Angus Deaton wins the Nobel

by on October 12, 2015 at 7:48 am in Uncategorized | Permalink

Angus Deaton of Princeton University wins the Nobel prize. Working with the World Bank, Deaton has played a huge role in expanding data in developing countries. When you read that world poverty has fallen below 10% for the first time ever and you want to know how we know— the answer is Deaton’s work on household surveys, data collection and welfare measurement. I see Deaton’s major contribution as understanding and measuring world poverty.

Measuring welfare sounds simple but doing it right isn’t easy. How do you compare the standard of living in two different countries? Suppose you simply convert incomes using exchange rates. Sorry, that doesn’t work. Not all goods are traded so exchange rates tend to reflect the prices of tradable goods but a large share of consumption is on hard-to-trade services. The Balassa-Samuelson effect tells us that services will tend to be cheaper in poorer countries (I always get a haircut when in a poor country but I don’t expect to get a great deal on electronics). As a result, comparing standards of living using exchange rates will suggest that developing countries are poorer than they actually are. A second problem is the cheese problem. Americans consume a lot of cheese, the Chinese don’t. Is this because the Chinese are too poor to consume cheese or because tastes differ? How you answer this question makes a difference for understanding welfare. A third problem is the warring supermarkets problem. Two supermarkets each claim that they have the lowest prices and they are both right! How is this possible? Consumers at supermarket A buy more of what is cheap at A and less of what is expensive at A and vice-versa for B. Thus, it would cost more to buy the A basket at store B and it would also cost more to buy the B basket at store A! So which supermarket is better? Comparing standards of living across countries isn’t easy and then you want to make these comparisons consistently over time as well! Deaton, working especially with the World Bank, helped to construct price indices for all countries that measure goods and services and he showed how to use these to make theoretically appropriate comparisons of welfare. Deaton’s presidential address to the American Economic Association in 2010 covers many of these issues.

I see Deaton’s work on world poverty as a tour de force, he made advances in theory, he joined with others to take the theory to the field to make measurements and he used the measurements to draw attention to important issues in the world.

Earlier in his career, Deaton developed tools to bring theory to data on consumption. A key contributions is the Almost Ideal Demand System. We all know that demand curves slope down which means that a fall in the price of the good in question increases the quantity demanded but in fact economic theory says that the demand for good X depends not just on the price of good X but at least potentially on the prices of all other goods. If we want to estimate how a change in policy will influence people’s choices we need to allow demand curves to interact in potentially many ways but we still want to constrain those reactions according to economic theory. In addition, economic theory tells us that an individual’s demand curve slopes down but it doesn’t necessarily imply that the aggregation of individual demand curves must slope down. Aggregation is tricky! The Almost Ideal Demand system, due initially to Deaton and Muellbauer, in 1980 and further developed since then shows how we can estimate demand systems on aggregates of consumers while still preserving and testing the constraints of economic theory.

The study of consumption leads naturally to the study of savings, consumption in future periods. Here we have Keynes’s famous propensity to consume theory (consumption is a fraction of current income), Milton Friedman’s permanent income hypothesis (consumption is a fraction of estimated lifetime income), Modigliani’s Life Cycle Hypothesis (borrow young, save when middle aged, dissave when old). Robert Hall, building on the work of Ramsey, showed in the 1970s that rational expectations implies the famous Euler equation that bedevils graduate students, which shows that suitably discounted changes in marginal utilities should follow a random walk. Deaton played a big role in testing the new theories, mostly finding them wanting.

Deaton’s book, The Great Escape, on growth, health and inequality is accessible and a good read. A controversial aspect of this work is that Deaton falls squarely into the Easterly camp (Deaton’s review of Tyranny of Experts is here) in thinking that foreign aid has probably done more harm than good.

Here is Deaton on foreign aid:

Unfortunately, the world’s rich countries currently are making things worse. Foreign aid – transfers from rich countries to poor countries – has much to its credit, particularly in terms of health care, with many people alive today who would otherwise be dead. But foreign aid also undermines the development of local state capacity.

This is most obvious in countries – mostly in Africa – where the government receives aid directly and aid flows are large relative to fiscal expenditure (often more than half the total). Such governments need no contract with their citizens, no parliament, and no tax-collection system. If they are accountable to anyone, it is to the donors; but even this fails in practice, because the donors, under pressure from their own citizens (who rightly want to help the poor), need to disburse money just as much as poor-country governments need to receive it, if not more so.

What about bypassing governments and giving aid directly to the poor? Certainly, the immediate effects are likely to be better, especially in countries where little government-to-government aid actually reaches the poor. And it would take an astonishingly small sum of money – about 15 US cents a day from each adult in the rich world – to bring everyone up to at least the destitution line of a dollar a day.

