Keynote speech of Marc Fleurbaey, Robert E. Kuenne Professor in Economics and Humanistic Studies, Professor of Public Affairs and the University Center for Human Values, at the 2014 IARIW General Conference

1. Beyond Income and Wealth
Marc Fleurbaey
August 26, 2014
Fleurbaey () Beyond Income and Wealth August 26, 2014 1 / 36

2. Sources
K. Decancq, M. Fleurbaey, E. Schokkaert 2014, "Inequality, income,
and well-being", forthc. in A. Atkinson, F. Bourguignon (eds.),
Handbook of Income Distribution.
K. Decancq, M. Fleurbaey, E. Schokkaert 2009, "Happiness,
equivalent incomes, and respect for individual preferences"
R. Boarini, M. Fleurbaey, F. Murtin, P. Schreyer, in progress.
K. Decancq, D. Neumann 2014, "Does the choice of well-being
measure matter empirically? An illustration with German data",
forthc. in M. Adler, M. Fleurbaey (eds.), Oxford Handbook of
Well-Being and Public Policy.
M. Fleurbaey, D. Blanchet 2013, Beyond GDP. Measuring Welfare
and Assessing Sustainability, OUP.
Fleurbaey () Beyond Income and Wealth August 26, 2014 2 / 36

3. Introduction: Multidimensionality of well-being for social
welfare and inequality measurement
1 Income and wealth already capture a lot (over commodities; over
time, over states of the world)
2 Non-market dimensions matter: social relations (in particular family,
but also occupation status), health...
3 Correlation of disadvantages matters: this excludes composite
indicators that aggregate over individuals by domains before
summarizing over domains
4 Preferences matter: more controversial, di¢ cult to implement
5 Fairness matters: interpersonal comparisons have to do with social
justice — who deserves greater priority?
Fleurbaey () Beyond Income and Wealth August 26, 2014 3 / 36

4. Three approaches
1 Capabilities approach
2 Happiness approach
3 Equivalent income approach
Fleurbaey () Beyond Income and Wealth August 26, 2014 4 / 36

5. Framework
An individual situation is (`i , Ri , Si )
`i is life (a vector with many dimensions)
Ri preferences (ordinal ranking)
Si satisfaction function: Si (`i ) is the level of satisfaction declared by i.
Goal: compare situations, or even measure their value.
Fleurbaey () Beyond Income and Wealth August 26, 2014 5 / 36

6. The capabilities approach
Functionings: all relevant doings and beings
Good for "non-market dimensions matter"
Capabilities: sets of accessible functioning vectors
"income/wealth already": budget set = set of accessible commodities
income, education, longevity in HDI: each proxies capabilities
"correlation matters": not implemented in Human Development Index
"preferences matter": not implemented in HDI
Sen: capabilities o¤er freedom of choice; weights are value-judgments,
seek community agreement, apply intersection principle (dominance) to
get a partial ranking of individual situations:
8R 2 R, `R`0
) 8R, R0
, S, S0
, (`, R, S) `0
, R0
, S0
Alternative view: weights are personal preferences, seek personalized
indices
"fairness matters": capabilities = opportunity sets; big role for
individual responsibility (ex. of health insurance)
Alternative view: respect preferences (choice and freedom matter, but
do not trump everything –and do not work for public goods)
Fleurbaey () Beyond Income and Wealth August 26, 2014 6 / 36

7. Dominance versus personal preferences
Fleurbaey () Beyond Income and Wealth August 26, 2014 7 / 36

8. Dominance versus personal preferences: Is this really a
paradox?
A "situation" is the pair (life dimensions, preferences), not just "life
dimensions".
Having more in all dimensions with worse …t with preferences may not
mean being better o¤:
an athlete may be better o¤ with (low income,great health) than a
businessman with (low income+ε, great health+ε);
similarly, a businessman may be better o¤ with (large income, poor
health) than an athlete with (large income+ε, poor health+ε).
Fleurbaey () Beyond Income and Wealth August 26, 2014 8 / 36

9. Dominance versus personal preferences: Is this really a
paradox?
Plausible rankings
Athlete(low income+ε, great health+ε)
Athlete(low income,great health)
Businessman(large income+ε, poor health+ε)
Businessman(large income, poor health)
Athlete(large income+ε, poor health+ε)
Athlete(large income, poor health)
Businessman(low income+ε, great health+ε)
Businessman(low income,great health)
If one insists on dominance, then the …t with preferences plays no role
in the assessement.
Fleurbaey () Beyond Income and Wealth August 26, 2014 9 / 36

