http://www.vox.com/2015/10/12/9505213/angus-deaton-nobel-prize

The 2015 Nobel Prize for Economics winner, Angus Deaton, explained 

Updated by Matthew Yglesias on October 12, 2015, 9

Angus Deaton, born in Scotland but a longtime professor at Princeton, has won the 2015 Nobel Prize for Economics "for his analysis of consumption, poverty, and welfare." Deaton is well-known for a broad body of work rather than for a handful of breakthrough papers. But it is possible to understand his output as falling along a couple of themes. Methodologically, Deaton is about both empiricism and individualism, arguing for a close look at data on how specific human beings and households behave, rather than stylized models or big national-level aggregate data.

Substantively, this is because he's trying to look behind the easiest summary statistics and understand what is actually happening in people's lives — who is better off than whom, and why. That's a subject that has very broad application. We might wonder if the average person in Oslo is better off than the average person in Orlando, and by how much. But it's of particular interest when we're thinking about questions of poverty. If we want to improve the lot of the worst-off people, we need to know who they are and how to measure improvements in their well-being.

Deaton's early work on two technical problems

Deaton originally rose to prominence for work on two technical issues. The first of these was the creation of the Almost Ideal Demand System, AIDS, which was first published in 1980 just before that acronym came to be known for something else entirely.

A very simple demand system says that if the price of apples falls, people will buy more apples. A natural complicating observation is that if the price of apples falls but the price of oranges falls even more, people actually might buy fewer apples because they are gorging on oranges. Comparing apples to oranges is a legendarily difficult problem, but to understand what products people will want to consume, you more or less need to compare everything to everything. AIDS was a promising effort to show how we can do all the aggregations necessary to understand these dynamics, and it's been the subject of a lot of subsequent refinement by various economists.

Deaton also worked on a problem known as the Deaton Paradox, which is a kind of puzzle internal to the widespread economic assumption that people have a more or less rational, forward-looking behavioral pattern.

This kind of work propelled Deaton's career forward but isn't really what he's best known for.

Comparisons of living standards

Money is a really convenient way of comparing how people are faring economically. Saying Jose has $1,000 more than Joe but $2,000 less than Giuseppe is very simple and relatively easy to verify.

But whenever you try to take these kind of simple cash comparisons into the real world, immediate problems resolve. If Jose lives in Texas but Joe lives in Toronto, then one of them has US dollars and the other has Canadian dollars. You can convert between the currencies using market exchange rates, but exchange rates bounce up and down at the speed of financial markets, and it's not plausible that living standards shift that quickly. We need to start looking at what people are actually consuming — the food, cars, medicine, etc. that make up economic life.

Yet the further afield you go, the harder this kind of problem becomes. The price of an iPhone is very similar around the world, with the difference largely accounted for by taxes and short-term currency fluctuations. But a haircut is cheaper in Hanoi than in Harrisburg, and cheaper in Harrisburg than in Helsinki. So the cost of living varies from place to place. But it also varies according to what you mean by "living" — the extent of the variation depends on what it is you are buying. If people in Hanoi don't get haircuts as often as people in Helsinki, the fact that haircuts are cheaper isn't as big of a benefit.

Empirical individualism

Deaton does not have one giant paper that solves this problem. The whole point of his work, rather, is that it's a problem that requires both theoretical sophistication and a lot of piecemeal work. Here are his papers on poverty in India, for example. It is not a small number of papers.

In a big-picture sense, Deaton is urging both empiricism and individualism. The easiest thing to do in economics is to choose one or the other. The most widely available empirical data is data about big aggregates — how much did Americans as a whole spend on this or that — and there's a long tradition of work grounded in observing the movements of these big aggregates. There is also a counter-tradition that insists on building up our model of how the big picture works from economists' standard model of how rational individual humans behave. This generates elegant but highly stylized takes on what is going on.

Deaton's approach emphasizes the use of household surveys and other finer-grained sources of empirical data. And it does so due to an appreciation, on a theoretical level, of the importance of diversity. Economic conditions vary enormously from place to place and from person to person. Poor people consume different sorts of things than do rich people, and these patterns vary across place and time.

This is crucially important when it comes to measuring poverty — you can read a nontechnical account of Deaton's approach here — because it implies that governments and nonprofits interested in combating poverty need a fine-grained understanding of how it varies as a phenomenon from place to place. It's not enough to set the poverty line at $1.90 a day and the see how it's changing around the world. You need to see what $1.90 a day actually means in Nigeria versus Nepal, versus Nanjing.

Health and well-being

Deaton's interest in consumption, and peering behind the veil of money, eventually led him into the arenas of health and well-being. For many people, health-care services constitute a large share of their spending and consumption. But while people buy movie tickets because they want to watch a movie, people don't really pay for doctors' visits because they like sitting in doctors' offices. The idea is to get healthier. And yet it's well-known that health is impacted by lots of things (diet, exercise, stress) that aren't health-care services, and also that lots of health-care services don't do much to improve health.

This is a big deal in rich countries where health-care costs are so important, but it's also a big deal in poor countries. Many foreign donors are very interested in improving public health, possibly as a tool for fostering economic growth. At the same time, one of the best things about economic growth is that it might foster better public health. Deaton's inquiries into poverty and consumption fed into this area, and his work is well-known among public health and development specialists.

Popular writing

Deaton is very much an economists' economist, but he's also a clear writer who dabbled in more popular fare. His book The Great Escape paints an optimistic picture of modernity and the benefits of economic development.

For a while now he's written a biannual "Letter From America" for the Royal Economic Society offering views on the need for regional price indexes, the benefits of a single-payer health-care system but the unlikeliness of adopting one, the impact of unemployment and health and happiness, and budget cuts to state university systems.

Criticisms of foreign aid and RCTs

Deaton is a very widely admired economist but does stake out two controversial positions in development economics that ruffle some feathers. One is that he is sharply critical of foreign aid, seeing improved state capacity as the key to sustainable economic development in poor countries, and aid as useless to counterproductive in achieving it. Other development economists note that aid can and has built state capacity, and that Deaton's argument that it's net useless or counterproductive doesn't match the empirical reality.

Deaton sees direct cash grants as superior to conventional foreign aid, but even so deems it "no solution" because "poor people need government to lead better lives; taking government out of the loop might improve things in the short run, but it would leave unsolved the underlying problem."

This is linked to Deaton's criticism of the recently popular trend toward Randomized Controlled Experiments (RCTs) as a key tool of development economics. His 2012 debate with Abhijit Banerjee on this subject is fascinating if you're interested in a deep dive, but broadly speaking Deaton thinks RCTs tell us too little about interventions that are too small in scale. A study of the deployment of antimalarial bednets in one village in Kenya tells us a lot about the effect of one specific policy in one specific region of one specific country — but it doesn't tell us much about the overall task of eradicating developing world poverty.

Per the title of his popular book, he is interested in understanding what poor people in poor countries need to achieve a "great escape" from a world of widespread immiseration — changes in political economy and economic development that are far too big to be studied as piecemeal RCTs.