Bringing economics back to the real world

Although much of the 69-year-old economist’s work was written with developing countries in mind, five leading Scottish economists contacted by the Sunday Herald said that Deaton’s work, with its emphasis on tackling poverty and inequality, offered useful lessons to the current Scottish Government which has repeatedly cited these aims as its top priorities.

In 1996, the last time a Scot won the Nobel Prize for Economics, it went to James Mirrlees for his work on an abstruse-sounding “economic theory of incentives under asymmetric information”. Awarding the prize last week to Deaton, the Stockholm academicians said his work had “immense importance for human welfare”.

Tosten Persson, secretary of the award committee, said that Deaton’s research has “shown other researchers and international organisations like the World Bank how to go about understanding poverty at the very basic level.”

Ronald MacDonald, Professor of Macroeconomics and International Finance at Glasgow University, told the Sunday Herald that the award was “a brilliant decision”. Economists had rightly been criticised in recent years, MacDonald said, for producing highly theoretical treatises that attempted to explain the world around them through obscure mathematical formulations.

By contrast, Deaton’s work deals with very practical and applied issues but combines this with a solid evidence-based approach. “That is the beauty of his work,” MacDonald said. “Deaton’s work is also particularly eclectic, combining micro, macro and development economics, compared with previous laureates who often focused on a particular esoteric field.”

As the Scottish Government ponders introducing a Scottish rate of income tax, including a possible re-introduction of a 50p income tax rate, MacDonald believes the government would do well to consider Deaton’s work which has helped governments plan policy changes and shows that “penalising the wealthy with extra taxes will not necessarily help those in poverty”.

While Deaton has been critical of widening inequality in the US, tackling inequality is not, he believes, about socialist-style redistribution of wealth. “We should not be concerned with others’ good fortune if it brings no harm to us,” Deaton said.

“The mistake is to apply the principle to only one dimension of well-being – money – and ignore other dimensions, such as the ability to participate in a democratic society, to be well educated, to be healthy and not to be the victim of others’ search for enrichment.”

In a week in which the UK government was accused of trying to hide the negative impact of its changes to tax credits after producing an analysis that failed to show how poorer families will be hit, the relevance of Deaton’s work on modelling how, for example, tax tweaks will impact the poor, the rich and those on middle incomes is particularly apposite.

This empirical approach, developed alongside the fellow academic John Muellbauer in their joint 1980 paper “Almost Ideal Demand (AID) System”, swept aside previous simpler models of how people respond to changes in prices.

Deaton’s work on how changes to household income impact consumer spending and how people make their consumption decisions helps to understand how individuals behave in practice rather than how they are supposed to behave according to a theory.

He also used household surveys to assess living standards, the link between health and income growth and how, for example, an increase in income improves the diet of poor households.

Meanwhile, Deaton’s work on the causes of malnutrition, whilst based on 35 year of studying poor countries, is as relevant to modern developed economies such as Scotland, where poverty in deprived areas and poor diet have long been thought to be linked.

Deaton’s most controversial conclusions in this field was that higher incomes lead to a better diet and not, as was previously assumed, the other way around. This finding strengthened the case for aid programmes to target economic growth rather than food supply as the best means of improving living standards and overall well-being.

“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”, Deaton wrote in his 2013 book “The Great Escape: Health, Wealth and the Origins of Inequality”.

According to Deaton, excessive development aid “is doing more harm than good” as it often does not reach the people for whom it was intended, can encourage corruption, shores up dysfunctional governments and undermines countries’ ability to grow.

His conclusion that increased free trade and incentives for drug companies were likely to be more effective in combating third world poverty drew a sharp rebuttal from Bill Gates.

David Bell, Professor of Economics at Stirling University, said the awarding of the Nobel Prize to Deaton was “richly deserved” as his work is concerned with the “really big issues facing the world such as poverty and inequality”.

“Unlike some of the Nobel Prize laureates that have been awarded to people focussed on theoretical economics some of which has not turned out to be terribly useful, Angus Deaton’s work is far more helpful to policy makers in improving the lot of the poor and has had a huge impact reducing poverty in China and India,” said Bell.

“Deaton didn’t write his books with Scotland in mind, but you can see how they are relevant to Scotland. Much of his work is as relevant to Scotland as anywhere else.”

Bell believes the fact that Deaton, the son of a Yorkshire miner, grew up in a family of modest means had a clear influence on his work. The family’s low income did not, though, stop Deaton from winning a scholarship to the independent Fettes College before studying at Cambridge University.

Anton Muscatelli, the principal of Glasgow University and a former member of the Panel of Economic Advisers of the Secretary of State for Scotland, said that Deaton’s work is particularly relevant to the increasing emphasis advanced economies are placing on reducing poverty and inequality and the concept of inclusive growth.

“The importance of inclusive growth can be seen in recent research work by the OECD and is central to the Scottish Government's economic strategy,” Muscatelli said. “The common element in all Deaton’s work is that he has provided economists with better approaches to measurement.

“Without accurate measurement and strong empirical evidence, policies against poverty and inequality cannot be designed robustly. Angus Deaton’s work has made a permanent mark on the way in which economists understand this important area of microeconomics.”

For David Ulph, Professor of Economics at St Andrews University, Deaton’s significance lies in the fact that his work “addresses an issue that has been at the heart of economics for over two hundred years: the conclusions we can draw from observations on the amounts spent on various goods and services… about the well-being of those individuals and consequently about the distribution of well-being within and across societies.”

“Angus Deaton’s work has been at the forefront of addressing and overcoming these challenges.

"At a time when economists are often criticised for being concerned only with growth and Gross National Product (GNP), Angus Deaton’s work demonstrates that economics has a powerful role to play in thinking about poverty and inequality and how to tackle them.”

Professor Andrew Hughes Hallett, Professor of Economics at St Andrews University and a member of the Scottish Fiscal Commission, hailed the award to Deaton as “one of the most distinguished awards that the Nobel committee in economics has made”.

“Many academics have depth, and some have width, but few have both. And it shows: any conversation with him, or reading of his work, can be said to be an education in itself.”

“Deaton has always grounded his analysis firmly in the big issues of the day, and made sure that his assumptions and working methods fit those issues – rather than frame those issues to fit some mode of analysis, as many others do,” Hughes Hallett said.

Deaton’s most recent book argued that, with increases in wealth, health and longevity, the world is now a better place than it used to be. After receiving the prize Deaton said he expects extreme poverty in the world to continue decreasing, but that optimism is only part of his message.

In a week in which it was reported by Credit Suisse that half the world’s wealth is now in the hands of just one per cent of the world’s population, Deaton’s pioneering work on inequality (embarked on before financial crisis made it trendy) continues to be pertinent.

Conferring the £630,000 Sveriges Riksbank Prize in Economic Sciences on Deaton last week, the Royal Swedish Academy of Sciences said that “to design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding.”