Angus Deaton’s ‘Economics in America’ challenges the direction that economics has taken, writes Brian Easton

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

In 2015 Angus Deaton was the sole awardee of the Bank of Sweden’s Prize in Honour of Alfred Nobel, for his contributions in the study of ‘consumption, poverty and welfare’. (It has been relatively rare for this Nobel to recognise poverty or welfare; nowadays the award covers a slightly wider remit than just economics.) The Royal Swedish Academy of Sciences, which makes the award, said that ‘more than anyone else, Angus Deaton has enhanced this [understanding of economic policy intended to reduce poverty]. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics’.

Deaton described himself as ‘someone who's concerned with the poor of the world and how people behave, and what gives them a good life’. His Deaths of Disease and the Future of Capitalism, which he coauthored with his wife Anne Case, illustrates both his concerns and how innovative he (they) can be.

He grew up in Scotland, going to Cambridge University where he graduated with a doctorate. Forty years ago he took up a chair at Princeton University near New York. Thus he is both an immigrant and well embedded in American life, which is a good place from which to provide an insight into the state of economics and US, as his memoir Economics in America: An Immigrant Economist Explores the Land of Inequality well illustrates. (If you think ‘civilised economist’ is an oxymoron, you have not read this book.)

Of course, American economics is not the whole of economics, but some 71 of the 93 Nobel laureates were born in the US, and a goodly number of the remainder spent most of their working lives at American universities; American economics dominates the economics profession.

Deaton reports that when he shifted to the United States from England, he was struck by how little attention was paid by American economists to distributional economics, which perforce means by the economics profession as a whole. I won’t say he has trod a lonely path, but certainly it has been the path less trodden.

For example, some years ago, I was looking at some New Zealand research which was trying to estimate the gains from reducing border protection. The assumptions in the model ensured there would be gains; at issue was how much? The research concluded that they would amount to an increase of about 0.3% of output. What the research did not notice was that the changing shape of the economy had real wages falling by about 5% amd profits correspondingly rising, which meant that the distributional impact of the proposed policy change was far greater than the gain in efficiency. The winners gains from the redistribution far exceeded the gains from greater allocative efficiency. 

I am not arguing these figures were correct. The point here is that the researcher did not notice the distributional implications of the research. Had I raised it with him, I would have been dismissed by the argument that workers could be compensated for their loss of income, but there would have been no consequent discussion of how the compensation would be implemented – that would involve raising taxes.

That is the story of much public discussion about the economy since. Lots of attention to efficiency gains – which are often quite small (and promised rather than measured) – and no attention to distributional impacts, which can be quite large. I often observe advocacy based upon efficiency gains – promised but not measured – without any attention to the effects on equity. Surprise, surprise; the advocate would be one of the beneficiaries from the gain. Even less surprising, the change is resisted – to the incomprehension of advocates – by those who will be made worse off; advocates attribute it to ‘politics’ (which they pretend to be above). Distributional economics is one of the most complex and difficult parts of economics, but that is no excuse for ignoring it, especially if the analysis is about policy.

Take, as but one example, the Regulatory Standards Bill and let us assume the charitable interpretation that its purpose is to provide a more systematic review of a regulation when it is being introduced. I would have thought that any systematic review would identify winners and losers but there is hardly any reference to that in the proposal. The exception is that a review is required to identify the losses (but not the gains) of those with property rights – commercial capital. One might have expected a similar provision for losses for those with human capital – their earnings. On that the bill is silent. (Even that addition would not cover wider distributional issues such as the degree of income and social inequality and poverty.)

Such criticisms are not peculiar to New Zealand; much of our economic debate echoes that in the US and elsewhere. That is what Deaton is challenging in public policy, area after public area, including health economics, which combines distributional issues with challenging technical ones. Deaton points out that while the healthcare sector consumes about 15 percent of US output (less in New Zealand), there are comparatively few health economists, and they generally have lower status (also true in New Zealand).

Deaton is not a minor economist. Among his recognitions are that he holds a prestigious economics chair at Princeton University, which is globally ranked among ten universities for economics and econometrics (most of them are American). He has been elected president of the American Economic Association. Deaton is an insider writing from the inside.

A great autobiographical memoir describes a journey through life, its vistas changing. Last year, Deaton wrote that he had changed his mind on large parts of the mainstream economics he had previously supported. While acknowledging that economics had achieved much, he concluded, that economists’ mistakes showed how ‘economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Adam Smith once did.’

The final chapter of his memoir, entitled ‘Is Economic Failure a Failure of Economics?’ is as an impassioned and informed essay on the state of economics as I have come across for some time – Keynes would have been proud to have written it. It is so dense, balanced and thoughtful that any paraphrase would be inadequate. I suggest you sneak into your local (good) bookshop and begin reading it. I bet you buy the book.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.