10. The capabilities approach
Functionings: all relevant doings and beings
Good for "non-market dimensions matter"
Capabilities: sets of accessible functioning vectors
"income/wealth already": budget set = set of accessible commodities
income, education, longevity in HDI: each proxies capabilities
"correlation matters": not implemented in Human Development Index
"preferences matter": not implemented in HDI
Sen: capabilities o¤er freedom of choice; weights are value-judgments,
seek community agreement, apply "intersection principle" (dominance)
to get a partial ranking of individual situations:
8R 2 R, `R`0
) 8R, R0
, S, S0
, (`, R, S) `0
, R0
, S0
Alternative view: weights are personal preferences, seek personalized
indices
"fairness matters": capabilities = opportunity sets; big role for
individual responsibility (ex. of health insurance)
Alternative view: respect preferences (choice and freedom matter, but
do not trump everything –and do not work for public goods)
Fleurbaey () Beyond Income and Wealth August 26, 2014 10 / 36

11. Capabilities: conclusion
Too fetishistic on choice and opportunities
Not respectful enough of individual preferences
But could move toward personalized indices of "re…ned functionings"
(incl. choice dimension).
Fleurbaey () Beyond Income and Wealth August 26, 2014 11 / 36

12. Happiness approach
Surge of subjective well-being (SWB) studies
Two branches:
1 Determinants of SWB at the individual level
2 Social welfare assessment (average SWB) and policy advice
Much of the second branch takes it for granted that SWB, as
recorded in surveys, is a magnitude of ethical relevance and is
interpersonally comparable in an ethically acceptable way.
Important distinction: emotions/evaluation (satisfaction/eudaimonia)
Focus here on satisfaction: emotions are only a subset of dimensions
of ` (focusing on emotions would be advocating hedonism),
eudaimonia responses cover only a subset of evaluation
Fleurbaey () Beyond Income and Wealth August 26, 2014 12 / 36

13. Happiness approach: evaluation
"non-income dimensions matter": good, as respondents can give as
much weight as they wish to such dimensions. (Note: emotions not
su¢ cient)
"correlation matters": good, as respondents synthesize their own
situation. (Note: emotions not su¢ cient, the correlation between low
achievement and bad feelings matters)
"preferences matter": prima facie good, but more problematic than it
seems
decision utility versus experience utility: closer to experience utility
(good?) (Note: experienced emotions not su¢ cient, if respondents
care about other things)
inter-situation comparisons marred by shifting scales (adaptation):
same person at di¤erent times, di¤erent persons
violates the "same-preference principle": if preferences do not change
and rank ` over `0, then the former is better than the latter:
(`, R, S) `0
, R, S0
, `R`0
Fleurbaey () Beyond Income and Wealth August 26, 2014 13 / 36

14. Happiness approach: evaluation
"fairness matters": even if every respondent used the same scale,
SWB would not necessarily give a good measure
"using the same scale" has no meaning when R 6= R0. How would an
artist and a businessman use "the same scale" to assess lives?
comparing situations involving di¤erent preferences requires fairness
principles: it is not su¢ cient to express a low satisfaction to be worse
o¤.
why not just use SWB directly? Can one get it roughly right about
average welfare, or even about the distribution of welfare? Interesting
theoretical and empirical question: start from a well-founded measure
of welfare, and examine if SWB from surveys track it well.
Come back to …rst branch of happiness studies: the determinants of
SWB may tell us something about ordinal preferences.
Fleurbaey () Beyond Income and Wealth August 26, 2014 14 / 36

15. Equivalent income approach
Fair allocation theory: interpersonal comparisons of commodity
bundles xi , taking account of ordinal preferences (no-envy xi Ri xj ,
egalitarian-equivalent xi Ii λx )
Money-metric utility (Samuelson, King, Deaton, Muellbauer...): make
budgets comparable.
Equivalent income (= money-metric utility): let ` = (y, p, q), y
nominal income (or wealth), p market price, q non-market dimensions
Equivalent income yi is de…ned by:
(yi , pi , qi ) Ii (yi , p , qi )
where p is a reference price vector, qi a reference q.
Choice of reference? Not arbitrary, but not obvious
p can be, for consumption goods, an average of the pi (e.g., the price
vector supporting the Scitovsky curve at a bundle proportional to total
consumption)
qi can be the best q for the given yi , p , according to Ri . It can
include leisure.
Fleurbaey () Beyond Income and Wealth August 26, 2014 15 / 36

