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[1] 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,

9 thoughts on “Capabilities as menus: A non-welfarist basis for QALY evaluation (Crosspost from Crooked Timber)

  1. Note: Swiftian satire follows. I am not seriously advocating this.

    An “economic rationalist” and cynic would advocate the following. Whilst there is a public health system, allow adult persons to sell back to the state their lifetime right to access the public health system. The government would announce it was selling a limited set of these sell-backs (say 100,000) and commence auctions at $10. Each week the price would rise by $10. Citizens could bid at any point. The government would reserve the right to announce further future sell-backs.

    By this mechanism, the government, acting for private capital of course, could swindle much of the population as most would sell their public health rights much too low, having little concept or concern for future health issues more than about a year out. The young would be particularly prone to sell their rights too cheap. Those who sold their rights would require private insurance or else would have no right to medical care whatsoever. Eventually, the auctions would rid the state of all but a rump of public health care patients. Once this rump was small enough they could be politically ignored and ditched for no price and public health could be axed.

  2. JQ you haven’t even begun to tackle the difficulties of the distributional issue even if some devotees of current fashion and some Popes would say the answers are simple.
    What about the inequalities resulting from genes whether those of Tiger Woods or Warren Buffett? And if you do want to put inheritance of money into a different caty for some (and what?) reason how are you are going to adjust for age when inheritance occurred, whether there was a long and uncertain wait, whether parental misconduct offset all or more than all the advantage of money? And, more important how do you factor in the interest we all have in all parents being motivated to act in the interests of their issue’s wealth, success and well-being. And what about the obverse where many children are born to feckless alcoholic parents?

  3. IKONOKLAST – your satire is a reminder that it was a necessary measure for the finances of some states to allow public sector pensions to be commuted to lump sums. Of course it is now the Australian taxpayer to whom the burden is passed since running down a lump sum meets John Howard with his hand out.

  4. My problem here would be how is the determination of a person’s future made with respect to their momentary medical situation.

    I have a friend who became a quadraplegic as a result of a bicycle accident. It would cost hundreds of millions of dollars to attempt to restore him to some semblance of his original condition. Clearly there are choices necessary here. But consider someone who has broken a leg near the knee joint. The cost effective approach is to fuse the joint and set the leg straight, but this then supposes that this person (a horticulturalist for example) will not need to run in the future as all of their work can be done at a slow pace.

    I do ponder the amount of effort of many people being applied to restore one person’s well being, and the aspects of that. In the end it comes down relative standard of living qualified by relative value of the physical resources required to achieve the situationaly optimal outcome.

    For Australia our problem is that we have a relatively inflexible approach to the apperatus of applying health care. Consider


    I think that any health approach has to be broad field, and preferably innovative, agile clever, reactive, and intelligently cost conscious. That is a big ask particularly when politics become involved.

    I think that if you set out to make a system based particularly on one theme that would quickly become a liability.

  5. Yuri, the success of Tiger Woods or Warren Buffett are not due to genetics. They are due to the existence of a system that allows great inequalities to arise based on your ability to whack a little ball, or understand markets and people.

    There is a clear problem with the current system. “Conservatives” tend to believe that the system is a bit broken, because at some time in the fairly recent past it deviated from some imagined perfection.

    But it is pretty obvious that the current system is not the best (using some arbitrary metric), except for the lucky few who have done exceedingly well out of it.

    It is a bit hard for people in comfortable middle-class Australia to face the fact that they reap the benefits of the flawed system, at the expense of people in Africa, The Philippines, China, Bangladesh etc. We naturally look at the Gina’s of the world when we say that the system is broken.

  6. This sounds like a very interesting approach. I haven’t had time to read your article, but it sounds similar to an approach used by a number of health economists eg John Brazier. In eliciting from people the relative disutility of two different diseases, each of the disease states is defined in terms of impact on functioning ie mobility is reduced this much, self care is limited a certain amount, mood is affected etc. But it sounds as though you have systematised this, and the idea of tradeoffs between different components of the capability vector could be very useful in attempting to elicit preferences.

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