Wednesday, 14 November 2007

Amartya Sen's Capability Approach

After a few drinks, I thought it would be nice to sit back, put on my intellectual hat, and pontificate about something that I'm pretty interested in.

When studying inequality, Amartya Sen's capability approach is by far the most thought-provoking abstract conceptualization analyzing the issue. It is more a framework for evaluating social welfare and development than an explicit measurement of inequality. The basis of the approach is rooted in normative egalitarianism derived from a Kantian philosophical emphasis.

Sen's approach is quite interesting and calls for economists evaluating inequality, whether from a statistical or policy-based method, to look beyond income as the only measure of social difference. Research has been conducted on an interesting hypothesis stemming from this idea - that for the same product, the poor pay higher prices than the more affluent. The Brookings institute study from 2005 provides empirical evidence supporting this conclusion. My own research, most recently also originating from the capability approach, seems to indicate that the poor use their income more inefficiently than the rich. The theoretical justification for this appears to be that the poor simply do not, for one, have access to the same financial services as the rich. This statement reveals another fascinating idea: a unit of currency yields greater return as the wealth of the individual holding that unit rises. In more colloquial terms, a richer person can make more money out of a single dollar than a poorer person can. Microfinance insitutions are one way of adressing this inequity. But, I believe that an altruistic investment fund structured like the CalPERS pension fund can most effectively grow money and alleviate poverty through a market-based, non-governmental effort. Yet another means is the pooling of funds in poor communities to achieve the collective status of an affluent economic actor, yielding more favorable rates of return. Clearly, problems of liquidity in these investment methods can easily arise and the locking of assets in a fund may be a contentious issue for poor individuals.