16. Equivalent income approach: evaluation
"non-income dimensions matter": respondents can give as much
weight as they wish.
"correlation matters": respondents synthesize their own situation.
"preferences matter":
yi (`i ) is a representation of Ri
the "same-preference principle" is also satis…ed: if Ri = Rj and `i Ri `j ,
then
`i Ii (yi , p , qi (yi , p )) & `j Ii yj , p , qj yj , p ) yi yj
"fairness matters":
if pi = pj = p , qi = qi and qj = qj , then yi ? yj determines who is
better o¤.
people’s scaling of satisfaction does not matter (consequence of
same-pref. principle)
respect preferences ) some responsibility for one’s preferences (e.g.,
yi = yj even if `i `j , provided j cares less about the gaps in quality
of life)
Fleurbaey () Beyond Income and Wealth August 26, 2014 16 / 36

17. Empirical comparison: how to estimate preferences?
Revealed preferences:
limited to market choices (consumption demand, labor supply)
decision utility versus experience utility
Stated preferences:
di¢ cult for multiple dimensions (but some attempts exist)
possible to obtain equivalent income at the individual level
Satisfaction regression:
endogeneity and observability issues
estimate subgroup preferences: laundered preferences?
Fleurbaey () Beyond Income and Wealth August 26, 2014 17 / 36

18. Empirical comparison in Russia (from Decancq et al. 2009)
Russia Longitudinal Monitoring Survey (RLMS-HSE)
Seven waves of: 1995, 1996, 1998, 2000, 2001, 2002 and 2003.
Unbalanced sample of 12016 individuals.
Life satisfaction: “To what extent are you satis…ed with your life in
general at the present time?”, …ve point-scale.
Regression with individual …xed e¤ects and time dummies:
Sit = αi + µt + (β + ΓZit ) ln(yit ) + (ϑ + ΛZit )0
qit + δ0
Zit + dit
yit , qit life variables, Zit scaling variables
Ordered logit, clustering at the household level.
Dimensions/scaling: expenditures per consumption unit, health,
housing, unemployment, “wage arrears”, occupational status,
education, marital status, ref. group unemployment, ref. group
expenditures, age and personality traits.
Subgroups: young/old, rural/urban, male/female, minority/Russian,
high/low education.
Fleurbaey () Beyond Income and Wealth August 26, 2014 18 / 36

19. Empirical comparison in Russia: regression
Fleurbaey () Beyond Income and Wealth August 26, 2014 19 / 36

20. Empirical comparison in Russia: regression
Fleurbaey () Beyond Income and Wealth August 26, 2014 20 / 36

21. Empirical comparison (year 2000)
Cross tabulation of equivalent incomes and expenditures per consumption unit
(Spearman rank correlation 0.48)
Fleurbaey () Beyond Income and Wealth August 26, 2014 21 / 36

22. Empirical comparison
Cross tabulation of equivalent incomes and objective measure (like HDI on expenditures,
health, housing, and unemployment)
(Spearman rank correlation 0.64)
Fleurbaey () Beyond Income and Wealth August 26, 2014 22 / 36

23. Empirical comparison
Cross tabulation of equivalent incomes and life satisfaction
(Spearman rank correlation 0.25)
Fleurbaey () Beyond Income and Wealth August 26, 2014 23 / 36

24. Empirical comparison
Portrait of the lowest 1583 individuals (those with satisfaction = 1)
Fleurbaey () Beyond Income and Wealth August 26, 2014 24 / 36

25. Empirical comparison in Germany (from Decancq and
Neumann forth.)
German Socio-Economic Panel (SOEP)
Wave of 2010, subsample 25 years old
14,027 individuals, living in 8,657 households
Variables: disposable income per consumption unit, estimated
self-assessed health, unemployment dummy.
Equation:
Subgroups g: lives/not with a partner, is male/female, and
belongs/not to the age group 45-60.
Cross-section rather than panel? Takes account of constant variables,
and personality traits are used as controls
Fleurbaey () Beyond Income and Wealth August 26, 2014 25 / 36

