Celebrating 2015 Nobel Prize in Economics with Personal Reflections By Ying Wu
Ying Wu, Economics & Finance Professor
I was excited to learn that Professor Angus Deaton of Princeton University received this year’s Nobel Memorial Prize in Economic Science for his contributions in the study of consumption, poverty and welfare. Many macroeconomists, including myself, have gotten used to teaching students the streamlined macro models that treat consumers typically as a whole and therefore ignore heterogeneity of individual consumers’ choices. Professor Deaton was one of the first to challenge this approach more than three decades ago.
According to his research, national income accounting should consider not only the general framework of traditional macro models based on aggregation of the "representative" individual’s behavior but also the impacts of possible behavioral variations arising from market conditions, credit availability and demographic profiles, etc. Consider a tax-cut policy, for example. Low-income households could respond to tax cuts differently from high-income households; thus, policy effectiveness will depend on the level of income inequality, among other things, which could make a difference from what conventional macro models normally predict. In this regard, Professor Deaton pioneered the study behind micro-foundations of macroeconomics. His 1980 book titled Economics and Consumer Behavior, coauthored with John Muellbauer, summarized these theories (which were novel at the time but embraced today) and also signaled his further contributions on issues of income inequality, poverty and economic development for years to come.
Deaton’s Nobel Prize also reminded me of a special time when I was fortunate to have been his student in 1986. In a summer economics workshop, Professor Deaton, along with Professors Gregory Chow, Robert Engle (2003 Nobel Prize winner in economics), Leonid Hurwicz (2007 Nobel Prize winner in economics) and John Taylor, taught us – a special group of Chinese students – in a one-year graduate program in Beijing, China. Professor Deaton’s lecture employed numerous mathematical models that were rather advanced in both content and methodology but helped us see how individuals actually behave behind aggregate data. Thanks to this summer workshop, I not only gained an incredibly eye-opening experience but also decided to become an economist. At the end of the workshop, we were all given a copy of Professor Deaton’s book Economics and Consumer Behavior, which has traveled many miles with me since and sits in the bookshelf of my office today. Needless to say, I still use it as an indispensable reference.