Last week’s award of the Nobel Prize in economics to Angus Deaton is a potential wake-up call to all government policy makers, especially in poor countries, as they face obstacles to alleviating poverty and health care disparities, among others. British-born Deaton, 69, who is a professor of international affairs and economics at Princeton University, was honored for his “analysis of consumption, poverty and welfare.”

“With a framework Deaton developed, we can, for example, estimate how taxes will disproportionately impact the spending power and consumption of wealthy and poor households,” says Wharton real estate professor Jessie Handbury, whose research interests include urban economics.

“Angus Deaton is a brilliant scholar whose later work continues to push the forefront of what we mean by increasing consumer utility and well-being,” says Ann Harrison, Wharton professor of business economics and public policy. She also notes Deaton’s current research “is just as exciting” where he explores how to use self-reported measures of happiness to measure well-being. “This is important because there are many measures of being better off that cannot be captured purely by money or even physical consumption,” she explains.

Influencing Policy Makers

Among his many contributions, Deaton’s work has been cited for his studies of demand and income at the individual level instead of the conventional emphasis on aggregate data; he showed how the two approaches differ. His path-breaking work in the analysis of household surveys and taxes, and his work on poverty and welfare, have influenced policy makers in removing disconnects between intentions and outcomes, especially with foreign aid. He is now focusing his research on the determinants of health in rich and poor countries, as well as on the measurement of poverty in India and around the world, according to the bio on his website.

The Royal Swedish Academy of Sciences says in its press note about the import of Deaton’s work: “By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics.”

The Academy noted Deaton’s contributions in addressing “three central questions”:

How do consumers distribute their spending among different goods? Deaton showed a way of estimating how the demand for each good depends on the prices of all goods and on individual incomes.

How much of society’s income is spent and how much is saved? Deaton demonstrated how individuals adapt their own consumption to their individual income, which fluctuates in a very different way to aggregate income.

How do we best measure and analyze welfare and poverty? Deaton uncovered important pitfalls when comparing the extent of poverty across time and place. He has also showed how the clever use of household data may shed light on such issues as the relationships between income and calorie intake, and the extent of gender discrimination within the family.

“Deaton’s recent work has highlighted the fact that, to correctly measure global poverty and inequality, we need to correctly measure both the differences in the choice sets (or prices) that households face as well as the differences in how households at different income levels perceive these choice sets,” says Handbury. She notes that his earlier work on demand estimation “has demonstrated that these differences in demand exist and provide a tractable way to account for them in policy evaluation.”

Guiding Research Directions

Deaton’s work has influenced Handbury’s research as well. Here, she refers to her work on “spatial price index measurement” that is related to Deaton’s research on international price indexes, or purchasing power parity. Her research on the subject is both from a general measurement perspective and an attempt “to account … for the different ways in which households at different income levels differentially distribute their spending among different goods,” she explains.

“With a framework Deaton developed, we can, for example, estimate how taxes will disproportionately impact the spending power and consumption of wealthy and poor households.”  –Jessie Handbury

Deaton dealt with those issues in his 2010 American Economic Association presidential address and in a related paper in the American Economic Review, notes Handbury. Handbury’s studies show the relevance of those income effects, or socioeconomic differences in demand more generally, in generating disparities in nutrition. Handbury’s findings are contained in a research paper she recently co-authored titled, “What Drives Nutritional Disparities? Retail Access and Food Purchases across the Socioeconomic Spectrum,” which was published in April by the National Bureau of Economic Research. Education levels — as opposed to income levels or access to supermarkets — determine food preferences, and therein lie useful pointers for policy makers, Handbury told Knowledge at Wharton in a recent interview.

Harrison is another avid follower of Deaton’s work, and cites his recent book, The Great Escape, as “a fascinating discussion of the importance of geography.” Some of Harrison’s research also treads the same ground as Deaton’s does. Her recent work evaluates the impact of anti-sweatshop campaigns and corporate social responsibility, and the linkages between globalization of firms, worker wages and employment, among other aspects. She is also the author of the book, Globalization and Poverty.

The Great Escape is “a must read for anyone trying to understand why some countries are richer than others,” says Harrison. “Where a person is born is a huge determinant of well-being. Deaton explores the enormous inequities that pervade today’s world and proposes explanations for them.” She points out that the book is controversial in its rejection of aid as a solution to today’s global poverty. “Deaton does not believe that official aid flows are helpful, and makes a case for why aid has often made receiving countries worse off, rather than better off.”

The Great Escape

“Luck favors some and not others; it makes opportunities, but not everyone is equally equipped or determined to seize them,” says Deaton in The Great Escape. The book’s title refers to how people of earlier generations “escaped” from poverty and malnutrition to relative wellbeing, and is also a reference to World War II prisoners-of-war who escaped by building secret tunnels.

“Angus Deaton is a brilliant scholar whose later work continues to push the forefront of what we mean by increasing consumer utility and well-being.” –Ann Harrison

“The tale of progress is also the tale of inequality,” writes Deaton. “This is especially true today, when the tide of prosperity in the United States is the opposite of equally spread. A few are doing incredibly well. Many are struggling. In the world as a whole, we see the same patterns of progress – of escapes for some, and of others left behind in awful poverty, deprivation, sickness, and death.”

In his book, Deaton challenges the popular theory that world poverty could be eliminated if every American adult donated $0.30 a day; or, $0.15 a day from “a coalition of the willing” from adults in Britain, France, Germany and Japan. He challenged that “hydraulic approach” to foreign aid, which argues that “if water is pumped in at one end, water must pour out of the other end.”

Deaton explains how that approach could be counterproductive. “If poverty is not a result of lack of resources or opportunities, but of poor institutions, poor government, and toxic politics, giving money to poor countries – particularly giving money to governments of poor countries – is likely to perpetuate and prolong poverty, not eliminate it.”

Deaton explores several ideas to fix those gaps, including enforcing accountability by the “aid industry” to donors and requiring recipient governments to show a commitment to good policies. Another of his ideas is for foreign aid to be invested in diseases such as malaria. Aid can provide pharmaceutical companies with the incentives to develop new drugs, with donors filling in for the missing purchasing power of the poor, he adds.

Deaton is also “cautiously optimistic” about the future. In his book, he noted the recent economic growth in India and China, advances in treating HIV/AIDS, and the spread of democracy and education, among other factors. “The desire to escape is deeply ingrained and will not be easily frustrated,” he wrote. “People may block the tunnels behind them, but they cannot block the knowledge of how the tunnels were dug.”