26. Empirical comparison in Germany: regression
Fleurbaey () Beyond Income and Wealth August 26, 2014 26 / 36

27. Empirical comparison in Germany
Reranking between equivalent income and composite indicator
(with weights 0.41,0.24,0.35 derived from principal component analysis)
(unemployment has a greater weight in the composite index)
Fleurbaey () Beyond Income and Wealth August 26, 2014 27 / 36

28. Empirical comparison in Germany
Reranking between equivalent income and composite indicator
Fleurbaey () Beyond Income and Wealth August 26, 2014 28 / 36

29. Empirical comparison in Germany
Reranking between equivalent income and income
Fleurbaey () Beyond Income and Wealth August 26, 2014 29 / 36

30. Empirical comparison in Germany
Portrait of the 9.2% worst-o¤
(= number of respondents with satisfaction less or equal to 4)
Fleurbaey () Beyond Income and Wealth August 26, 2014 30 / 36

31. International comparisons of living standards (from Boarini
et al.)
Social welfare from equivalent income, per country in 2011
(inequality aversion = 1.5, roughly equivalent to focusing on the median)
Fleurbaey () Beyond Income and Wealth August 26, 2014 31 / 36

32. International comparisons of living standards (from Boarini
et al.)
Average growth of social welfare ("median") from 1995 to 2011
Fleurbaey () Beyond Income and Wealth August 26, 2014 32 / 36

33. Application of equivalent income: household equivalence
scales
Traditional equivalence scales: based on unitary model, and not
identi…able from demand data without heroic assumptions. (criticism
by Pollak, Lewbel, Chiappori)
Equivalent income: income one would need to live as a single and
obtain same satisfaction. (basis for "indi¤erence scale" in Chiappori
and co-authors’work)
Di¢ cult issue: focus on consumption utility or include family
relations? (indi¤erence scale focuses on consumption)
One can generalize to allow for best household type as reference,
rather than single.
Open question: what assumptions are compatible with usual
equivalence scales?
Example: OECD scale obtained with identical individuals in household
spending half of the budget on public good.
Fleurbaey () Beyond Income and Wealth August 26, 2014 33 / 36

34. Application of equivalent income: Publicly provided goods
(STIK)
(When the goal is to measure adjusted income:)
Production cost: no direct link to bene…t to population
Cash equivalent: equivalent income transfer
Problem: adjusted income does not respect preferences over various
situations (it depends on the status quo)
Market value: not always available
(When the goal is to measure welfare:)
Equivalent income: use reference price for such goods, or value the
non-market consequences (e.g., on health)
Insurance vs actual use? Looking at ex post situation records
inequalities better, but then requires taking account of needs
Fleurbaey () Beyond Income and Wealth August 26, 2014 34 / 36

35. Application of equivalent income: PPP indices
EKS (extended Fisher index) and GK indexes have loose link with
preferences
Neary (2004) proposes to compute GK using compensated demands
at the GK prices ) money-metric utilities
In Neary, preferences are assumed identical, but they could be diverse
Fleurbaey-Blanchet (2013) propose to take reference prices p
maximizing ∑i ei (p, ui ) / ∑i pxi . This minimizes the aggregate
Gershenkron e¤ect and makes ∑i xc
i proportional to ∑i xi .
van Veelen’s (2002) impossibility theorem: 1) continuous, 2) price
dependent, 3) satis…es dominance, 4) no third-country dependence.
EKS and GK violate 4, MMU violates 2 and 3.
Open question: how to deal with small overlap of commodity lists
across countries (or time)? (Deaton)
Fleurbaey () Beyond Income and Wealth August 26, 2014 35 / 36

36. Open questions
Imperfect preferences: empirical question/survey design question
(seek "authentic" preferences)
Imperfect estimations: seek suitable tests for each statement
Link with stochastic dominance approach (which ignores diversity of
preferences); possible also to seek robustness w.r.t. reference
parameters
Comprehensive list of dimensions: it seems that beyond 3-4
dimensions additions do not matter much...
Preference speci…cation (over functionings)
Choice of reference parameters p , qi (the attraction of the
dominance principle shows that too many situations can plausibly
serve as references). It is possible to average over various MMU (the
average of utility representations is still a utility representation)
Lifetime evaluation? Equivalent wealth, or equivalent permanent
income...
Fleurbaey () Beyond Income and Wealth August 26, 2014 36 / 36