SlidesErikSchokkaert.ppt

1
An introduction to the
capability approach
Erik Schokkaert
Department of Economics, KULeuven

2
Introduction
 consequentialist evaluation of policy: how to
evaluate social states?
 main contribution of Sen:
 introduced ideas about multidimensional measurement
of quality of life (Cummins, 1996: 1,500 articles) into
economics;
 was among those who stimulated the debate between
economists and social and political philosophers
(Rawls);
 started with a rigorous analysis of the issues (related to
social choice theory) – "Commodities and Capabilities"
(1985).

3
 Popularity far beyond academia: Human
Development and Capability Association,
Journal of Human Development
 social choice theoreticians, heterodox economists,
social activists;
 proliferation of different interpretations;
 believers and non-believers.
 I will focus on methodological issues which
are (in my view) crucial if one wants to use
the approach for a coherent evaluation of
policies.

4
Structure
1. Equality of what?
2. Challenge 1: selection of functionings
3. Challenge 2: capabilities versus
achievements
4. Challenge 3: the indexing problem

5
I. Income versus utility
does not sufficiently take
into account interpersonal
differences in needs
- "physical condition
neglect"
- "valuation neglect"

6
Basic critique on welfarism
 "Physical-condition neglect": mental attitude of
the person does not sufficiently take into account
the real physical conditions
 expensive tastes
 adaptation of aspirations to objective
circumstances
A person who is ill-fed, undernourished,
unsheltered and ill can still be high up in the scale
of happiness or desire-fulfillment if he or she has
learned to have "realistic" desires and to take
pleasure in small mercies. (Amartya Sen)

7
 "Valuation neglect": valuing a life is a reflective
activity; content of a life is a crucial determinant
of its value
 the drug-example
It is better to be a human being dissatisfied than a pig
satisfied; better to be Socrates dissatisfied than a fool
satisfied. And if the fool, or the pig, is of a different
opinion, it is because they only know their own side of
the question. The other party to the comparison
knows both sides. (John Stuart Mill)

8
I. Income versus utility
does not sufficiently take
into account interpersonal
differences in needs
- "physical condition
neglect"
- "valuation neglect"
FUNCTIONINGS
e.g. being well-nourished, mobile, healthy, taking part in the life
of the community
))
x
(
c
(
f
b i
i
i 

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"Well-being" = valuation of vector of
functionings
II. Achievements versus opportunities
"Freedom" is crucial: example of fasting versus
starving
CAPABILITIES
FUNCTIONINGS
)))
x
(
c
(
f
(
v
)
b
(
v
v i
i
i
i
i
i 

 
i
i
i
i
i
i
i
i
i
i X
x
,
F
f
some
for
)),
x
(
c
(
f
b
b
)
X
(
Q 




10
 capabilities = real "positive" freedom (not
equal opportunities in narrow sense)
 capability approach is NOT a complete theory
of justice (or social evaluation)
 example: relative versus absolute poverty

11
Structure
achievements

12
An example: Klasen (2000), Deprivation in
South Africa

14
Another example: Phipps (2002) – the well-
being of children

15
Empirical work?
 Usually ad hoc and data-driven (factor
analysis)
 Policy conclusions following from different
lists not very different (Ramos and Silber,
2005)

16
 Should we not be more ambitious:
 IF we want to formulate clearly the trade-offs
between different policy issues and in different
policy domains;
 IF we want to integrate the evaluation in a
coherent second best-analysis;
 IF we want to avoid manipulation of the results of
the policy evaluation?

17
Two approaches
 NUSSBAUM: a priori list of capabilities,
based on an Aristotelian view of "human
flourishing"

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Two approaches
 NUSSBAUM: a priori list of capabilities,
based on an Aristotelian view of "human
flourishing"
 SEN: flexible approach, in which the
definition of the list of capabilities has to be
settled in a democratic process through
public reasoning

21
Applications
 participatory groups?
 interesting, but necessarily leading to context-
specific results
 surveys?
 Clark (2005): Coca-Cola example

22
Conceptual questions
1. How "subjective" should our concept of well-
being be, i.e. what is the place of
psychological functionings?
 consumption and social status;
 feelings of depression.
2. How to treat "social capabilities"?
 "living in a just society".

