April 13^th concluded a relatively quiet week for economic news.  Oil prices, which surged last week and sparked fears of another 1970's style crisis, subsided.  Most Americans, including myself, seem more worried about filing their taxes on time and about receiving a refund check.  It's also a time where many people examine their finances and try to asses their standard of living.  Am I better off now than I was a year ago?  Financial self-assessment certainly won't be near all time highs, despite soaring property values.  This year, many Americans will probably look back and wonder how their stock portfolio could suddenly be worth so little.

     Americans like to measure their well-being in dollars.  Not only because it is their currency, but as a society, the notion of standard of living has become synonymous with rising incomes.  For years, economists had adopted this mindset as well.  Some tried to pattern equality, inequality, and growth.  Simon Kuznets, Nobel laureate and father of national statistics and GDP accounting, was famous for his theoretical inverted-u hypothesis.  He argued (using data from just a few countries) that as income levels rose, economic inequality would rise and then fall in an upside-down u shape.  Similar analysis continues today, and countries are often ranked by their gross domestic product.

     But several clever economists have moved away from these sort of comparisons for a number of reasons.  First, currency conversion is not equivalent.  Thus an American dollar might have a varied purchasing power in different countries.  Income based measures known as PPP or purchasing-power parity measures have tried to take this into account.  But ranking by PPP income is weak as well.  Nobel laureate Amartya Sen has become famous for his diligent work on this subject.  Many of the world's poorest nations have some of the highest levels of education, safety, life expectancy and the like.  Because nations can progress in terms of human development without necessarily attaining a higher level of per capita income, Sen suggests that new forms of measurement are vital.

     Sen rejected the willingness of economists to make interpersonal comparisons of utility.  That's a mouthful, but I'll try to clarify that here.  He noticed that the relationship between say low income and low capability is not constant.  For example, we may describe someone as being capable to attend school.  But take another individual who may be handicapped or even just live further away.  In this case, it may take more resources for the second individual to achieve the same capability, that of attending school.  Instead, importance should be placed on freedoms.  He further clarifies that he is not talking about freedoms from but freedoms to.  The freedom to do something is how Sen reaches this notion of capability; the range of which a person has being his or her capability set.

     Sen's work has culminated in the creation of several United Nations indexes measuring relative inequality.  These indexes, which Sen helped to develop, carry out what he calls "distinguished capability comparison" by incorporating proxies such as life expectancy, educational attainment and in a few but not all cases, income.  Indeed, the UN's Human Development Index provides a re-ordering of nations, bearing strong changes from income based ordering.  The index ranks over 160 countries and ranges from Norway at the top (US is sixth) to Sierra Lione at the bottom (having a life expectancy on average of 38.3 years, poor educational attainment, and a PPP per capita income of $448).  Such an index can serve as a valuable progress indicator.  For example, foreign aid could be tied to human development, essentially a pressure tool forcing governments to focus on their development progress.  Aligning the priority of government and the well-being of citizens in the third world is certainly a desirable course of action, as the two unfortunately often diverge, and better assessment of the world's well-being is essential.