Yet this is no solution. Poor people need government to lead better lives; taking government out of the loop might improve things in the short run, but it would leave unsolved the underlying problem. Poor countries cannot forever have their health services run from abroad. Aid undermines what poor people need most: an effective government that works with them for today and tomorrow.

One thing that we can do is to agitate for our own governments to stop doing those things that make it harder for poor countries to stop being poor. Reducing aid is one, but so is limiting the arms trade, improving rich-country trade and subsidy policies, providing technical advice that is not tied to aid, and developing better drugs for diseases that do not affect rich people. We cannot help the poor by making their already-weak governments even weaker.

Here is Tyler’s post on Deaton.

Addendum: Chris Blattman offers a very good perspective and appreciation.

1 Ed October 12, 2015 at 7:56 am
2 Ray Lopez October 12, 2015 at 11:10 am

@Ed – if you read the thread you provide, you’ll see the bloke was making $2500 a month in Manila, which is a princely sum, but died penniless due to expensive medical bills…

3 James October 12, 2015 at 9:09 am

Can anyone comment on the relative contributions of Ester Duflo and Abhijit Banerjee on similar work in quantifying economic data in the developing world? Too young? Is this more of a lifetime achievement prize in this case or is there are more specific contribution that the committee rewarded?

4 Economist October 12, 2015 at 9:38 am

B&E have done other work besides Randomized Control Trials. Banerjee’s earlier work in economic theory (related to credit constraints, traps and the like) is considered first rate – enough to win tenure at MIT, but very far from being good enough to win a “Nobel”. At this point the RCT movement in economics has received more attention than the results suggest they deserve. That might change, it might not.

More pertinently, It is worth noting that neither invented the methodology. The methodological origins may have begun with the work of a well known 19the century analytical philosopher and later from applications to agriculture by Fisher (one of the fathers of modern statistics). Neither Banerjee or Duflo invented applications to humans (which was done by doctors and mainstreamed in medicine several decades ago). Neither Banerjee or Duflo were the first to apply the method in social science (Education : see for example the work done by Rubin in the 1980s, Program Evaluation : see for example the work done by Lalonde in the 1980s), or even to applications in development economics. So the original ideas and discoveries are not Banerjee’s and Duflo’s in any sense. Not remotely close.

What they did was to perform moderately skillful experiments to highlight the uses of RCTs in development and more importantly serve as influential advocates for the use. They have succeeded in that regard- with policy makers, international organizations and academia. So should a “nobel” prize be awarded for advocacy. Perhaps. I am not sure how these things work.

5 James October 12, 2015 at 10:38 am

Thanks! I appreciate the context. (Also, please excuse the ignorance. I’m very biased by economics that reaches the masses and have little concept for what is valued within academic circles.)

6 gerard October 12, 2015 at 11:35 am

||| “economics that reaches the masses”

Alfred Nobel was trying to improve lives of the masses with his Foundation, but the Principal-Agent problem arose over time.


Objects of the Nobel Foundation (Statutes extract):

” § 1.
The Nobel Foundation is established under the terms of the will of the engineer Dr. Alfred Bernhard Nobel, drawn up on November 27, 1895, which in its relevant parts states:

“The whole of my remaining realizable estate shall be dealt with in the following way: the capital, invested in safe securities by my executors, shall constitute a fund, the interest on which shall be annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit to mankind.

5.
A work may not be awarded a prize, unless it by experience or expert scrutiny has been found to be of such outstanding importance as is manifestly intended by the {Alfred Nobel} will.

If none of the works under consideration is found to be of the importance indicated in the first paragraph, the prize money shall be reserved until the following year. If, even then, the prize cannot be awarded, the amount shall be added to the Foundation’s restricted funds. ”

7 Economist October 12, 2015 at 9:18 am

Wonderful decision. There is much to admire and emulate.

8 Rahul October 12, 2015 at 3:22 pm

+1

Great decision. Much rather Deaton gets it than Duflo / Banerjee. Here’s some solid work for a change.

As much as Duflo / Banerjee are overhyped here’s a guy who’s underrated. Not in economist circles but in the popular press.

9 Nathan W October 12, 2015 at 10:03 am

Very happy to see this. Quite a lot of the translation work I’ve done was involved in diffusion of capacity for working on basically the same things, albeit often using different methods. He is often cited in their works. I’m curious to see whether the Nobel prize will spur broader adoption of his methods.

10 Jthorc October 12, 2015 at 10:04 am

Here is Deaton at an NYU conference (put on by Easterly, DRI): http://www.nyudri.org/events/annual-conference-2012-debates-in-development/
I’ll have to watch it again, but I believe Deaton had some sharp criticism of randomized trials…

11 Gochujang October 12, 2015 at 12:00 pm

Related: Most research spending is wasted on bad studies. These billionaires want to change that.

