Income and Outcomes

Economics
Sir Anthony B. Atkinson
Fellow, Nuffield College, Oxford, England, UK
Angus S. Deaton
Dwight D. Eisenhower Professor of International Affairs and Professor of Economics and International Affairs at the Woodrow Wilson School, Princeton University, Princeton, NJ USA

Atkinson and Deaton have been suggested as possible Nobel Prize winners “for empirical research on consumption, income and savings, poverty and health, and well-being”

What joins the two together and suggests a Prize — split one-half for each — is their concern with precise measurements of income and its association with economic and social outcomes of many kinds. This is an area that has not been recognized by the Nobel Prize committees in economics in quite some time (the most recent Prize for research somewhat related to the work of Atkinson and Deaton would be that given to Amartya Sen in 1998 for his contributions to welfare economics).

Atkinson has had a long and productive scholarly career and has also been a much consulted source for government policymakers, especially in the United Kingdom and Europe. However, and in particular, it is his 1970 paper in the Journal of Economic Theory, “On the Measurement of Income Inequality,” that stands out and has been most influential among his works. This measurement is known as the “Atkinson Index” or the “Atkinson Inequality Index.” His 1970 paper, now with over 1,300 citations, is listed in a summary on what mattered most in economics since 1970. What follows is an informed commentary of the importance Atkinson’s measure: “Many people used measures like the Gini coefficient or the Lorenz curve to say something about the distribution of income or wealth. These measures suggested a kind of objectivity. The beauty of Atkinson’s measure of income inequality is that it points out that the very act of measuring it is subjective and requires some statement about how much one cares about the distribution of income or wealth. Only after stating one’s degree of relative income aversion, is it possible to measure the degree of inequality.”

http://www.eui.eu/Documents/DepartmentsCentres/Economics/AtkinsonLaudatio.pdf 4 pp | 60 KB

Deaton has had a most interesting scholarly career, having begun his studies with the 1984 Nobel Laureate Sir Richard Stone at Cambridge University in the early 1970s. Deaton’s first focused on precise econometric studies of demand based on the British economy. In 1980, with John Muellbauer, he published “An Almost Ideal Demand System” in the American Economic Review. This paper is Deaton’s most cited journal article, having now received more than 1,000 citations. It is listed in a summary on what mattered most in economics since 1970 and as one of the 20 most influential articles ever published in the American Economic Review, a study authored by several past Nobel Prize (see: http://economics.mit.edu/files/6349). In the latter, it is described as follows: “This paper, building on the traditions of Cobb-Douglas, Stone, and Gorman, introduces a practical system of demand equations that are consistent with preference maximization and have sufficient flexibility to support full-welfare analysis of policies that have impact on consumers. The Deaton-Muellbauer system is now the standard for empirical analysis of consumer demand.” He also showed that movements in consumption are smaller than changes in income, revealing a surprising smoothness, a phenomenon known as the “Deaton Paradox.” This is described in a 1987 paper, “Life Cycle Models of Consumption. Is the Evidence Consistent with the Theory?,” in Advances in Econometrics, Fifth World Congress, Volume II, Cambridge University Press, and in a 1989 paper, “Why is Consumption so Smooth?,” written with John Campbell, which appeared in the Review of Economic Studies.

From his early econometric studies of demand, Deaton has, through the years, broadened his investigations to include income and savings, and more recently poverty (especially in India), health and even the concept of well-being. He has exploited data gained from household surveys to explore the relationships of these variables. These studies have been highly influential, reflected in over 900 citations (from journals) to his book, The Analysis of Household Surveys: A Microeconometric Approach to Development Policy, World Bank and Johns Hopkins University Press, 1997. Of note in the realm of studies on the relationship of income to well-being (the perennial question “Does money buy happiness?”) is a recent paper by the 2002 Nobel Laureate Daniel Kahneman and Deaton entitled “High Income Improves Evaluation of Life but Not Emotional Well Being,” which appeared in Proceedings of the National Academy of Sciences of the USA in 2010.

Commentary on the Economics Laureates by David A. Pendlebury, Analyst, Thomson Reuters

Interview with Angus S. Deaton, Dwight D. Eisenhower Professor of International Affairs and Professor of Economics and International Affairs, Woodrow Wilson School, Princeton University

For empirical research on consumption, income and savings, poverty and health, and well-being

Please provide a brief overview of your field of research and explain what led you to focus in this area?

