Princeton economist Angus Deaton addressed "issues of immense importance."

Princeton University Press

Economics Nobel honors study of consumption differences between rich and poor

This year's Nobel Prize in Economics honors a scholar whose work has bridged the conceptual gap between the masses and the individual, injected data into the realm of conjecture, and developed tools to help fight global poverty. Angus Deaton, 69, a British-American economist at Princeton University, pioneered the study of consumption among poor families and individuals and how it differs from that of more affluent people.

Deaton's work has enabled economists to better model overall consumption and the effects of economic policies and has played an important role in the dramatic reduction in abject poverty seen globally in the past 3 decades. The $980,000 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, as the award is officially called, wasn't established in Alfred Nobel's will but created in 1969 with an endowment from Sweden's central bank.

"It's long overdue," says Oriana Bandiera, a labor and development economist at the London School of Economics and Political Science (LSE), of Deaton's prize. "Professor Deaton's contributions to the field have been profound and transformative." Diana Weinhold, an international development economist at LSE, notes that Deaton's work is so foundational that many younger economists just take it for granted. "A lot of the contributions that Deaton pushed through now seem completely obvious," Weinhold says.

Deaton made seminal contributions in three areas, economists say. First, he studied so-called demand systems, essentially mathematical models of how consumption of goods depends on their prices and utilitythe sort of stuff you'd find in an economics textbook. In 1980, he developed the so-called "almost ideal demand system" to model consumption at the individual, or microeconomic, level. That theoretical advance has now become part of bedrock economic theory and a standard tool for policymakers. "It completely revolutionized how we look at, measure, and understand consumption," Bandiera says.

Deaton then turned his insights to the collective, macroeconomic level, to identify and resolve a problem in the theory of consumption. In macroeconomic modeling, economists had generally focused on aggregate measures such as the average amount of consumption as embodied in a fictitious "representative agent." "Poor households were presumed to behave in roughly the same way as rich households, only with less money at their disposal," Tore Ellingsen, an economist at the Stockholm School of Economics, explained during the press conference to announce the prize today.

But such models often produced incorrect results, a mismatch that became known as Deaton's paradox. Deaton showed that to resolve the paradox economists had to examine how price changes, income changes, and other factors would affect consumption of diverse individuals, both richer and poorer, and then sum up the individual results.

For example, suppose a government wishes to raise revenue by increasing the sales tax. The increase may hardly bother richer individuals who can easily afford it, but it may drastically alter the consumption patterns of poorer people who already have little to spare, Stockholm University economist Jakob Svensson, a member of the prize committee, explained at the same press conference. Only by accounting for such differences can economists and policymakers accurately predict the effects of a tax hike and determine its optimal size.

Finally, Deaton has studied poverty around the globe and how best to fight it. Speaking on the phone at the press conference, the laureate explained that he had studied poverty in the United States, the United Kingdom, South Africa, and, in particular, in India. He relied primarily on data collected by statistical office in various countries, which he praised as "great unsung heroes." Deaton's contributions include helping develop more consistent quantitative measures of consumption, Bandiera says.

Deaton sounded jovial today. "Gosh, I was sleepy, so it's hard to remember exactly how I felt" when the early morning call from the Nobel organization came, he told reporters. "Obviously like many economists I knew that it was a possibility. But in any given year the odds are very, very small. I was surprised and delighted."

But if Deaton seems like a bookish academic, he has not shied away from speaking up on real-world issues. For example, he has warned of the dangers of increasing economic inequality in the United States and has been critical of international aid as a means of combating poverty.

Deaton's peers say that his work has played an important role in reducing the worst poverty, the rate of which has fallen in recent decades. For example, according to data collected by the World Bank, in 2012, 896 million people lived on less than $1.90 a day, compared with 1.91 billion in 1990. Although the numerical definition of abject poverty remains controversial—the decrease is much more modest if the line is set at $2.00 per day—other measures such as literacy, health, and life expectancy show that the lot of many of the poorest has improved, Weinhold says, especially in China. Deaton's efforts have contributed to such improvement, Weinhold says: "He's got his mitts in everything."

Although abject poverty will likely continue to decrease, vast numbers of people continue to live in destitution, Deaton noted. "While things continue to get better, you have to remember that things are very, very bad for many people," he said. "It's not a good world, but it's getting better."

*Update, 12 October, 10:57 a.m.: The story has been updated and expanded.

*Update, 12 October, 1:12 p.m.: The story has been updated to include comments from Deaton's peers.