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Why should we compare apples to oranges?

14 octobre 2015, 08:30

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Why should we compare apples to oranges?

Scottish-American thinker Angus Deaton, 69 years old, has just won the Nobel Prize for Economics. The man has a simple belief: our world is a complicated one and trying to boil it down to simple, mathematical, and rational theories could be quite dangerous, at least to a large extent from an academic standpoint.

 

«Deaton developed a reputation early in his career as a formidable theoretician and econometrician. Among his achievements was creating, with Muellbauer, a system for testing how the demand for individual goods varies with prices and incomes, which was widely adopted by other economists. But he has spent much of the past thirty-five years studying poor countries, where reliable statistics are hard to come by», underscores John Cassidy in the New Yorker.

 

If you were asked tomorrow if the world is cruising in a good direction, your answer would mostly depend upon your personal outlook on life and your own experiences in the world you are living in. If you ask the same question to Angus Deaton, he will opt for an optimistic answer: “Things are getting better, and hugely so.” This is the theory he develops in his 2013 magnus opus ‘The Great Escape: Health, Wealth, and the Origins of Inequality’.

 

According to those who have studied his groundbreaking volumes of research — a vivid and very long bibliography — his reading of world history is one of progress. He challenges that “poverty, death, and isolation are in global decline; in his view, there has never been, on the whole, a better time to be alive.”

 

Deaton was precisely prized because of three crucial contributions to the body of knowledge. 1) He developed AIDS (Almost Ideal Demand System) on the eighties — a tool that models how consumers spend their money.

 

2) His challenge of prevailing macroeconomic theories of consumption — or consumer spending — by pointing out the flaws of aggregate data. (Individual data is just as key, he argued.)

 

3) His use of household surveys to collect more accurate, empirical, individualized economic data in developing countries. Deaton has always focused on theories that are built of econometric data on the one hand and empiral data coming from real life experiences on the other hand.

 

According to Deaton, one must continue to challenge institutional beliefs and look over the horizons. For instance, one could just conclude that if the price of apples falls, people will buy more apples. However, if the price of apples falls but the price of oranges falls even more, people actually might buy less apples because they might switch to oranges. Deaton posited therefore that «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.»

 

Deaton also underscored a paradox (The Deaton Paradox), based on the widespread economic assumption that people have a rather rational, forward-looking behavioral pattern.

 

According to Deaton, both empiricism and individualism need to be taken into account. «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.» Especially in the big data era where the importance of diversity can be diluted in big masses of information.

 

If Economics “is haunted by more fallacies than any other study known to man” (according Henry Hazlitt), and if economics is a lot about claims about how human beings will act in given circumstances, then it is probably a good thing that Angus Deaton, together with Joseph Stiglitz and Amartya Sen, keep on thinking about what makes us happy – and how do we properly capture this happiness in various parts of our transforming world.