Capabilities as menus: A non-welfarist basis for QALY evaluation (Crosspost from Crooked Timber)
This is a contribution to a discussion of Sen’s capability approach, taking place at Crooked Timber. It’s a bit too wonkish for the CT readership, it seems, and maybe the same here, but I’ll toss it up anyway.
Most of the discussion of capabilities has concerned poor/developing countries. Moreover, most of it has been qualitative rather than quantitative. One consequence is that, although the idea of capabilities has been around for a while now, its impact on the policy process in developed countries has been modest at best.
My own work on capabilities, represented by an article published last year in the Journal of Health Economics has also had a modest impact, but for very different reasons. While not strictly quantitative, it’s mathematical, more so than the average reader of JHE tends to be comfortable with, and its direct relevance to policy is limited by the fact that we are, at least to start with, not addressing distributional issues.
The main objective is to explore the idea that capabilities can provide a basis for allocating health care resources based on the QALY (Quality-Adjusted Life Year) measure. in previous work, we looked at the “welfarist” idea that policy should be based on maximizing lifetime expected utility. It turns out that, considered purely as a technical problem, this can’t be done, except in very special cases. The appeal of capabilities is that they provide a non-welfarist (or at least ‘extra-welfarist’ in that it is more than a simple expected utility maximization) rationale for policies involving scarce resources like health care.
Our idea comes from the economic literature on menus, which began with work by Kreps and others. The idea here is that people value having a set of choices open to them, because they don’t know what their future preferences/needs will be. This seems very close to capabilities, if we think of capabilities as sets of possible functionings. In the health context, your health status is not an end in itself, but the capability of moving about, looking after yourself, watching sunsets and so on. Similarly, money is not valued for itself, but for the consumption choices it makes possible. So, we can regard a list of wealth and health characteristics both as a single object (a capability vector) and as the source of a set of possible functionings, which may be valued more or less highly.
This is the only point in the analysis where the math is more than routine algebra. Even though values (more precisely, ordinal rankings) are derived from sets of functionings, which are difficult to handle mathematically, we can associate them with capability vectors, which are mathematically similar to the consumption bundles economists handle all the time. There are trade-offs between improvements in different components of the capability vector, and these trade-offs can be represented by ratios, that work very like prices. In particular, if we scale all improvements in health capability against improvements in healthy lifetime, we get a Quality-Adjusted Life Years measure and, at least in principle, a trade-off between QALYs and (lifetime) wealth.
The way I think about what we’ve done here is to provide a basis for an objective notion of capabilities, which all reasonable people would evaluate more or less similarly, even while allowing for lots of individual variation in preferences, life-circumstances and so on. However, while there is a fair bit of room for variation, it’s not unlimited. For example, some participants in the health care policy discussion (mostly from the medical side) assume (implicitly or explicitly) that long life and good health are the supreme goods, and that everything else is secondary. That’s clearly not consistent with a view that places positive weight on the capability of choosing various mixes of consumption goods, education and so on.
A more serious problem is that we don’t discuss distributional issues. The analysis here works for a society in which everyone starts out with equal capabilities and chooses how to use them. We haven’t yet dealt with the case where capabilities are unequal, either because of entrenched economic inequality or because of inherent differences in health status. That problem becomes more difficult if people experience good or bad luck over their lifetimes, and there is no workable social mechanism for insurance.
In summary, this is really a very preliminary approach to making the capability idea workable. Still, I was excited to work on it, and would really like to see others pick up on it. So, I’m very happy to be able to present here at CT, and hoping it will generate some discussion
fn1. It’s joint work with Han Bleichrodt of Erasmus, with whom I’ve worked on health economics regularly over the last 20 years or so. The interpretation here is my own, though,