they are far from perfect, and that they ‘have no special ability to produce more credible knowledge than other methods.’

Behaviour and Effect of Commodity Prices

Scholars have devoted years of effort and gallons of ink into determining why some countries are more conflict-prone than others. Specifically, commodities and economic growth are often considered determinants of stability. Richard Auty first outlined the resource curse in 1993, bringing the term into the lexicon of Comparative Politics and International Relations.  Subsequent work supported the thesis, and by 2015 a vast body of scholarly work has accumulated around it.

Deaton was no stranger to the study of commodity price fluctuations and their effect on developing countries. He noted that commodity prices are usually highly auto-correlated (their values in one year are highly dependent on their value in the previous year), but subject to violent shocks. In Sub-Saharan Africa in particular, Deaton argued that ‘fluctuations in commodity prices induce fluctuations in real national incomes and pose problems for macroeconomic management.’ In other words, violent shifts in a commodity’s price are anathemas for countries which depend heavily on the export of the commodity in question.

It’s not hard to see how Deaton’s work is crucial within the broader resource curse literature. The traditional resource curse argument centres on ‘rentier states,’ states which derive a significant portion of revenue from natural resource extraction. By deriving revenue from non-tax sources, the contract between the state and the individual is lessened; stability and legitimacy suffer as a result. But Deaton’s work adds another facet, that rentier states are also unusually vulnerable to commodity volatility: when commodity prices decrease, instability increases (to simplify a much more complicated argument).

Has Foreign Aid Done More Harm than Good?

While often misinterpreted as a polemic against aid, Deatons’s latest book, The Great Escape: Health, Wealth, and the Origins of Inequality is actually a warning against naïve aid. He argues that merely giving aid is counterproductive: what is necessary is an aid problem which is actually informed by the relevant economic scholarship.

Deaton is arguing against aid which is targeted broadly to reduce poverty and meet dollar targets. This aid merely disincentivises local governments from putting the institutions into place which would alleviate the need for this aid.  But again, Blattman argues ‘he’s talking about a particular kind of aid. I don’t think he means emergency relief for disaster and conflicts. I don’t think he means the money behind peacekeeping forces and post-war assistance. He might exclude child sponsorship. I’m guessing he’s not talking about money spent on vaccine research in the West.’ Aid which is effectively aimed towards specific targets can be effective.

Deaton’s main conclusion in the book is that health and income are much less correlated than one would expect. His conclusion (again, this is a vast simplification) is that effective institutions are what drive good health outcomes. If foreign aid allows for institutions to delay or avoid reforms, then aid is harmful to health. Simply throwing money at developing countries, however, is ineffective. So his argument is not that we should end foreign aid, but that governments need to fundamentally rethink what kind of aid works.

It is clear that Deaton’s corpus is far reaching. But the above summaries barely even touch what he was actually awarded the Nobel for. His work in deriving the Almost Ideal Demand System as well as ground breaking work on aggregate consumption were the other two thirds of the rationale for his being awarded the prize. In short, his contributions to international affairs broadly defined is remarkable in both breadth and depth. Deaton of course, remains modest, saying, ‘I’m just hoping it’s not a dream which I’m going to wake up from.’

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