I hear hear Deaton as being anti-bad-study, focused on RCTs because he believes they receive little scrutiny. Actually a wider problem.

12 Rahul October 12, 2015 at 11:38 pm

His criticism is very valid IMO. Randomized trials in poverty reduction are the fad of the decade. This too shall pass.

RCTs have a role. But it is nowhere close to the hype they’ve been receiving. And there’s an epidemic of low quality RCTs trying to get their day in the limelight by coming up with a counter-intuitive conclusion.

13 JC October 12, 2015 at 10:07 am

Great pick. I’m happy. The fight against poverty should focus on designing institutions to work for the poor not to dictate their way or exploit them, Deaton is one of the voices defending better governance to achieve economic development.

14 Econchic October 12, 2015 at 10:23 am

Excellent pick, love his book!

15 Cyril Morong October 12, 2015 at 11:03 am

Thanks for posting all of this great information

16 mkt42 October 12, 2015 at 4:27 pm

Alex and Tyler’s posts about Angus Deaton are nicely complementary, but I found Alex’s to be more informative and in-depth. Usually I prefer reading Tyler but this was a good job by Alex.

17 Ray Lopez October 12, 2015 at 11:08 am

AT – “When you read that world poverty has fallen below 10% for the first time ever and you want to know how we know— the answer is Deaton’s work on household surveys, data collection and welfare measurement. I see Deaton’s major contribution as understanding and measuring world poverty.” – well the cynic in me says that all Deaton did was measure something that is obvious–and obviously wrong, as no household survey in Asia, where ‘saving face’ is so important, will tell the questioner that a family is living in poverty. They will exaggerate to seem wealthy, unless the survey can lead to potential money, in which case they will take the opposite tack.

18 Simon K October 12, 2015 at 11:38 am

Not sure I can take seriously any comment which refers to Asia as a homogenous mass. Is “saving face” equally important in Vladivostok and Varanasi, Jerusalem and Jakarta, Hiroshima and Hanoi and Homs?

19 Ray Lopez October 12, 2015 at 6:50 pm

@Simon K – not sure if your answer is a rhetorical question, but having visited many of these places, I’d say the answer is “YES”. A litmus test is whether their bathrooms have high-pressure (over 40 psi) water for showers or not. If not, then ‘saving face’ is the norm.

20 Nathan W October 12, 2015 at 12:06 pm

Interesting observation, but I’m not sure it’s as big a deal as you might think. A lot of these surveys are too detailed for stuff like that to matter a whole lot. Especially, considering that with the poorest, market income is often very near to zero, rather their income is imputed from subsistence production. But for the poorest, the relevant measure is more likely to be “how many kg of rice/maize/sorghum/etc. did you sell and how much did you keep for yourself?”.

These surveys often include long lists of questions about various households assets, including farm equipment, quality of housing assets, implements for transportation and communication, and quite a fair few other things that may surprise you.

For the matter of “face” specifically, I’m pretty unfamiliar with rural Asia, but for some reason I imagine that a poor rural farmer would be more so proud of their ability to make ends meet on a paltry income, rather than being embarrassed by their low income. The few times I have spent time in rural areas in the developing world (not in Asia though), women often congregate to discuss prices of various foodstuffs in the markets, and pride themselves on how far they can make their limited dollars go.

That having been said, you raise a very interesting point and I draw a complete blank at even a hint at how one would untangle it if it were indeed a particularly significant problem.

Simon – in speaking of “face”, he’s obviously speaking of East Asia.

21 Ray Lopez October 12, 2015 at 6:55 pm

@Nathan W – thanks for the reply. Maybe you are right, in that, like those math problems that ask a series of questions and, via triangulation, figure out the number you have in mind, that the researchers are crafting a series of redundant questions that arrive at the correct ‘truth’. But, knowing medical researchers, which I’ve worked with, I’d posit that dev economists may be taking the lazy person’s way out, and just asking direct questions that distort the data. Who knows? The primary data that the dev econ reports deal with is never published, just the conclusions.

22 Nathan W October 14, 2015 at 6:00 am

It’s not a matter of triangulation or anything particularly complicated. It’s just that the market income itself is not very relevant to the imputed income across all categories, when considering the poorest. Just think about the definition of “subsistence farming”, and this should make sense. They produce for their own consumption, and have little or no surplus for market trading.

On the matter of datasets, these are generally owned by national governments and/or more rarely WB/UN who help to administer and fund the surveys. This means that the researchers themselves basically never have the right to fully open up the data.

23 Rahul October 12, 2015 at 11:43 pm

Give a credible impression that the survey does lead to money? Even when it doesn’t.

Of course, you can only fool them for so long.

