Economics

A Nobel surprise

Print edition : November 13, 2015

British economist Angus Deaton at a news conference after he won the Nobel Memorial Prize in Economic Sciences, at Princeton University. Photo: Jessica Kourkounis/Getty Images/AFP

Midday meal time at a government school in Hyderabad. Photo: Mahesh Kumar A./AP

IN his 2013 book titled The Great Escape: Health, Wealth and the Origins of Inequality, Angus Deaton quotes the economist and Nobel laureate James Meade as saying that “the three great disasters of the twentieth century were the ‘infernal’ combustion engine, the population explosion and the Nobel Prize in economics”. Deaton disagrees with Meade on the population question because, among other reasons, though the world’s population has increased by four billion people over the last half century, “the seven billion who are alive today have also, on average, much better lives than their parents and grandparents”. Deaton, however, does not express an opinion on Meade’s view of the Nobel Prize. But with the award of the 2015 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to the Scottish-born Princeton University professor, he is likely to demur. In fact, in his “message to India” on being awarded the Nobel, he does say he is thrilled to have been chosen for the prize and even more thrilled that the Nobel Committee highlighted the work that he and his collaborators have done in India.

The award of the prize to Deaton has been welcomed by many, including a host of Indian commentators, in language that suggests that the Nobel is indeed a yardstick of achievement and that Deaton deserved to be measured by the recognition it brings. The fact is that the Nobel for economics was not in the original stable of prizes set up as per the will of Alfred Nobel in 1895. It was created and tagged on to those for physics, chemistry, literature, peace, and medicine/physiology in 1968. Hence the special name that it carries. The Nobel family occasionally disapproves of this decision taken as part of the 300th anniversary celebrations of the Bank of Sweden. “The Economics Prize has nestled itself in and is awarded as if it were a Nobel Prize. But it’s a PR coup by economists to improve their reputation,” Nobel’s great-great-grand-nephew Peter Nobel reportedly told AFP in 2005. He went on to say that “it’s most often awarded to stock market speculators.... There is nothing to indicate that [Alfred Nobel] would have wanted such a prize.”

Yet, at least this year, as in a few others, the view that economics is not a science that is non-controversial enough to deserve a Nobel and the view that it has been awarded to undeserving or even relatively unknown scholars for ideological reasons has been less expressed. This is undoubtedly related to the nature of Deaton’s work. Deaton was, according to the Royal Swedish Academy of Sciences, chosen for the award “for his analysis of consumption, poverty and welfare”. The fact that poverty and human well-being were among Deaton’s concerns and that a considerable part of his scholarship has been on developing countries, especially India, where the availability of household consumption surveys helped him pursue work on the measurement and determinants of living standards and poverty, has played a role in the response received.

Nevertheless, the awarding of the prize to Deaton came as a bit of a surprise to many commentators. Underlying that surprise were a number of other features of this year’s selection that seem to point to deviance from the often strongly ideological and controversial choices of the Nobel Committee for economics.

To start with, contrary to the normal inclination of the Prize Committee to choose individuals who have concerned themselves with extending, or, occasionally, correcting, mainstream theory, Deaton has shown a deep appreciation of the need to engage with the real world —with empirical data that are never perfect and with matters of economic policy. He has indeed contributed to the theory dealing with the consumption and savings behaviour of individuals and households. But his major contributions in that broad area were his books Economics and Consumer Behaviour and An Almost Ideal Demand System, both of which he published along with John Muellbauer in 1980. That the Nobel Committee chose not to award the prize jointly to these two authors, as it has often done in the past, suggests that it implicitly considered other work conducted by Deaton as of greater importance.

Deaton’s work on developing countries began in the 1980s when he became a part of the Research Programme in Development Studies in Princeton University, of which he subsequently became the director. Two areas emphasised in this body of work, much of which was undertaken in India, were the measurement of poverty and health and mortality and their relationship with income and growth. This, besides other experiences such as that of China, led him to the view that while much scepticism has been expressed (often correctly) about the poverty estimates that come out of consumption surveys, the same degree of scepticism is missing when estimates of GDP (gross domestic product) growth are discussed.

Message to India

In his message to India, he elaborated on this as follows: “I have used data from India’s famous National Sample Surveys to measure poverty. Perhaps the biggest threat to these measures is that there is an enormous discrepancy between the National Accounts Statistics [NAS] and the surveys. The surveys ‘find’ less consumption than do the national accounts, whose measures also grow more rapidly. While I am sure that part of the problem lies with the surveys—as more people spend more on a wider variety of things, the total is harder to capture—but there are weaknesses on the NAS side too, and I have been distressed over the years that critics of the surveys have got a lot more attention than critics of the growth measures. Perhaps no one wants to risk a change that will diminish India’s spectacular (at least as measured) rate of growth?”