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3. Equality of what? A normative debate
 personal sphere (respect for privacy and
personal integrity)
 Two possible options:
 keep the full list of functionings, but redefine the
task of government: it has to set the
environmental and social conditions under which
individuals can take up their own responsibility
(Nussbaum)
 include only refined functionings which are in the
realm of social responsibility (Fleurbaey, 1995)

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AVOID ADHOCERY
•, FORMULATE THE CHOICE OF FUNCTIONINGS
AS A NORMATIVE PROBLEM
• KEEP THE SAME LIST OF FUNCTIONINGS
WHEN COMPARING POLICY INTERVENTIONS
IN DIFFERENT DOMAINS

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A real-world example
 each major policy proposal by the European
Commission has to be accompanied by an
"Impact Assessment" (IA)
 "Better Regulation"-agenda of Barroso
 description of the consequences (impacts) of
the policy action to allow for a more
transparent discussion of trade-offs and of
synergies between impacts and objectives

27
 impacts have to be described in three
domains:
 economic: competitiveness, administration costs,
international relations, macroeconomic
environment.
 social: employment and labour markets, social
inclusion, equality of treatment and opportunity,
non-discrimination, governance, access to justice,
media, ethics, public health and safety, crime,
terrorism, security, social protection, access to
education
 environment: air and water quality, climate
change, biodiversity, waste production, transport
modes, animal and plant health, food safety

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Structure
achievements
A. Opportunities are not observable
B. How to evaluate sets?
C. Social interdependencies
D. Achievements and opportunities

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Two ways to incorporate freedom
 Opportunity sets
OR
 "Refined functionings"/"comprehensive
outcomes"
 include the availability of alternatives or the
process of choice itself in the definition of the
functionings
 e.g. fasting/starving example

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Structure
achievements

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A. "Opportunities" are not
observable
 describing opportunities requires consideration
of counterfactual states
 only achievements are directly observable
 how reliable are survey studies? how to
formulate the "opportunities" question in an
attractive way?
(cf. Paul Anand)

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Structure
achievements

33
L1
0
L2
Q R
L1
0
L2
Q
R

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A seminal article: Pattanaik and Xu (1990)
IFF CARDINALITY-BASED ORDERING

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Take the best element?(Sen: "elementary evaluation")
L1
0
L2
Q
R b
a
L1
0
L2
Q
R b
a
General question: how to take into account preferences?
Compare {a} and {b} in terms of "freedom"?

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Refined functionings as an alternative?
 basic freedoms of thought, speech, political
activity, travel etc. part of the functioning
vector
 indirect indicators of opportunities: education,
social relations, accessibility of the health
care system
challenge: to model the process of "producing"
refined functionings

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Structure
achievements

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 achieved functionings of person A do not only
depend on A's choices, but also depend on
actions taken by other individuals
 how then to define the "capabilities"
(opportunities) of A?

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Basu (1987) – Edgeworth box

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An example from the theory of rights
(Gibbard)
 Angelina: (AE) PA (AJ) PA (S)
 Erwin: (S) PE (AE) PE (AJ)
 "freedom of choice": (AJ) P (S) & (S) P (AE)
=> (AJ) P (AE)
 Pareto: (AE) P (AJ)

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Structure
achievements

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L1
0
L2
Q R
c
a
b
compare {R,b} and {R,c}
compare {Q,a} and {R,c}
Are persons responsible for all their choices?
• compassion: what about sins of one's youth?
• limitations of individual decision-making
capacities

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Source: McFadden, AER, 2006
Example 1: Medicare, part D (2006)

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Example 2: Savings and retirement
 I focus on one (socially important) example:
savings decisions in the context of retirement
 participation in US employer-sponsored defined
contribution savings plans (401(k) plans)

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Savings plans: is there a problem of self-control?
Does procrastination leads to "too low" savings?
68%
31%
35% of "too low" group intend to increase their contributions;
only 14% of that subgroup actually do increase their contributions
Source: Choi et al., NBER, 2004

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Importance of the default options
Example 1: automatic enrollment
effects are largest for younger employees,
lower-paid employees, Blacks and
Hispanics

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Example 2: choice of contribution rate (anchoring)
Results are even more pronounced for
choice of asset allocation

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Refined functionings as an alternative?
 how to measure "the actual ability to
achieve"? (Sen) Integrate limited capacities
of decision-making in the evaluation of
opportunity sets?
 OR: consider "comprehensive outcomes",
including the process of choice itself
challenge: to analyze carefully the choice process

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Structure
achievements
A. Welfarism and the happiness literature
B. A partial approach: the dominance relation
C. A way out? The equivalence ordering

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The indexing problem
 For policy purposes, we should be able to
formulate trade-offs between different
functionings in a consistent way
 "Leaving it to the politicians" implies that much
leeway is given to the "political decision-making
process":
 democratic transparency not at all guaranteed;
 huge possibilities of manipulation;
 priority to what can be quantified.

