Economics and Consumer Behaviour
John has made noteworthy contributions in modelling consumption. Especially important was his 1980 book co-authored with Angus Deaton entitled Economics and Consumer Behaviour (Deaton and Muellbauer 1980b).
This classic of the literature was designed both as a comprehensive textbook for graduate economics and as a reference work for economists. The first part provides readers with a well-organised and accessible introduction to consumer choice and duality theory. Duality theory is then used to derive cost functions, including those underlying the demand functions that Stone- Deaton's graduate adviser—estimated in his classic LES. The authors then introduce the AIDS framework and a simple but effective application. The book, from the start, effectively integrates theoretical and empirical analysis, a relatively rare achievement in economics.[206] Thereafter, there are extensions to analysing labour supply and durable goods purchases.The second part of the book reviews the conditions needed for demand components to be separable and for demand to be aggregated across consum- ers—both featured prominently in John's early publications in refereed journals. This sets the stage for the third section of the book, on consumer index numbers, Engel curves, and the analysis of social welfare.
The fourth part of the book provides a mix of theoretical and empirical extensions, covering topics involving labour supply, intertemporal choice, consumption and income dynamics, the demand for durables, discrete choice, credit rationing and uncertainty. Deaton and Muellbauer were prescient in introducing readers to the relevance of these topics—which preoccupied economic research in the following decades—and to tools to allow them to be addressed with better integration of theory and empirical practice.
A particular achievement of the book was highlighting the contributions and shortcomings of the then prevailing representative agent and perfect markets version of the life-cycle/permanent income hypothesis (LCH/PIH). At the micro-level, the book documented how empirical tests of the basic tenets of the theory were rejected using this framework. Deaton and Muellbauer pointed to the need to incorporate credit constraints, heterogeneity in preferences, and uncertainty into an LCH/PIH framework in order to better reconcile micro-theory with empirical evidence. In so doing, their book helped many in the economics profession (especially those of us in graduate school) to make sense of the implications of research on imperfect information and financial frictions unfolding in the following decades.[207]
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