24 William Sjostrom October 12, 2015 at 11:20 am

A nice choice, but if they really wanted to note applied welfare economics, who they could have given to Al Harberger, who pioneered it all.

25 Steve Y. October 12, 2015 at 12:57 pm

Based on the excerpt—clear, concise, non-jargony expression—I like this guy.

By the way, the “cheese problem” should have presented a third alternative:
“Americans consume a lot of cheese, the Chinese don’t. Is this because the Chinese are too poor to consume cheese or because tastes differ?” Well over half–some reports show 90%–of people with Chinese ancestry are lactose intolerant. So it should not be a burning problem, at least for economists.

26 mkt42 October 12, 2015 at 4:24 pm

There are indeed many reports showing 80% or 90% lactose intolerance in China, but I wonder about the accuracy of that figure.

I recently saw a map which claimed that is was around 65% or so, although I can’t find that map now. One thing I did notice when I was in China was the large number of Pizza Huts in Shanghai; when I asked some Chinese people they said that plenty of people in China do like to eat pizza and don’t mind eating cheese. I also have a student worker who is from China (Chengdu specifically) who says that the percentage of people who she knows who are lactose intolerant is a lot less than 90%.

That’s not proof that the standard figures are wrong, but I haven’t seen much evidence that they’re correct. The high school that I attended was about 10% Asian American (mainly Japanese American) and we loved pizza, milkshakes, chocolate milk, etc. Granted, lactose intolerance is something that is less common in children and young people.

27 Martin October 12, 2015 at 3:02 pm

There is no Nobel Prize in economics. The economics prize was created by Sweden’s Central Bank in 1969 and is called the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.” It was not established by Nobel, but supposedly in memory of Nobel. It was done completely against the wishes of the Nobel family.

28 carlolspln October 12, 2015 at 3:45 pm

The so called ‘Prize’ for Economics ought to be shrunken head.

http://www.theguardian.com/commentisfree/2015/oct/11/nobel-prize-economics-not-science-hubris-disaster

Its touching how the proprietors avoid completely the rubric ‘Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’.

Like crashing a party to which they haven’t been invited [& never, ever will].

29 Art Deco October 12, 2015 at 4:34 pm

Given that Riboberto Menchu and Harold Pinter are nibbling at the pate and sipping the scotch at said party, I’d say the crashers are raising the intellectual and moral level of the gathering.

30 Ntrust October 12, 2015 at 8:53 pm

“the proprietors avoid completely the rubric ‘Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’.”

I’d say it’s not surprising that they avoid it at all: that’s a mouthful.

31 Urstoff October 12, 2015 at 5:34 pm

Nobody cares

32 carlolspln October 12, 2015 at 6:54 pm

The Prizes for Science are filet mignon.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is spam.

Different, much?

33 E. Harding October 12, 2015 at 8:20 pm

Hey, it’s that guy on the Internet from Dilbert!

34 Jim October 12, 2015 at 10:51 pm
35 chuck martel October 12, 2015 at 7:29 pm

Deaton says: ” Poor people need government to lead better lives”

I guess the native Americans can be used as a good example of how that works. Isn’t today when the discovery of Columbus by the native Americans is celebrated?

36 Ricardo October 13, 2015 at 4:26 am

Deaton didn’t say government is sufficient for the poor to lead better lives, he is simply saying it is necessary.

37 Steve Sailer October 12, 2015 at 11:06 pm

“Almost Ideal Demand System”

An unfortunate acronym, it turned out.

38 Sam October 13, 2015 at 4:45 am

When they awarded Obama a Nobel, I stopped caring what they did, because clearly he had done nothing at all. That said, isn’t it a popularity contest anyway?

39 Nikita October 13, 2015 at 6:37 am

And it would take an astonishingly small sum of money – about 15 US cents a day from each adult in the rich world – to bring everyone up to at least the destitution line of a dollar a day.

Who is “everyone”? They can just shit more children into poverty.

If the infinite potential children count as “everyone”, you’d need infinite cash transfers.

40 Nathan W October 14, 2015 at 6:13 am

You exude such profound respect for humanity. “Shit more children into poverty” and all.

Consider that when girls can access better schooling and are not barred entry from property ownership and the job market, they tend to have fewer children.

41 Nikita October 15, 2015 at 5:11 am

You exude such profound respect for humanity.
Respect is not free. It must be earned. I see a lot of people doing the exact opposite.

“Shit more children into poverty” and all.
That is literally what they are doing.

Consider that when girls can access better schooling and are not barred entry from property ownership and the job market, they tend to have fewer children.
Consider not trusting that blindly.

42 Tom October 15, 2015 at 2:08 am

From the New Yorker article: “Renowned for his meticulousness, he believes that the world is a complicated place and that reducing it to simple theories is almost always dangerous.”

Cage match against Krugman!

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