Business Irish

Thursday 29 September 2016

Nobel winner has plenty to say of relevance to Ireland

Published 18/10/2015 | 02:30

Economist Angus Deaton of Princeton after winning the 2015 Nobel Prize for Economics
Economist Angus Deaton of Princeton after winning the 2015 Nobel Prize for Economics

Who gets what is always high on the agenda in budget week? How resources are allocated is what economics is all about.

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As it happens, on the day before last week's Budget was unveiled, the winner of this year's Nobel Prize for Economics was announced. The decision on who gets the prize each year not only reflects the life-long contributions economists make to the discipline, but also the relevance of individuals' work to real world issues.

This year's winner, Angus Deaton (a Scot based in the US for the last four decades), has written more than many other previous recipients on real world matters, particularly around issues of poverty - how to measure it, how to alleviate it and how not to try to alleviate it. He has also helped bring economics a bit closer to what happens in the real world and away from excessively abstract theories. Theory, he believes, should complement and follow data - rather than the other way round.

His work has world-wide relevance and no little relevance from an Irish perspective.

What people actually consume from day to day and week to week was Deaton's first major area of endeavour. Although this work is a bit dry and technical, it could be summarised as stating that it is important to look at the behaviour of individual households, as opposed to aggregate consumption patterns, in order to get a better handle on what is really going on in the nooks and crannies of the economy.

One legacy of his work has been very revealing in Ireland. More than 10 years ago a regular survey started to be taken in EU countries with a view to better understanding household behaviour and activities at a more granular level. What is known as the Survey on Income and Living Conditions (SILC) is very much the kind of micro-level data that Deaton pioneered and advocates.

In the Irish case, it revealed that the problem of jobless households was much bigger than previously thought - because the standard measure of unemployment didn't capture it (the standard jobless rate only looks at people in the labour force and ignores the large number of adults who, for various reasons, are neither working nor looking for work).

But despite having strong views on many things, Deaton has always been humble about the limitations of data and his own findings. Indeed, he named his consumption model the 'Almost Ideal Demand System'. A healthy scepticism of his own and the work of others has been a trait throughout his career. This is refreshing in a discipline in which a willingness to be upfront about the extent of uncertainties has not always been in over supply.

In the 1980s, Deaton turned his attention to the economics of developing countries, helping to transform the field.

His work in the area was recently condensed into a highly acclaimed book, The Great Escape: Health, Wealth, and the Origins of Inequality.

One of Deaton's big themes is that the world is actually getting better. While there are huge challenges and progress is too slow for many, he has long found evidence for optimism. People are living longer, as great strides have been made in global health - he is fond of noting that when he was born in Edinburgh in 1945, life expectancy in Scotland was lower than it is in India today.

Extreme poverty has also fallen dramatically - only the week before last the World Bank reported that fewer than one in 10 people on the planet is now living in extreme poverty, down from more than one in three a few decades ago.

But he has not shied away from taking strong positions which have at times caused controversy. He has, for instance, been very critical of the aforementioned World Bank, saying it "has an institutional bias towards finding more poverty rather than less".

Before it became as fashionable a subject as it is today, Deaton worked on inequality and on its relationship with health. Like many, he is greatly concerned about the rise of inequality, especially in the United States, believing that it has the potential to undermine democracy if it allows the really rich to pull up the ladder and give those below no chance to clamber up.

At the same time, he has pushed back against notions from other disciplines that inequality is always and everywhere bad. Some inequality can spur people to become educated, innovate and succeed. On a global level, an example of benign inequality Deaton often uses is healthcare.

Richer countries have the skills and resources to discover and develop new medicines and medical technologies. The advances, which originate in developed countries, tends to create more global inequality, as the initial beneficiaries are wealthier people. But eventually the costs of treatment decline, allowing the less wealthy and developing countries greater access to new medicines and practices.

The spread of medical knowledge has gone a large way towards improving the world's health. As Deaton states: "Wealth has a formidable record of generating new ways of improving health, and we need to harness its power, not muzzle it on the grounds that it generates temporary inequalities in health."

Another view which is unpopular in some quarters is his critique of foreign aid. While aid to developing countries is justified on ethical grounds, he believes there are big unintended consequences for poor countries. If a country is heavily dependent on aid, he has written, it can undermine the capacity of that state's institutions - and make recipient country politicians and bureaucrats more interested in keeping foreign technocrats happy than being accountable to citizens.

Deaton believes western countries should, for instance, shift focus from contributing to the spending of developing world governments to putting more resources into curing diseases prevalent in poorer countries.

His advice to students who want to relieve suffering in the world is as follows: "I tell them to go to Washington or London and to work to stop the harm that rich countries do - to oppose the arms trade, the trade deals that benefit only the pharmaceutical companies, the protectionist tariffs that undermine the livelihoods of African farmers; and to support more funding to study tropical disease and health care. Or they could go to Africa, become citizens, and cast their lot with those they want to help. That is how they can save the lives of African kids."

With last week's budget allocating €640m towards overseas aid and development, the matter warrants more debate in Ireland than it currently gets.

A list of Deaton's extensive writings can be found here: http://scholar.princeton.edu/deaton

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