Traditional economics identifies a person's well-being with the goods and services the person consumes and the utility that the person gets from such consumption. This, in turn, has led to the widely used approach of welfarism that uses individual utilities as ingredients for evaluating a society's aggregate welfare. This approach has long been contested as being too restrictive in its view of what constitutes human well-being and for its commodity fetish. What has injected new life into this critique is the emergence of an alternative approach, which replaces the traditional concern for commodities and utility with functionings and capabilities. While the origins of this “capabilities approach” go back to the works of John Stuart Mill, Adam Smith, and, in spirit if not in form, to Aristotle, it was the seminal contribution of Amartya Sen in the form of his 1979 Tanner Lectures that gave it shape and structure. Subsequent works by Sen and an enormous outpouring of writing by various authors in economics, philosophy, and sociology have made this a major field of inquiry, which has also led to important practical applications. The present chapter is a survey of this new field of study. In Sen's terminology a “functioning” is what an individual chooses to do or to be, in contrast to a “commodity,” which is an instrument which enables her to achieve different functionings. While functioning is central to the notion of human well-being, it is not merely the achieved functionings that matter but the freedom that a person has in choosing from the set of feasible functionings, which is referred to as the person's “capability.” Beginning with a discussion of these ideas in history, the present chapter tries to present a comprehensive review of the recent literature, including formalizations and applications. It is important to recognize that a full formalization may not be feasible, since there are important dimensions of life that are germane to the capabilities approach that may be impossible to capture in a single formalization. Nevertheless, the capability approach itself has been immensely useful in the context of studying poverty, gender issues, political freedom, and the standard of living. It has also resulted in the creation of the Human Development Index (HDI), popularized by UNDP's Human Development Reports since 1990. This chapter critically examines the HDI and recent advances in the human development literature.
