The welfarist academician

The Nobel Prize in Economic Sciences in 2015 was awarded to Angus Deaton, then at Princeton University, New Jersey, USA "for his analysis of consumption, poverty, and welfare".

Deaton finished his undergraduate studies in economics in 1967, Masters in economics in 1971 and a PhD in 1975 — all from the University of Cambridge. His doctoral thesis was titled 'Models of Consumer Demand and Their Application to the United Kingdom' which he wrote under the supervision of Richard Stone. After his PhD, he taught econometrics at the University of Bristol from 1976 to 1983. He was also a visiting professor at Princeton University in 1979-80, and had joined as full-time faculty member at Princeton in 1980.

In this article, we will review the main works of Deaton and see how these have helped in guiding public policy, particularly in the field of welfare and poverty eradication.

Main works of Angus Deaton

Deaton realised that consumption was probably the most important factor in the fight against inequality and poverty. If individual consumption is aggregated, it also becomes the largest component of aggregate demand and, therefore, has an impact on savings and investment. Given this importance of consumption to social welfare, Deaton has spent most of his career theorising and measuring consumption and linking individual consumer choices to aggregate consumption. Deaton focused on three main aspects of consumer theory. He was inspired by the works of Richard Stone, who also happened to be his PhD advisor. It may be recalled that Stone was one of the early economists to link consumer theory with statistics and had developed the Linear Expenditure System in 1954, wherein he explored the linkages among market demand, prices and total expenditure. Stone was also the Nobel laureate in 1984.

Deaton's first major work was his mapping of the evolution of consumer demand in the 20th-century United Kingdom. His work, which included a new way to model consumer demand, was published in 'Econometrica' in 1978, and earned him the Frisch medal in 1978. He extended this work with his co-author John Muellbauer, wherein he proposed a system of demand equations which could be aggregated over consumers, and used for the welfare analysis of policies. Further, Deaton's model made more realistic assumptions than the earlier models of consumer demand. The model came to be known as the Almost Ideal Demand System (AIDS) and was published in the 'American Economic Review' in 1980. As Deaton noted in his 1980 paper, their model was superior to the existing alternate models, namely the Rotterdam and translog models, since it comparatively had all the desirable properties.

Deaton's second work in consumer theory was to find how much individuals spent and how much they saved over time, and how this squares up with aggregate consumption patterns. This, in turn, leads us to the levels of capital formation and investment. In a sense, Deaton was laying the ground for further study of micro-foundations of macroeconomic data such as consumption, savings and investment.

Deaton's third work was the measurement and analysis of poverty and welfare. This was carried out using household survey data in developing countries. His work shed light on how poverty eradication measures should differ across geographies and time. It also found an important relationship between income and calorie intake; and intra-family apportionment of consumption and the neglect of the woman in households.

In addition to his path-breaking research in consumer theory, Deaton also worked on the issues of morbidity and mortality in the 21st century with his wife Anne Case who is also a renowned economist at Princeton. In a 2015 paper, 'Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century', they found high levels of mortality among middle-aged white Americans, and the reason behind this was alcoholism, suicide, drugs. They also noticed that high mortality was accompanied by high morbidity, which they attributed to the easy availability and abuse of opioids, mainly as pain killers. They continued this inquiry and came up with another paper, Mortality and Morbidity in the 21st century (2017) and Deaths of Despair: A Tale of Two Americas (2021). They found a declining trend of mortality among the educated white Americans, but a rising trend for white non-educated Americans. The mortality rates for non-white Americans declined during the same period. This has also led to 'cumulative disadvantages' — such as bad marriages, problematic children and bad health — for the white Americans. Anne Case suggested that this trend may increase the support for outlier positions of political candidates such as Donald Trump and Bernie Sanders.

Deaton's work on health and wellbeing has resulted in two major books: 'The Great Escape: Health, Wealth and the Origins of Inequality' (2014) and 'Deaths of despair and the Future of Capitalism', (2020). 'The Great Escape' tells us that even though the world has become richer and healthier, challenges still remain and the main one is that of rising income inequality. In Death and Despair, Deaton has painted a bleak picture of the working-class white Americans under the influence of drug overuse, alcoholism and broken marriages.

Deaton's work has had a strong influence on research in microeconomics, macroeconomics, econometrics and development economics. In microeconomics, he focussed on data from household surveys to get information on food consumption, housing etc. He shifted attention from aggregates to real-world individual choices that have a direct impact on their welfare.

In econometrics, Deaton developed tools to sift data and looked closely at various issues of measurement such as misreporting, faulty surveys and imperfect data. Deaton was also careful to avoid mechanical use of econometrics to test a theory or conduct randomised control trials. According to Deaton, if a government policy worked at a point in time, it is not necessary that it would work again. An RCT or an econometric test may therefore give a wrong result in another context. His suggestion was to complement theory with testing, and label a result as generalised only after looking at the underlying economic processes and the manner in which these square up with economic theory.

In macroeconomics, Deaton moved away from the fiction of a representative consumer that is so often assumed, and used individual consumption choice as a building block to arrive at macroeconomic aggregates.

In development economics, Deaton looked at micro-level and household data from developing countries to understand the lives of the poor — what they consume. Where they live, gender equations within the family, the status of women etc. This data gives a far better way of measuring and assessing global poverty.

Deaton also gave us the buffer stock model of savings in his papers written in 1989 and 1990. This model basically says that when there are no banks to borrow from, consumers take out their savings as part of an optimal savings strategy. These models became popular in development economics since many areas in developing countries were under-banked, where the poor relied on the informal sector for their credit needs.

Conclusion

In addition to being a full-time academician, Deaton was also fully engaged in global policy issues on poverty and inequality. He was a member of the Chief Economists Advisory Council of the World Bank and a senior research scientist at Gallup Organisation. Deaton was also the president of American Economic Association in 2009 and was awarded the BBVA Foundation Frontiers of Knowledge Award in 2011 — a prize that acknowledged his fundamental contributions to the field.

He was also the Director of the Research Programme in Development Studies — founded by W Arthur Lewis — at Princeton University. While his early work focused on consumption and savings, in the 1990s, he became interested in determinants of health and wellbeing, which was again grounded in the use of survey data. He also founded the Centre for Health and Wellbeing at Princeton University.

But Deaton's most important contribution was to look at data more critically and base analysis on household data, which gives us information on how people make choices in the real world. In doing so, Deaton also laid a solid micro-foundation to macroeconomic analysis. In

his own words: "further progress on difficult economic questions would be likely when macroeconomic questions are addressed in a way that uses the increasingly plentiful and informative microeconomic data."

The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal. Views expressed are personal.