And the winner is...

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A Nobel for a Real-World Economist

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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For two years, I had great success -- some might even call it luck -- at predicting the recipients of the Nobel Memorial Prize in Economic Sciences. Well, my run is over. I failed to foresee that the prize would be given to Angus Deaton,  a British-American economist working at Princeton. But despite the ruination of my record as a prognosticator, I am happy, because Deaton is a great choice for the prize. 

Last year, the Nobel went to Jean Tirole, a master theorist, who uses math to predict how companies interact and compete in markets. This year’s prize is for a very different kind of work. Though Deaton started out as a theorist, he dedicated his most famous efforts toward making sure that economics has better data. And he has used that data to study poor people around the world, with the goal of improving their lot in life. 

People often look to the Nobel for evidence of how the economics profession is changing. The selection of Deaton shows how data and evidence are becoming ever more central to the field. It also shows that econ isn’t just about boosting growth or efficiency, but is deeply concerned with poverty and inequality. 

It’s really hard to measure how well-off people are. We all want to eat food, live under a roof, have a car and get good health care. But it’s hard to compare how much value an American or a Japanese person places on each of these things with the value placed on them by someone in Zambia or Fiji. When you look at 7 billion people and try to compare their standards of living, things quickly become difficult. 

But Deaton and economist John Muellbauer made a big advance in this area in 1980, developing some math approximations that simplified the problem greatly. They called this the Almost Ideal Demand System (an unlucky choice of acronym). Since 1980, the AIDS and its descendants -- simpler and more robust than the alternatives -- have been widely adopted by economists trying to measure household consumption. 

Deaton contributed in many other important ways to the empirical revolution in econ. He pioneered the use of household surveys as a way of working around the limitations of government data-collection agencies. In an age when many high-flying economists were spinning grand theories about how economies grow and develop, Deaton was down on Earth, wading through the mess of real-world data, doing the hard, un-glamorous work of making sure that we all got the facts right. In the end, most of those theories have been discarded or forgotten, while Deaton’s work endures. 

It’s partly because of Deaton that we know how much better off the world has been getting during the past few decades. In his 2013 book "The Great Escape," Deaton marshals an overwhelming and diverse array of evidence to show that global living standards have risen enormously. Whatever the reason -- capitalism, free trade, social democracy, technological progress -- the facts are clear. Most people on planet Earth are much better off than their ancestors. Period. 

But although Deaton is an inveterate optimist, he also recognizes that the march of progress has been flawed. Poverty has plunged, and with it global inequality. But at the national level, inequality within many countries has risen. Although Americans in particular have previously been blasé about this latter trend, Deaton has warned us not to be complacent. In a 2014 letter to the U.K.’s Royal Economic Society, he expresses hope that we Yankees are finally waking up to the problem. He chides American economists such as Harvard’s Greg Mankiw who have dismissed the importance of inequality, and praises Thomas Piketty for gathering data on the super-rich. He has defended Obamacare, and urged Americans to take the problem of climate change more seriously. 

If you thought the economics profession shilled for conservative policies, Deaton’s Nobel should make you think twice about that. 

Deaton has also done much to advance the field of development economics, which tries to answer the question of how poor people’s lives can be improved. Development econ relies heavily on randomized experiments and on random events known as natural experiments. Deaton has worked tirelessly to improve the reliability of these methods. Along the way, he has made some interesting findings about what works and what doesn’t in the fight to reduce third-world poverty. Basically, giving foreign aid to governments is not as effective as giving money directly to poor families, who often use that money to better their long-term situation. 

So this richly deserved Nobel Prize probably does say a lot about where the economics profession is going. More attention to data and careful experiments; more concern for the poor; and more attention to inequality. All in all, an encouraging trend.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net