What does the Deaton Paradox show developing countries?

Scottish-born economist Angus Deaton won this year's Nobel Prize in economics. Despite being from Scotland where classical economics was born, he studies consumption like his contemporaries rather than production, unlike classical economists. As dominant economics refuses to change the basic production mechanism, you can be an acceptable economist like Deaton and address consumption and the theories that structure consumption.

Deaton puts forward a paradox, arguing that austerity programs that rapidly reduce the incomes of a vast majority of the public do not reduce their expenditures at the same rate. After all, as low-income groups strive to scrape by on the inadequate means they have, there are not so many margins to be obtained from such groups through austerity measures. Also, as consumption is an ideology that is hard to abandon, people continue to spend and run into debt unnecessarily, and these unpaid debts might escalate into a systemic problem. So, one does not need to be an economist to suggest that both cases might lead to social crises.

Currently, the Deaton Paradox already runs in developing countries. For instance, there are bad practices in Turkey like imposing consumption taxes, unnecessary credit limitations and tight monetary policies based on high interest rates in order to bring down the inflation rate and current account deficit. This practice produces two results: As the Deaton Paradox suggests, people do not give up consumption, but instead give up savings, and run into unnecessary debts. This is a dynamic that intensifies the poverty in the medium and long run. The emergence of racist and fascist political movements in eastern and southern European countries, the proposition of radical solutions and the rise of street protests are related to the reality characterized by the Deaton Paradox. However, the classical economics that emerged in Deaton's birthplace, Scotland, does not address this reality.

Classical economics considers production to be the source of wealth (capital). According to Adam Smith's theory, labor productivity and the true division of labor ensure it constitutes the basis of prosperity. Smith also argues that nations living on fertile soils may not benefit from this fertility and become poor if they cannot ensure labor productivity. Quite the contrary, nations living on unfertile soils become rich if they ensure labor productivity, produce more than they need and sell surplus goods to other nations.

Of course, the problem was not that simple. When viewed from the U.K., which was the primary land of the Industrial Revolution and the preceding mercantilist plunders, this theory constituted the basis of classical economics. Classical economics did not ponder on which working conditions labor productivity - hence wealth - can be ensured. It either did not dwell on how and under which pricing conditions an infertile country would sell its surplus goods, which it produced with labor productivity (plunder), to unindustrialized countries that failed to produce such goods. In short, it overlooked the humanitarian aspect in the former and the interests of unindustrialized countries in the latter. This was the essence of the matter; the capital grew through a ruthless way of plundering labor inside the country and through the transfer of funds in an unjust way outside the country. The cheap metals, raw materials and energy of underdeveloped fertile countries were being transferred to industrialized countries, where they were being converted into expensive goods with cheap labor, and sold to unindustrialized countries.

One can enlarge this mechanism as he wishes by including finance, a raft of foreign trade theories, politics and diplomacy. The essence of the matter, however, is this basic economic cycle. This is the source of wealth of not all countries but of developed ones. This basic mechanism started to change after the second half of the 20th century. In accordance with Smith's theory, developed countries pushed production to southern and eastern countries where labor was relatively cheap in order to make greater gains from labor. For instance, China turned into the factory of the world. In short, poor nations in the world started to sell not only their natural wealth but also labor wealth, cheaply to the West.

This was not a sustainable situation. The system started to break down from its most vulnerable points. Africa and the Middle East started to export not only their civil wars but also poverty to the developed world in the form of terrorism. Those who wanted to maintain the existing system restructured this terror and used it. This is the basic historic and economic cause of the current refugee crisis and terror organizations.

If developing countries like Turkey cannot develop economic policies that highlight their interests and enable them to make use of their resources freely, a new and greater crisis might engulf all of us. This systemic crisis cannot be eliminated by pushing the poor to consume less or to change their consumption habits.