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Thursday, October 15, 2015

A Friend of the Impoverished Lot Has Won the Economics Nobel

“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”, said Prof Angus Deaton recently, and what can be more heartening than to hear that the Nobel committee has awarded this year’s Nobel for Economics to Prof. Deaton for his contribution towards bettering our understanding of: one, “the system for estimating the demand for different goods” that he developed along with John Muellbauer; two, “the link between consumption and income”; and three, measuring living standards and poverty in developing countries with the help of household surveys”. 

As many of his fellow economists have observed, Deaton is an empiricist besides being a systematizer and is always eager to analyze things in the right way. His philosophy of research, in his own words, is: “I think putting numbers into a coherent framework always seemed to me to be what really matters.” This well reflects in his contributions to the field of developmental economics—with a specific focus on the economies of poor countries—to which he indeed gave a new dimension.

The ‘demand system’ that he developed along with Muellbauer is the standard tool to the current crop of economists “to measure the effects of economic policy for constructing price indexes and for comparing living standards across countries and time periods”. Perceiving the apparent contradiction between the theory of ‘Permanent Income Hypothesis’ and the data —consumption varying less than income—that is often referred to as “Deaton Paradox’, Deaton, studying the “income and consumption of individuals’ as a way out for better understanding the macroeconomic data, proposed to “start at the individual level and then, with great caution, add together individual behaviors to compute numbers for the entire economy”. Indeed, Prof Deaton is the trailblazer in “linking detailed individual choices and aggregate outcomes” that simply “transformed the fields of microeconomics, macroeconomics and development economics.”

Believing that consumption data is more reliable in developing countries than income data, he advocated building up of extensive datasets with household consumption of different goods to measure and understand poverty and its determinants better. Indeed, he advocated combining the questionnaire-driven surveys with carefully developed economic theory and appropriate statistical methods in order to assess the living standards, malnutrition, gender discrimination, etc.  Suffice to say that three decades of his research has bridged the gap between theory and data, and also between individual behaviors and aggregate economic outcomes that have a lasting impact on economic policy and modern economic research.  

Interestingly, much before Thomas Picketty came on global TV screens with his inequality argument, it is Deaton who first warned the world about the growing inequality in the world. In his book, The Great Escape: Health, Wealth and the Origins of Inequality—one of Bloomberg/BusinessWeek Best Books of 2013 and also one of Forbes Magazine’s Best Books of 2013 that explores the relationship between the material standard of living and health across countries and over time—asserting that “life is better now than at almost any time in history; More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die”, Prof. Deaton equally emphasized that  democracy is always under threat from economic inequality—a phenomenon that “is often a consequence of progress”, particularly, in developing countries—and the more extreme the economic inequality, the greater the threat to democracy.

Having said that, he also clarified that worrying about growing inequality does not mean that one being jealous of the wealthy; but it is all about the effect of the wealthy people’s behavior such as their less inclination to support health insurance cover to everyone, their disinterest in making public education system more effective, their disinclination to regulate banks more effectively fearing that it would restrict their ability to earn profit, etc., which has a tremendous say on the wellbeing of everyone. “And, hence it needs to be addressed urgently”, argues Deaton.  

As a researcher, he is not averse to landing in controversies: for instance, when many of the macroeconomists in the US, relying on the theory of ‘rational expectations’, were criticizing traditional Keynesian policies, he argued that data on consumer spending did not support some of the implications of this theory. Similarly, he questioned the wisdom of economic aid doled out by the rich countries, for he strongly believes that such an aid “is doing more harm than good” to poor countries. Equally interesting is his argument against using the ‘randomized control trials’ in assessing policy interventions in developing countries, for he strongly believes that a particular intervention that worked at one place is no guarantee that it will work in another context or again. 

As his profile page proclaims, “My current research focuses on … the measurement of poverty in India…” Prof. Deaton is no stranger to India and he is quite familiar to Indians through his articles published in Economic and Political Weekly. With his in-depth look at the ‘wellbeing’ of the people, Deaton strongly favored ‘cash-transfers’ as an anti-poverty tool, for they, reaching the beneficiaries directly, can enhance consumption choices. Such transfer, he argues, can also be made women-centric and thereby ensure their right usage. According to him, the second best anti-poverty tool is the ‘in-kind’ transfer, but it suffers from a disadvantage: the shadow-value of the goods supplied to the beneficiary will often be perceived less than the cost of it to the provider.    

Dr.Deaton—a professor with a deep concern for capturing the complexity of the real world— admitting that “inequality occurs naturally because of divergent luck”, observed that “we should not be concerned with other’s good fortune if it brings no harm to us”. At the same time he also expressed his concern about the growing gaps in recent years, “for it might pose a new economic and political challenge.”

Incidentally, I remember to have read Prof Deaton, asserting that increased income does indeed lead to consumption of more calories, saying that the best measure for the success of any governmental intervention programme in alleviating poverty is people’s mandate.   While I respect the philosophy behind his statement, I wonder if this observation holds good in India.   

Having acquired a reputation as a formidable theoretician and econometrician, and having spent more than three decades in researching poverty and inequality that too in poor countries, where data reliability is a big question mark, Prof. Deaton stands out as “the only economist at work in this area [poverty and inequality] … as authoritative and as having no ideological axe to grind.” What an accomplishment!  


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