The Great Escape from Poverty

Newly minted economics Nobel laureate Angus Deaton worries crony capitalism will kill off economic growth.

The Princeton economist Angus Deaton is singularly devoted to facts and close measurement. The latest winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, Deaton is a fierce empiricist who deploys data to slay gauzy theoretical speculations on the sources of economic growth, poverty, and inequality. His work focuses on what counts as economic growth, whether money actually makes people happy, and how development aid has failed to help poor countries.

One of Deaton's studies involves the ratio between men and women, which is skewed unnaturally toward men in many poor countries. One popular theory in the 1980s was that tradition-minded families allocated more resources, chiefly food, to sons than to daughters. Deaton tested this hypothesis with data from careful surveys of how consumption changed after the birth of children in families in the Ivory Coast and Thailand. The results: There were no significant differences in how resources were distributed between boys and girls. Thus, the anomalous sex ratio in many poor countries had to be the result of other dynamics, such as sex-selective abortions and the use of contraception once the desired number of sons was born.

More recently, Deaton has been trying to figure out why the amount of calories consumed by people in India has apparently been declining over the past 25 years even though their incomes have been increasing. Deaton suggests that Indians may be eating less because they are healthier and engaged in less strenuous physical labor. Yet undernutrition figures for the subcontinent remain among the highest in the world—50 percent of children are underweight for their ages, for example. The mystery remains unsolved.

With regard to well-being, Deaton has challenged the "Easterlin paradox"—the notion that after a certain level of income, more money can't buy happiness. In 1974, the economist Richard Easterlin argued that increasing average income did not raise average well-being. Among other evidence, Easterlin cited survey data that showed that Americans in the 1970s were no happier than Americans in the 1940s, even though their incomes had basically doubled since then.

Deaton compared data that measure day-to-day emotional well-being versus long-term life satisfaction. The former does appear to top out at around $75,000 per year in the United States. But there is no income satiation point using an 11-point life evaluation scale in which 0 represents a person's worst possible life and 10 his or her best possible life. In general, the higher someone's income, the more satisfied he or she is with his or her existence.

In his 2013 book The Great Escape, Deaton reprises his years of research on how, over the past two and a half centuries, a significant proportion of the world's people managed to break out of humanity's natural state of abject, disease-ridden poverty and ignorance. "Life is better now than at almost any time in history," he writes. "More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die."

How did this great escape occur? Improving health played a big role. Citing English demographic data from 1550 to 1750, Deaton shows that average life expectancy during that period hovered around 35 years. The nobility generally had more food yet did not live any longer, so Deaton argues that "it was disease, not lack of nutrition, that set the limits on life expectancy." After 1750, the life expectancy of British aristocrats began to increase while that of the commoners remained stuck. Why? Deaton suggests the divergence arose from different health habits, with the gentry having the wherewithal to take advantage of fancy and expensive new medical technologies such as variolation to prevent smallpox and chinchona bark to treat malaria.

In the 19th century, wealthier folk were also the first to accept the germ theory of disease and adopt hygiene practices that fended off deadly infections. Once the germ theory was widely accepted, public sanitation measures followed, including filtered municipal water supplies, pasteurized milk stations, and sewerage, reducing the toll of infectious diseases. The resulting decline in disease, debility, and death set off a virtuous feedback loop in which societies with improved health became ever more productive, innovative, and well-fed. With the spread of medical knowledge, life expectancy has increased from a global average of 35 years in 1900 to around 70 years today.

Now rapid growth in China, India, and other countries is propelling hundreds of millions out of poverty. "Both theory and experience suggest that economic growth is the surest and most lasting solution to poverty," argues Deaton. In 1981, 42 percent of the world's population lived on incomes beneath the World Bank's international extreme poverty line. Since then the world gross product has just about tripled. Using an updated international extreme poverty line of $1.90 per day, the World Bank in October forecasted that such poverty will fall to 9.6 percent of the world's population in 2015.

Deaton thinks this mass escape from poverty has nothing to with the fact that rich countries of the world have spent around $5 trillion in real dollars on aid since 1960. Rather than helping, that aid has far more often than not harmed the poverty-stricken in poor countries. That's chiefly because the money goes into the hands of corrupt elites that use it to maintain their power by buying off opposition factions and then squirrel away what's left in offshore bank accounts. Aid is a perverse incentive—the more immiserated a tyrant keeps his people, the more foreign dollars will flow his way.

Deaton's relentless empiricism is also his weakness: Throughout his work, he suggests economic growth comes from a country having the luck to stumble into the right sort of "politics."

He does observe in The Great Escape that poor countries remain poor because they "lack the institutions—government capacity, a functioning legal and tax system, security of property rights, and traditions of trust—that are a necessary background for growth to take place." That's absolutely correct as far as it goes, but it also confuses democracy with liberty. Ultimately, Deaton's analyses never grapple with how the undirected spontaneous activities enabled by institutions of liberty are what initiate and sustain the "great escape" that his data so brilliantly document.

Looking to the future, Deaton is worried about the economic effects of America's rising inequality. Citing the Australian economic historian Eric Jones, Deaton observes that growth has from time to time taken off in various societies around the world only to be "snuffed out by powerful rulers or priests who either appropriated the innovations for themselves or banned the activity altogether because it threatened their own positions." His chief concern is that the super-rich will capture our political system and seek to choke off the sources of creative destruction that make a society vibrant. Will a rising class of crony capitalists kill off economic growth here? Good question.