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Two approaches
functioning 1 … functioning k
person 1 b11 … b1k
… … …
person n bn1 b1k
natural approach: aggregate first over functio-
nings (per person), then over persons
alternative approach (HDI): aggregate first over
persons, then over functionings
well-being of
person 1
"average" value for
functioning 1

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Dutta et al. (2003)
 The two approaches are only equivalent
under very restrictive conditions (basically
linear aggregators – cf. HDI)
 Not surprising but highly relevant!
If we are ultimately interested in the well-being
of individual persons, only one procedure is
interesting in principle

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Primitive weighting schemes
   
 
   
 
   
 
   
 
   
 
   
 
log log
1 1
3 3
log log
1
3
MIN MIN
i i
i MAX MIN MAX MIN
MIN
i
MAX MIN
GDP GDP Life Life
HDI
GDP GDP Life Life
Educ Educ
Educ Educ
   
 
   
 
   
 
   
 

 

 

 
"Losses in human welfare linked to life expectancy, for
example, cannot be compensated for by gains in other
areas such as income or education." (Human
Development Report, 2005)

54
A question on multidimensional
inequality/poverty measurement
 Most indices impose a weighting scheme for
the different dimensions
 Where do the weights come from?
 The economists playing God?
 How to introduce some respect for individual
preferences (individual's ideas about what is
a good life)?

55
The problem
 Assume Ri is sound, well-informed and
respectable
 How to rank individual situations (fi, Ri)?
dimensions of life
valuation ordering Ri

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PERSONAL-PREFERENCE PRINCIPLE
(fi,Ri) is at least as good as (f'i,Ri) if and only if
fi Ri f'i
SAME PREFERENCES PRINCIPLE
if Ri = Rj, (fi,Ri) is at least as good as (fj,Rj) if
and only if fi Ri fj

57
Structure
achievements

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A. Welfarism and the happiness
literature
 Psychologists have a huge experience with
measuring attitudes, traits, emotions
 Rapidly growing number of publications, now
also in mainstream economics journals
 A variety of questions:
"On the whole, are you very satisfied, fairly satisfied,
not very satisfied or not at all satisfied with the life you
lead?"
 Results show some remarkably robust empirical
patterns

59
Over time, no correlation between income and
satisfaction
Source: Diener et al., Psychological Bulletin, 1999

61
Explanation of individual "life satisfaction" (Helliwell,
Econ. Modelling, 2003)

62
Freedom and happiness
Source: Frey and Stutzer, Journal of Economic Literature, 2002

63
Strong points of the happiness-approach:
 has brought in a forceful way different
considerations into the picture, which always have
been dear to the CA-approach:
 importance of non-material values
 crucial role of health and employment (social integration)
 freedom and autonomy contribute to people's happiness
 is it not possible that the answers on the satisfaction
question reflect to some extent individuals' views on
what is a good life?
 taking human beings seriously?

64
Happiness approach does not satisfy the
same-preferences principle
 two persons
 situation I : average inhabitant of Iceland,
university degree, life expectancy 81.5 years,
income of $36,510
 situation S : average inhabitant of Sierra Leone,
no schooling, life expectancy 41.8 years, income
of $806
 possible that both persons are equally happy,
but that both prefer I to S

65
Structure
achievements

66
B. A partial approach: the
dominance relation
 Sen (1985)'s intersection principle: "If a
person i is better off than another person j for all
functionings, it is natural to state that the
advantage of person i is greater than (or at least
not smaller than) the advantage of person j"
 (fi, Ri) is better than (fj, Rj) if fi » fj
 incomplete, but an interesting starting point?

67
Conflicting with the personal-preference
principle
Brun and Tungodden (2004), Fleurbaey (2007), Pattanaik and Xu (2007)

68
Structure
achievements

69
C. A way-out? The equivalence
ordering
 Restrict the dominance principle to a curve
 THEOREM:
The Personal-Preference Principle and the
Restricted Dominance Principle imply that the
ranking of (fi, Ri) is an Equivalence Ordering

70
A way out? The equivalence ordering

72
Choice of the reference path
 Basic principle: formulation of distributional
judgments that are independent of individual
preference
 Individuals at the reference can be compared by
their ordinary incomes, independently of their
preferences
 Example: health-wealth combinations
 two persons with poor health – not obvious that wealthier
person is better off is he cares more about health
 two healthy persons – natural to rank them according to
their wealth

73
Example 1: use of satisfaction data
 Data from the Russia Longitudinal Monitoring
Survey (RLMS) for seven waves between
1995-2003
 12016 individuals
 Detailed information on living conditions and
personal characteristics: how to weight these
different dimensions?
 "Satisfaction with life"-question: "To what
extent are you satisfied with your life in
general at the present time?"

