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

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An introduction to the capability approach

Erik Schokkaert

Department of Economics, KULeuven

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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).

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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.

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Structure

1. Equality of what?

2. Challenge 1: selection of functionings

3. Challenge 2: capabilities versus achievements

4. Challenge 3: the indexing problem

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I. Income versus utility

does not sufficiently take into account interpersonal

differences in needs

- "physical condition neglect"- "valuation neglect"

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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

circumstancesA person who is ill-fed, undernourished, unsheltered and ill can still be high up in the scaleof happiness or desire-fulfillment if he or she haslearned to have "realistic" desires and to take pleasure in small mercies. (Amartya Sen)

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"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)

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I. Income versus utility

does not sufficiently take into account interpersonal

differences in needs

- "physical condition neglect"- "valuation neglect"

FUNCTIONINGSe.g. being well-nourished, mobile, healthy, taking part in the lifeof the community

))x(c(fb iii

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"Well-being" = valuation of vector of functionings

II. Achievements versus opportunities"Freedom" is crucial: example of fasting versus

starving

CAPABILITIESFUNCTIONINGS

)))x(c(f(v)b(vv iiiiii

iiiiiiiiii Xx,Ffsomefor)),x(c(fbb)X(Q

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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

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Structure





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

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Example (continued)

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

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Empirical work?

Usually ad hoc and data-driven (factor analysis)

Policy conclusions following from different lists not very different (Ramos and Silber, 2005)

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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?

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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

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Applications

participatory groups? interesting, but necessarily leading to context-

specific results

surveys? Clark (2005): Coca-Cola example

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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

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Some quotes:

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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




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









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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









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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









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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









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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-makingcapacities

43Source: 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 andHispanics

Source: Choi et al., NBER, 2004

47Source: Choi et al., NBER, 2004

Example 2: choice of contribution rate (anchoring)

Results are even more pronounced forchoice 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




4. Challenge 3: the indexing problemA. 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 isinteresting in principle

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Primitive weighting schemes

log log1 1

3 3log log

1

3

MIN MINi i

i MAX MIN MAX MIN

MINi

MAX MIN

GDP GDP Life LifeHDI

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)

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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)?

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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

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Structure







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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

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Over time, no correlation between income and satisfaction

Source: Diener et al., Psychological Bulletin, 1999

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Europe…

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

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Freedom and happiness

Source: Frey and Stutzer, Journal of Economic Literature, 2002

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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?

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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

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Structure







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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?

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Conflicting with the personal-preference principle

Brun and Tungodden (2004), Fleurbaey (2007), Pattanaik and Xu (2007)

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Structure







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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

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A way out? The equivalence ordering

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Equivalent income

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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

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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?"

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Life satisfaction in Russia: low!

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Estimating the "satisfaction" equation

FUNCTIONINGSASPIRATION

LEVELS

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Indifference curves

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Fixing reference values

health: perfect health employment: not being unemployed wage arrears: no wage arrears housing: median

calculation of "equivalent incomes" Yi*

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Portrait of the deprived

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Example 2: direct questionnaires Why not ask individuals directly about their

"willingness to pay"?

Example: health-income combinations

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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.

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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.)

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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)

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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)

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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%

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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%

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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%

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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%

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Econometric analysis

theoretical setting:

functional specification (cf. Van Soest, Das and Gong, 2002):

"healthy-equivalent income"

number of minor diseases

number of severe diseases

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Results

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Indifference curves 1

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Indifference curves 2

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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

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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

Documents

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