3 things to know about the new economics Nobel laureate

Scotsman Angus Deaton won the Nobel Prize in Economics this year “for his analysis of consumption, poverty and welfare”. The announcement capped a week of Nobel news. What are the three things you need to know about Deaton’s work and the award he has won?

1. It is and it isn’t a Nobel Prize

Officially, the prize Deaton was awarded is called “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2015.” That is because unlike the other Nobel Prizes, the Economics Prize wasn’t originally conceived by its namesake founder, Alfred Nobel.  As the Nobel Prize website states: “On 27 November 1895, Alfred Nobel signed his last will and testament, giving the largest share of his fortune to a series of prizes in Physics, Chemistry, Physiology or Medicine, Literature and Peace – the Nobel Prizes”.

It was only in 1968 that Sweden’s central bank established the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Since 1968, famous economists including John Nash (1994) Friedrich von Hayek (1974) and Milton Friedman (1976) received the prize. Because the economics prize wasn’t awarded prior to 1968, other world-class economists such as John Maynard Keynes (†1946), Irving Fisher (†1947) and Joseph Schumpeter (†1950) missed their chance to ever win one.

2. Deaton receives the prize for three different contributions

In its press release, the Nobel Prize Committee said Deaton was being honored for his contributions around three central questions. They are:

• How do consumers distribute their spending among different goods?

 In his early work around 1980, Deaton developed the Almost Ideal Demand System – a flexible, yet simple, way of estimating how the demand for each good depends on the prices of all goods and on individual incomes. His system helps policymakers greatly in assessing how policy reforms, like changes in consumption taxes, affect the welfare of different groups.

• How much of society’s income is spent and how much is saved?

Deaton’s research clearly demonstrated why the analysis of individual data is key to untangling the patterns we see in aggregate data, an approach that has since become widely adopted in modern macroeconomics. Commonplace now, Deaton’s approach in its early days was at odds with the prevailing consumption theory, which looked at aggregate income and consumption data.

• How do we best measure and analyse welfare and poverty?

Deaton’s answer was to focus on household surveys, and that approach helped transform development economics from a theoretical field based on aggregate data to an empirical field based on detailed individual data. He showed, for example, how you could use household data to find the relationship between income and caloric intake, or the extent of gender discrimination within a family.

3. Deaton is a Brit, but he works at a U.S. University

Deaton is a Scotsman, born in Edinburgh in 1945. But he does work for a U.S. institution, Princeton University, and lives in the U.S. That is not at all uncommon for economics prize winners: over the last 10 years, all but 2 of the 19 laureates worked at an American University.

Only last year’s winner, the Frenchman Jean Tirole, and one of three 2010 laureates, the Greek-Cypriot Christopher Pissarides, were not affiliated at a U.S institution when they were awarded. Tirole worked at the University of Toulouse in France, and Christopher Pissarides at the London School of Economics in the U.K.

More remarkable still is that of those laureates from U.S. universities from the last decade, three more were working at Princeton: Eric S. Maskin, who won in 2007, Paul Krugman, who was the laureate in 2008, and Christopher A. Sims, awarded in 2011.

Image: A picture of British economist Angus Deaton, winner of the 2015 economics Nobel Prize, is seen on a screen as Goran K. Hansson (C), permanent secretary for the Royal Swedish Academy of Sciences, and Tore Ellingsen (L), chairman of the prize committee, and Jakob Svensson, member of the Academy, address a news conference at the Royal Swedish Academy of Science, in Stockholm, Sweden October 12, 2015. REUTERS/Maja Suslin