I work on a broad range of topics in economics, mostly applied, and many of them ultimately concerned with measuring and understanding wellbeing. This ranges from understanding why individuals make the choices that they do, to how we might measure how well off they are. Currently, I work on poverty and on inequality, on health, and on economic development.  I work on domestic US issues, as well issues in developing countries; for many years, I have worked on India, particularly on measuring and understanding poverty.

I started out life as a mathematician, but wanted something that was more applied, and more directly connected with human behavior. Economics was a natural choice. I began by trying to understand why people spend and save as they do, and from there, through a series of steps, moving on to broader conceptions of how well off they are. Most recently, this has led me into trying to understand the economics and psychology of happiness.

What did you want to accomplish when you began your research?

I wanted to work in an area where there was lots of scope for curiosity and for enquiry into everyday things, like spending and saving, poverty, or inequality. I have always been interested in trying to reconcile theory and evidence, or in more prosaic terms, of telling good stories about why things are the way they are.

What notable problems, challenges, or obstacles did you face? Conversely, have there been particular sources of enjoyment, satisfaction, or pride?

I suspect that everyone faces the same obstacle; that we see the world through a fog, in which mechanisms and connections are very unclear. Prior notions and accepted wisdom often make it hard to clear away even a little of the fog, but they are very hard to give up.

Particular sources of satisfaction are the few occasions where I have managed to clear away some confusion and think, “Oh, that is how it works.”

How would you assess the importance and influence of your work?

I think that is for others to do! As Thomson-Reuters is doing through these citations. I am always surprised, albeit pleasantly surprised, when something I have worked out helps other people’s thinking too. That does seem to have been the case, but it was never what motivated my work, which was always satisfying my own curiosity or trying to understand things that were not clear to me.

Has this research found wider application in industrial or commercial areas? If so, what are some possible future developments?

One of my most cited papers, “An almost ideal demand system,” that John Muellbauer and I published in 1980, develops a tool for measuring the way that consumers respond to prices and incomes. Since then, it has been very widely used in practice beyond academic economics, for example in antitrust work, in legal work, in industry, and in various policymaking exercises.

Interview with Sir Anthony B. Atkinson, Fellow, Nuffield College

For studies of income inequality and contributions to welfare state and public sector economics

Please provide a brief overview of your field of research and explain what led you to focus in this area?

I decided to study economics as a result of my experience working, before university, as a male nurse in a deprived inner city area in Germany (I was in Hamburg at the same time as the Beatles!). The first book that I wrote, after graduating from Cambridge, was on poverty in Britain and the reform of social security. Since then, my research has largely focused on issues of economic inequality and on the design of public policy.

What did you want to accomplish when you began your research?

When I started research, very few economists were interested in issues of inequality, whereas I believed that social justice and fairness should be central to economics. I was concerned that the macro-economic topics on which economists focused, such as the growth of GDP, meant little to the person in the street, and that we needed to investigate who benefited from growth and who was being left behind. This meant studying not just poverty but also riches, since inequalities at the top have a major influence on society as a whole. We needed to restore welfare economics to a central position.

What notable problems, challenges, or obstacles did you face? Conversely, have there been particular sources of enjoyment, satisfaction, or pride?

There have been two major challenges.

The first is the lack of empirical data. The situation is now much improved, but a great deal remains to be done. In recent years, I have been much engaged, with colleagues, on the assembly of data on the top of the income distribution, which has led to the creation of the World Top Incomes Database. It is these data that are cited in the New York Times and appear on placards held up by members of the Occupy movements.

The second challenge is the construction of adequate theoretical explanations, where I am not convinced that rising inequality is solely due to globalization and technological change. We need for example to understand the concentration of wealth, as well as earnings. To achieve this, we need, in my view, to bring together different branches of economics. The subject of economics has become too fragmented.

How would you assess the importance and influence of your work?

The criterion that means most to me is the extent to which young researchers are working on the topics that I feel to be important. I am delighted that there are so many of my young (and not so young) students investigating key issues of inequality and social justice, and contributing to the development of policies to achieve a fairer world.

Has this research found wider application in industrial or commercial areas? If so, what are some possible future developments?

I have always been concerned with the relevance of my research, but the main field of application has been to public policy, rather than industrial or commercial use. At the national level, I have served on official bodies, particularly those dealing with the development of official statistics. The inequality measure that was the subject of my most cited article is employed, for example, by the US Census Bureau in its official reports. I have been much engaged in the development of the social policy at the level of the European Union, including the design of the social indicators that underlie the Europe 2020 Agenda.