In 2015, Angus Deaton was awarded the Nobel Prize in Economic Science for his “analysis of consumption, poverty, and welfare.”

One of his contributions that the Nobel Committee singled out was his 1980 article, co-authored with John Muellbauer, titled “An Almost Ideal Demand System,” on how demand for various consumption goods depends on prices and income. This article has since been hailed[i] as one of the twenty most influential articles published in the American Economic Review in the first hundred years of that journal.

As the Nobel Committee put it:

The challenge was to build a system that was sufficiently general to provide a reliable picture of demand patterns in society, but also simple enough to be statistically estimated and used. The solution was Deaton and Muellbauer’s Almost Ideal Demand System from 1980. Their first estimates based on this system did not provide clear answers to all the questions surrounding consumption, but the system’s flexibility and potential for expansion and modification provided a powerful boost to research into consumer behaviour.[ii]

The challenge with such systems is to come up with a “representative consumer”—a consumer who can represent all the consumers in the economy—without imposing too many restrictions on the utility functions of consumers. Deaton and Muellbauer fit their model to annual British data from 1954 to 1974 and broke consumption down to eight nondurable groups: (1) food, (2) clothing, (3) housing services, (4) fuel, (5) drink and tobacco, (6) transport and communication services, (7) other goods, and (8) other services. Their model, they wrote, “is capable of explaining a high proportion of the variance of the commodity budget shares.”

Two of Deaton’s biggest contributions were his work on index numbers and on purchasing power parity comparisons. He used these tools to measure world poverty and world progress, and concluded, by measuring consumption, that extreme poverty in the world has fallen dramatically and will likely fall further. In his 2013 book, The Great Escape.  Deaton wrote:

Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die. Yet millions still experience the horrors of destitution and of premature death. The world is hugely unequal.

He could have dropped the word “almost.” By the standards of poverty, life expectancy, and overall wellbeing, there has never been a better time in history. One major factor in the 19th century’s economic growth and decline of poverty was the Industrial Revolution. Deaton attributes much of early 20th century progress to cleaner water, widespread vaccination, and the application of germ theory. One practical application of germ theory in the early 20th century that Deaton notes was that hotels started changing sheets between guests; that made it harder for disease to spread.

One graph in Deaton’s 2013 book, taken from demographer Samuel Preston and updated, shows that countries with the highest per capita income typically have the highest life expectancy. Below $8,000 per capita in 2005 U.S. dollars “infectious diseases are important causes of . . . many of the deaths . . . among children, so that in the poorest countries, about half of all deaths are of children under the age of 5.” Deaton noted that for higher incomes, child deaths are rare, and that “most deaths are of old people who die not from infectious disease but from chronic diseases.”

Economists have often been hesitant to discuss the horrors of communism. But Deaton documented the massive deaths that China’s Chairman Mao caused with his 1958 manmade famine. In a 2013 interview[iii] with the Financial Times, Angus Deaton did not mince words in laying blame on Mao.

Deaton has been critical of government-to-government foreign aid. In his 2013 book, he pointed out that between 1960 and 2010, about $5 trillion in foreign from governments of rich countries poor countries’ governments had little effect. The reason, argued Deaton, is incentives. The receiving governments had little incentive to help their own people with that aid. Instead, the governments responded to the wishes of the donor governments.

What about person-to-person foreign aid? In The Great Escape, Deaton showed that if all the adults in the United States, Britain, France, Germany, and Japan gave 15 cents a day, we could eliminate extreme world poverty. But Deaton pointed out a problem with this “hydraulic approach.” He wrote:

[I]f water is pumped in at one end, water must pour out of the other end. Fixing world poverty and saving the lives of dying children is seen as an engineering problem, like fixing the plumbing or repairing a broken car.

What’s the problem? The hydraulic approach ignores the fact that to really help those countries, we need them to improve their institutions. Deaton wrote:

Innovators need to be free from the risk of expropriation, functioning law courts are needed to settle disputes and protect patents, and tax rates cannot be too high. When all of these conditions come together— as they have in the United States for a century and a half— we get sustained economic growth and higher living standards.

One obvious solution to world poverty is to allow people in poor countries to immigrate to rich countries. Economists who have studied this issue have concluded[iv] that totally open borders could approximately double world gross domestic product. Deaton, though, has not addressed this solution. In his bi-annual “Letters from America”[v] he has commented on American public policy since 1996. In all that time, he does not mention immigration.

In 2020, Anne Case, Deaton’s wife and fellow Princeton economist, along with Deaton, wrote Deaths of Despair and the Future of Capitalism. They showed that the death rate for middle-age whites without a college degree had risen since 1999. The main factors beyond this rise, they argue, are drugs, alcohol, and suicide. Case and Deaton asserted that capitalism, pharmaceutical companies, and expensive health insurance are major contributors to white people’s despair. They noted that the U.S. medical system “is nothing like a free market” and that highly regulated U.S. corporations seek protection from competition “in a way that would be impossible in a free market.” This did not lead them, though, to advocate more capitalism, another term for freer markets. They argued that the high cost of health insurance is due to high payments to medical providers, but did not address the role of certificate of need regulations that protect some hospitals from competition.

Deaton was born in Edinburgh, Scotland. He earned his B.A., M.A., and Ph.D at the University of Cambridge. He was a professor at the University of Bristol from 1976 to 1983 and a professor at Princeton University to the present day.

 


About the Author

David R. Henderson is the editor of The Concise Encyclopedia of Economics. He is also an emeritus professor of economics with the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford University. He earned his Ph.D. in economics at UCLA.


 

Selected Works

  1. (with John Muellbauer.) “An Almost Ideal Demand System,” American Economic Review 70(3), 312-326.

2013. The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton University Press.

2020: (with Anne Case.) Deaths of Despair and the Future of Capitalism. Princeton University Press.


 

Footnotes

[i] Arrow, Kenneth J., B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow. 2011. “100 Years of the American Economic Review: The Top 20 Articles.” American Economic Review, 101 (1): 1-8.

[ii] Nobel Committee. “Consumption, great and small.” The Prize in Economic Sciences 2015: Popular Science Background. At: https://www.nobelprize.org/uploads/2018/06/popular-economicsciences2015-2.pdf

[iii] “Angus Deaton on the ‘escape’ from inequality.” Financial Times, October 18, 2013. At: https://www.ft.com/video/aad811f3-8970-315d-a085-4bd0bd4ad955

[iv] See, for example, Michael A. Clemens. 2011. “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk? “Journal of Economic Perspectives, 25 (3): 83-106. At: https://www.aeaweb.org/articles?id=10.1257/jep.25.3.83

[v] Angus Deaton, “Letters from America.” At: https://scholar.princeton.edu/deaton/letters-america


Related Links

Angus Deaton on Inequality, Trade, and the Robin Hood Principle, an EconTalk podcast, October 10, 2016.

Angus Deaton on Health, Wealth, and Poverty, an EconTalk podcast, November 18, 2013.