74
Life satisfaction in Russia: low!

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Estimating the "satisfaction" equation
FUNCTIONINGS
ASPIRATION
LEVELS

77
Fixing reference values
 health: perfect health
 employment: not being unemployed
 wage arrears: no wage arrears
 housing: median
 calculation of "equivalent incomes" Yi*

79
Example 2: direct questionnaires
 Why not ask individuals directly about their
"willingness to pay"?
 Example: health-income combinations

80
An empirical exploration
 Survey based on hypothetical scenarios (2007)
 Location: Marseille (542 respondents)
 Three parts in the questionnaire:
1. Questions on respondent's income, household income,
household composition + usual socio-demographic
questions.
2. Health in the last 12 months: diseases (close-ended and
open-ended questions), access to health care and health
expenditures, self-reported health (verbal analog scale).
3. Retrospective hypothetical scenario: decrease of personal
income to avoid health problems that have developed in
the past twelve months.

81
 Step 1:
Preferences elicitation
Introductory text
During the first part of the questionnaire, you provided us information
about your health in the past 12 months and your current health. You
also provided us information on your financial resources. We now would
like to evaluate with you the burden of your health problems in the past
12 months and the way you compare health gains and income.
(respondent is given a brief summary on his/her responses to the health
and financial resources questions.)

82
 Step 2:
Participation question
If no health problems had occurred in the past 12 months and you
would therefore have been in perfect health, you would have saved the
health expenditures that you stated earlier. Moreover, you would have
benefited from a better quality of life. Without accounting for health
expenditures, would you have preferred a lower income in the last 12
months without any of the health problems that you had?
(Answer: Yes / No / Don’t know)

83
 Step 3:
Valuation question (if yes to the previous question)
Indicate the monthly decrease in your personal consumption in the last
12 months that you would have accepted to forgo in order to be in
perfect health (during the same period of time) on top of health
expenditures that you would have saved.
(Payment card: intervals on a grid from 0 to more than 1500
euros)

84
Empirical results
i. Participation question:
• Positive answers : 435 (80,25%)
• Negative answers: 101 (18,63%)
• Don’t know: 6 (1.11%)
Other aspects of my life are more important than health 52 51,40%
My level of resources is too low 36 35,60%
Refusal to participate / protest answer 11 10,90%
Too difficult 2 1,90%

85
Empirical results
ii. WTP and Income:
Income Quantile Mean ratio WTP/
household income
Mean ratio WTP/
personal income
0-25% 6.4% 10.1%
25-50% 3.9% 7.7%
50-75% 4.6% 6.7%
75-100% 3.7% 6.7%

86
Empirical results
iii. WTP and access to health care:
Annual number of
visits to the GP
Mean ratio WTP/
household income
Mean ratio WTP/
personal income
Less than 2 4.0% 6.0%
2 to 3 5.0% 8.9%
3 to 6 4.4% 7.7%
More than 6 6.5% 11.0%

87
Empirical results
iv. WTP and self-reported health:
Self-reported health
(verbal scale)
Mean ratio WTP/
household income
Mean ratio WTP/
personal income
« Very bad » 7.7% 10.9%
« Bad » 6.6% 8.1%
« Good » 4.9% 8.4%
« Very good » 3.1% 5.9%
« Excellent » 1.8% 3.0%

88
Econometric analysis
 theoretical setting:
 functional specification (cf. Van Soest, Das
and Gong, 2002):
"healthy-equivalent income"
number of minor
diseases
number of severe
diseases

92
Estimated equivalent income statistics
 A slight difference in inequality measures:
Gini(personal income) = 0.386
Gini(equivalent income) = 0.346
 Mean number of diseases in lowest income
quantile (10%):
D1 D2 (D1>0)x(D2>0)
Personal income 2.61 .60 .42
Equivalent income 3.16 .63 .48

93
Conclusion
 The capability approach has to be taken
seriously
 This raises interesting theoretical challenges
 The approaches presented at this Winter
School are very relevant to tackle these
challenges

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