Nobel Memorial Prize in Economic Sciences to Angus Deaton

Consumption, saving, growth, sex, health, happiness, poverty, divorce, aging, mortality - no facet of human life was alien to Angus Deaton, and all facets appear in his rich work.
When I was a young student and research assistant in Bonn, Germany, one of my duties was to program consumption demand systems. Demand systems are necessary, e.g., to estimate models of household consumption and to study how the household’s consumption will change when one good is taxed heavier than others, and to detect chains of substitution and complementarity among many consumption goods. At that time, Angus Deaton together with John Muellbauer developed the Almost Ideal Demand System (Deaton and Muellbauer, 1980), and it became quickly the method of choice. It was Angus Deaton’s first step towards the Nobel prize.
Such structural estimation is somewhat out of fashion these days, and the acronym AIDS has now unfortunate connotations.¹ On a technical level, AIDS was an important achievement because this functional specification made sure that the axioms underlying the theory of consumer demand and their implications (such as adding-up, homogeneity, symmetry, and aggregability) were imposed on the econometric estimation. Moreover, AIDS was easy to estimate in times when the available computer power prevented the estimation of large non-linear systems of equations. The intellectual achievement, however, goes much deeper and has characterized Angus Deaton’s work up to the present day, namely taking the econ in econometrics seriously -- which it is very often not.
In the late 1980s, Angus Deaton became interested in the economics of aging and joined a NBER working group led by David Wise which is still very active. What was the reason for engaging in such a seemingly marginal topic? The answer is easy: Studying the situation of elderly humans is like using a magnifying glass. If things went well, people are well off in old age -- in terms of health, money and happiness. If things went not so well, people are sicker, poorer and much less happy, usually all at the same time. Hence, the economics of aging turned out for him to be not at all a marginal field in the realm of economics but rather a field where consumption, saving, growth, sex, health, happiness, poverty, divorce, aging, and – indeed – death, in short: the elements of life are woven together from a viewpoint of human development.
Human development is the key to appreciate Angus Deaton’s work. He worked for the World Bank and has travelled extensively. The development of entire countries over time is as much his interest as the development of single individuals over their life cycles, and both are fundamentally connected. In the late 1980s, his first contribution to the economics of aging was an analysis of aging in Thailand and the Ivory Coast, contrasting the much further demographic and economic development in the Asian country with the African country. The domains of study were living arrangements, urbanization, illness, labor force behavior, and economic status (Deaton and Paxson, 1992).
There are two reasons why this paper of Angus Deaton’s and the strand of work following from it is worth stressing. First, while he started as a theorist like so many economists, he was not afraid to do data analysis from scratch. With this I mean to travel to foreign developing countries, to dig out what data are available, convince the local administration to permit additional household-based data collection by Angus Deaton and his team, to raise the necessary funds, and to analyze the data first with simple statistics and then with ever increasing sophistication. Using data for policy at all is still a breakthrough for many developing countries; using micro data – i.e. data on individuals in a household context -- even more so. His experience with micro data collection and analysis in developing countries produced a textbook on household survey analysis (Deaton, 1997).
Part of that sophistication was the development, with Christina Paxson, of a now standard method to distinguish age from cohort effects in panel data (Deaton and Paxson, 1994). This brings me to the second point: Hallmark of Angus Deaton’s work is to ground his analysis in the historical and local environments, both of which are vastly different among countries. In understanding saving and consumption patterns, e.g., it is important to appreciate the historical situation in which a person grew up and acquired her consumption and saving habits – in our language this is a “cohort effect”, i.e. a personal trait which remains impressively stable over the entire life course. Ignoring such historical influences is as detrimental for a reliable analysis of consumption and saving behavior (Deaton, 1992) as it is detrimental to ignore local, regional, and country differences in international comparisons (Deaton and Paxson, 1992).
I regard the microdata foundation of development analysis both on the individual and country level as the greatest achievement of Angus Deaton. While everybody over 50 appreciates how important health is for her or his individual well-being, it took micro data to convincingly reveal that health is a key ingredient to explain the development of entire countries. The link between health and economic status has therefore occupied much of Angus Deaton’s recent work, both on the individual (Case and Deaton, 2005) and the aggregate level (Deaton, 2001). The unfortunate feedback loop between bad health and low income explains much of how individuals fall in poverty. The availability of health care (or to put it more politically: the importance which governments put on health care vis-à-vis heavy industry or arms) is a major driver not only of the well-being but of the income and economic wealth of nations.
In his most recent book, Angus Deaton elaborates in this view and enlarges it to a much longer horizon of economic development (Deaton, 2012). Civilization has produced hygienic and economic conditions which, in turn, improved health which then enlarged the productive capacity of countries enabling them to become richer. This grand escape from poor income and poor health which was prevalent in the old days depends, however, on environment conditions and governance which differ vastly across countries. It is therefore the same mechanism which produces inequality among countries on the macro level as it generates inequality within countries on the micro level. Angus Deaton is an optimist in showing that countries such as Taiwan or Thailand have succeeded in this great escape; he is also a realist in acknowledging that this escape is further away in the Ivory Coast than it was when he wrote his 1992 article with Christina Paxson. And his view is more pessimistic when it concerns the increasing inequality within rich countries such as the United States where the lower income strata now experience a declining life expectancy and worsening health.
His work teaches economists as well as politicians why these differences emerge and what we can do about them. This is more than a good reason for being awarded the Nobel Memorial Prize in Economic Sciences.

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¹ Before 1981, AIDS was not even regarded a disease in its own right.

References:

• Deaton, Angus S., and John Muellbauer (1980). An Almost Ideal Demand System, The American Economic Review, Vol. 70 No. 3, 312-26.
• Deaton, Angus S. (1992). Understanding Consumption. Clarendon Lectures in Economics. Oxford: Clarend: David on Press.
• Deaton, Angus S., and Christina H. Paxson (1992). Patterns of Aging in Thailand and Côte d’Ivoire. InA. Wise (editor): Topics in the Economics of Aging, Chicago: University of Chicago Press.
• Deaton, Angus S., and Christina H. Paxson (1994). Saving, Growth, and Aging in Taiwan. In: David A. Wise (editor): Studies in the Economics of Aging, Chicago: University of Chicago Press.
• Deaton, Angus S. (1997). The Analysis of Household Surveys: A Microeconometric Approach to Development Policy. Baltimore: Johns Hopkins University Press for the World Bank.
• Deaton, Angus S. (2001). Health, Inequality and Economic Development. Cambridge: Cambridge University Press.
• Case, Anne, and Angus S. Deaton (2005). Broken Down by Work and Sex: How Our Health Declines. In: David A. Wise (editor): Analyses in the Economics of Aging, Chicago: University of Chicago Press.
• Deaton, Angus S. (2013). The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton: Princeton University Press.

Published in: ORDO – Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft (Lucius & Lucius, Stuttgart 2015) Bd. 66 - 2015, S. 345-351.

Foto: (c) Nobel Media AB 2015/ Pi Frisk