This willingness to go against the dominant opinion explains the respect that Deaton commands and the surprise on the award of the Nobel to him.

In fact, Deaton has often gone against mainstream trends and received orthodoxy on issues of both method and substance. He has, for example, been critical of the currently fashionable tendency to pretend that economics (including development economics) is similar to science and opt for “randomised control trials” (RCTs) to both test hypotheses and assess the efficacy of alternative policy interventions. In an RCT, a chosen population is randomly distributed between groups subject to an intervention and those that are not, to arrive at conclusions about the effect of such interventions. In Deaton’s view, neither is the sample population selected randomly nor is it true that (even) if such experiments do help to design good programmes in one context, they would work in a different context. So, generalising these results is to be over-confident about the usefulness of such trials. Overall, in his view it is wrong to “claim too much” based on such methods since “these tools are not magic”. He worries, too, because such “experiments are technical solutions to political problems, that really ought to be decided by democratic discussion; that experiments are often done on the poor and not by the poor is hardly an encouraging sign”.

Deaton has also been critical of the theory of rational expectations, which operates on the presumption that economic outcomes are the result of people making decisions on the basis of expectations of the future that are not systematically wrong, rendering many government interventions irrelevant or failures. This was an important component of the theoretical attack on Keynesianism and was, in keeping with its inclinations, celebrated by the Nobel Committee with more than one award. Deaton had pointed out that the evidence on consumption behaviour does not support many of the theory’s implications.

Aid illusion

Deaton is also notorious for his strong criticism of foreign aid, which he elaborated in a book titled The Great Escape. There he attacked the “aid illusion”, which held that donations from rich people and countries to their poor counterparts can help eliminate global poverty. Rather, in some countries, Deaton argues, by shoring up regimes that are anti-people, aid makes things worse for the poor. That is, by rewarding or supporting “poor institutions, poor governments and toxic politics” which do little for growth, aid, Deaton says, can keep poor countries poor. That also strengthens the claim that “aid” is provided for political reasons and not out of altruism.

Strong positions of these kinds, which go against the grain of mainstream thinking, do make this year’s Nobel choice a surprise, even if a pleasant one to some. But the question still remains as to why this choice was made by an establishment that has not had the most credible track record because of what are seen as errors of both commission and omission (with many major economists left out). One answer could be that every now and then the Nobel Committee seeks to regain credibility by making an unusual choice. And since real-world events, especially after the financial crisis of 2008, have questioned many past choices made by the Committee, the pressure to accommodate alternative voices has increased.

This argument is strengthened by the fact that the choice of Deaton occurs in a context where there is increasing concern about rising inequality, which too is an issue on which Deaton has strong views. In The Great Escape, he argues: “If democracy becomes plutocracy, those who are not rich are effectively disenfranchised. The political equality that is required by democracy is always under threat from economic inequality, and the more extreme the economic inequality, the greater the threat to democracy. If democracy is compromised, there is a direct loss of well-being because people have good reason to value their ability to participate in political life, and the loss of that ability is instrumental in threatening other harm.”

Referring to the United States, he went on to say: “The very wealthy have little need for state-provided education or health care; they have every reason to support cuts in Medicare and to fight any increase in taxes. They have even less reason to support health insurance for everyone, or to worry about the low quality of public schools that plagues much of the country. They will oppose any regulation of banks that restricts profits, even if it helps those who cannot cover their mortgages or protects the public against predatory lending, deceptive advertising, or even a repetition of the financial crash. To worry about these consequences of extreme inequality has nothing to do with being envious of the rich and everything to do with the fear that rapidly growing top incomes are a threat to the well-being of everyone else.”

Those are strong words, suggesting that the willingness of the Nobel Committee to accommodate deviant voices has increased substantially. But if past experience is any guide, next year will see a return to “normalcy”. Moreover, among the “deviants” Deaton is a moderate. While he is concerned about the extent of poverty and social deprivation, he is convinced that much progress has been made in alleviating them even within the actually observed trajectory of growth. While he recognises that calorie consumption in India has decreased over the last three decades, especially calories from cereals, he argues that this is neither linked to per capita income decline nor is there any “tight link” between calorie consumption and nutritional or health status. Rather, calorie requirements may have declined due to better health status and reduced burden of hard labour.

In any case, falling real income among the poor is not the explanation—a contention that gave rise to a controversy with economist Utsa Patnaik. While he sees GDP growth as exaggerated in China and India, especially the former, he agrees with the view that growth in these highly populated countries was adequate to reduce global inequality, despite evidence of an increase in within-country inequality. And while he notes that the use of purchasing power parity adjusted exchange rates when examining divergences in global income is fraught with problems, he goes with the conclusion that global inequality has declined as indicated by income measures based on such estimation methods. Given such moderation, Deaton was perhaps the best choice to make if the Nobel Committee was looking to reward a critic of some mainstream positions as a means of gaining legitimacy.

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