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Tuesday 22 Aug 2017 | 02:15 | SYDNEY
Tuesday 22 Aug 2017 | 02:15 | SYDNEY

Angus Deaton wins the Nobel Prize for economics



13 October 2015 14:11

Thomas Piketty might be the rock-star of the income-inequality debate, but Angus Deaton has won the Nobel Prize for economics, and deservedly so. 

Perhaps you first heard about his impending fame here on The Interpreter: his book, The Great Escape, was my book of the year in 2014 and I thought he got the better of the income inequality debate with Piketty. The Nobel, however, demonstrates that his contributions go back a long way, and cover much wider ground. You can read the short version of his contributions here and the long version here.

Most of his early work at the World Bank is quite technical, setting up the means for measuring and comparing income across disparate countries and over time, solving difficult issues of income aggregations and comparison. This analysis provided the bedrock data to support his various arguments. He provided a bridge between the arm-waving debate on poverty and the rigour of the academic world.

Tyler Cohen describes Deaton's contribution in more practical terms: 'understanding what economic progress really means'. 

While Piketty was largely focused on rising inequality in mature economies, Deaton was telling a parallel story of a billion people in emerging economies (notably China and India) shifted out of poverty, dramatically reducing income disparities between rich and poor countries. Hong Kong, Singapore, South Korea and Taiwan demonstrated what a couple of decades of fast growth can do to raise living standards. China, India, Indonesia and a raft of others followed.

Instead of making comparisons of income, Deaton focused on the specifics of consumption measured in intuitively understandable terms: the spectacular general improvements in health and education:

The world is a healthier place now than at almost any time in the past. People live longer, they are taller and stronger, and their children are less likely to be sick or to die. Better health...allows us to do more with our lives, to work more effectively, to earn more, to spend more time learning, and to spend more time with our families and friends.

Not every country is succeeding, and inequality within the success stories is typically getting worse. Deaton captures this diversity with the image of a crowd running forward, holding national flags. Some advance faster than others. Some country groups start behind others. Within each country group the fastest runners are getting well ahead of their compatriots and steadily catching up to those who started in front. The overall result: fewer left behind in abject poverty but many still quite poor; a huge increase in the world's middle class; and a rapid expansion in that small group of the super-rich, holding an assortment of country flags.

Deaton accepts 'the deep conflict between incentives and inequality', but he reminds us that there is more to a better life than just income. Technology, dissemination of knowledge and improved social structures have dramatically raised living standards and life expectancy, making us healthier (and thus probably happier). In the past half-century, the poor have largely caught up with the longer life expectancy that the rich have enjoyed for more than two centuries. Life expectancy in India is now the same as it was in the UK in 1850, when UK income was far higher than India's today.

The foreign-aid industry may have mixed feelings about this award. Deaton was sceptical that foreign aid does much good. Particularly in Africa, fiscal dependence on aid flows has undermined the development of domestic tax administration and institutions.

While Piketty caught the zeitgeist of increasing concern about growing income inequality in mature countries, Deaton added a more cheerful and perhaps more important message: that opportunity – particularly opportunity for education and health – are hugely important to a well-functioning and equitable society. We can take heart from the upbeat opening line of The Great Escape: 'Life is better now than at almost any time in history.'

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